ROLE OF BANKS IN ECONOMIC GROWTH

Since 1972 the banks of Bangladesh used to operate under a regime of rigid government control and central bank regulations. The regulation covered fixation of interest rate on deposits and credits, direction, of credit to public sector enterprises and to priority sectors, directed expansion of banks branches. During the period, 1972-82 the bank services i.e. deposits mobilization; deployment of credit and branch expansion was significantly in favor of the rural areas compare to the urban areas. Nevertheless, there was no prudential and informational regulation on the banking sector. As a result, the banks persuade a policy of rapid credit expansion without analysis was replaced with socio-economic considerations. On the other hand, the lending rates on priority sectors were kept such a lower rate, which did not cover the risk and cost. Consequently, a huge proportion of assets profile became overdue and profitability of the banks declined. Since 1982, the government of Bangladesh for the first time decided to take restructuring measures in the form of denationalization and privatization of the banks. Nevertheless, they estimated that the operational efficiency and customer service was not improved because of absence of prudential and informational regulations

The supply of loans to small and medium-sized companies, the backbone of economy of a country

neconomy, is inadequate. Expansion and consolidation loans are subject to unrealistically high-risk premiums when they are available at all. Small and medium-sized companies pay the price for completely exaggerated expectations in terms of yield in the boom-and-bust cycles of the international capital markets. Labor- and energy intensive companies both in the small-trade and the industrial sector are not capable of generating double-digit yields.

The severe losses in the real-estate sector in the 1980s have caused banks to develop a veritable risk aversion. Small and medium-sized companies suffer most from this. Even though by now some commendable efforts have been made, too few banks have done away with the centralized credit checking that was introduced as a result. Small and medium-sized companies can only be given the service they need locally, with a knowledge of local structures and the personality of the owner.

nThe highest cluster risks are no longer to be found within the sphere of small and medium-sized companies. With the globalization of the financial markets, more and more banks are becoming increasingly involved in ever more risky areas of business.

The banks are relatively progressive employers in terms of both salary and social fringe

benefits, one reason being that their added value is so great.

In today’s financial industry, there is a blurred line between healthy competition and rapacious greed combined with criminal energy. The latter is a great risk for financial institutions as well as the economy. Checks and risk management are one remedy, but even more important is a comprehensive reform of the entire economic system. What I mean is a reorientation focusing on sustainability. In this context, the banks must play a key role as financial intermediaries.

The universal banks active in the issuing sector face a whole range of potential conflicts of interest, given that issues often involve various parties from within and outside the bank and that these parties are not motivated by the same interests: the issuance unit is interested in the offering, securities trading is looking for high revenues, asset management clients expect the bank to safeguard their interests irrespective of its role in the issuing transaction, the lending unit may have information on the issuer that is otherwise not in the public domain, etc. Defusing and controlling potential conflicts such as these places enormous demands on a bank’s organizational structure, processes and compliance activities. Only when a bank succeeds in controlling the potential conflicts and managing them on a transparent basis can the different stakeholders involved be sure that their legitimate interests are equitably upheld.

Asset management covers a range of banking activities: portfolio management, investment advisory, securities trading and lending business (collateral loans, securities lending and borrowing). With a discretionary portfolio management agreement, clients authorize a bank to undertake, for their account and at their risk, all the actions it deems appropriate within the framework of the normal asset management activities of a bank. Clients expect their assets to be managed professionally and in their best interests. The bank contracts to exercise its undertaking to the best of its knowledge and abilities, taking into account clients’ circumstances but acting as it sees fit within the scope outlined as part of the investment goals defined with the client.

The last business I mentioned was foreign exchange trading, an activity which has been unjustly attacked as “casino capitalism”. Various factors have given rise to this perception. First, without a doubt the massive amounts traded in the foreign exchange markets every day. According to figures from the Swiss National Bank, for example, in April 2001 foreign exchange trades in Bangladesh alone amounted to CHF 121 billion each working day. (For the purposes of comparison, the global figure was USD 1,210 billion.) The vast majority of this trading takes place between financial intermediaries, the aim being to exploit even the slightest differences between exchange rates (arbitrage). Only a very small proportion of this trade issued to finance foreign trade and hedge foreign currency positions. Furthermore, the fact that serious economic crises such as the one Argentina is experiencing at present are almost always currency crises may fuel suspicions that it is currency traders with their speculative attacks that trigger such developments.

nIn fact, the very opposite is true. Many people may fail to see the point of the vast amounts of arbitrage transactions, since they are not primarily used for financing purposes. In reality, however, they underpin liquidity in the markets, thus helping them to function smoothly. In less liquid markets, new information would inevitably lead to much greater volatility in rates. A distinction has to be made in the case of protracted currency over- or undervaluation’s (in terms of interest rates and purchasing power parity), which are a genuine problem, as they could result in the misallocation of resources.

Nevertheless, the economic benefits generated by a bank are basically no different from the economic benefits generated by a doctor, teacher or train driver: by exercising, to the best of their knowledge and abilities, their specialist function in competition with others, companies and their employees make their contribution to economic benefit. And their motivation need not be a selfless one. Pilots do not fly planes to generate economic benefit, just as bankers do not grant credits for any such selfless reasons. Economic utility is created as a “by-product” anywhere women and men function successfully, and this does not apply solely to their jobs.

Even though a banker grants loans to many companies and sectors of the economy, this does not mean he can do their work or bear their responsibilities.

The argument of economic goals and responsibility is generally seized on by politicians when it is a matter of re-distributing capital, risks, profits or costs.

Although not strictly wrong, the economic responsibility argument has the major political advantage that it can be flexibly deployed for absolutely anything. You will look long and hard – and probably in vain – for any “handy” definition of a bank’s economic responsibility that is at the same time general enough. Which is why my suggestion is the following: bankers act responsibly when they ensure that their house is in order and resist the temptation to pass off poor financial performance as a contribution to the economy.