Why open new banks if they chase the same customers?

Thailand, with an economy that is nearly double the size of the Bangladesh economy, has only 18 banks that are Thai-owned. Singapore, meanwhile, just has five banks that are owned by Singaporeans. Even neighbouring India, with a massive $2.7 trillion economy, has only 34 Indian-owned banks.

So how many banks does Bangladesh have? 

Currently, there are 52 local banks, and nine foreign banks, under full control and supervision of the Bangladesh Bank. And yet there are proposals for more banks in the pipeline.

Professor Abdullah Al Mahmud. Illustration: TBS

The general justification provided for sanctioning so many banks is the need to expand financial inclusion. Unfortunately, there is little evidence that increasing the number of banks has aided financial inclusion. Professor Abdullah Al Mahmud of the Department of Banking and Insurance, University of Dhaka, talks about whether we actually need so many banks and what alternate measures exist to expand financial inclusion.  

61 scheduled banks are operating in Bangladesh right now. How justified is this number for an economy like ours?

Despite the growing number of banks, the customer base has remained static. Our banking sector basically has more sellers than buyers. 

The banks in operation should have been reaching out to newer customers and expanding the customer base. Unfortunately, all of them tend to run after a similar customer base. If a new bank lacks the ability to serve the purpose of expanding the customer base, then what is the justification behind its launch? 

The existing banks, instead, should achieve economies of scale. That means a bank should become more efficient by providing similar products to many people, or producing the same kind of product in larger volume, that helps reduce production costs thanks to increased efficiency.

What is the point of introducing new banks when most of the rural population is still out of banking coverage? When a new bank joins the fold, they usually set up their first branch in Dhaka. See how many bank branches are in Dhaka's Motijheel area? A newcomer doesn't want to open [branches] up in remote localities. 

People in remote areas remain unserved thanks to the existing banks' indifference. This practice will not increase their efficiency in providing services. 

From this point of view, increasing the number of banks is actually a big problem. If a bank with limited efficiency wants to bring more customers from a similar customer base, it may fail. For example, a new bank such as this would have no other option but to offer a loan to a customer who is already a defaulter.  In doing that, the bank's non-performing loans will only grow. Ultimately, it will challenge the bank financially. That's what had happened to the Farmers Bank.

Ensuring transparency and accountability is a big challenge. Even Bangladesh Bank fails to ensure good governance in the banks. There is a lot of pressure from the boards. And the boards sometimes work in favour of political parties and big businessmen. 

I think, if there is a possibility to ensure good governance in providing services, new banks can be opened; but not otherwise. 

Merger of existing banks will be the best option. It will benefit the smaller ones with the same customer base a big bank already has. 

I think in the next two or three years, we might need to think about this option. Former finance minister Abul Maal Abdul Muhith spoke about this when he was in charge.     

Do you believe that increasing the number of banks ensures financial inclusion? 

Not really. Production diversification or service customisation is required for financial inclusion. Instead of increasing the number of banks, opening more branches or service points will be effective.

What kind of service point? You see, Police Community Bank has service points at every police station. Even though the service desks provide very limited services, it still is helpful to the rural people.

Hence, a service desk is one of the key ideas. Sub-branch can be another option. Many commercial banks are opening their sub-branches. That's not a full-fledged branch but still, you can have almost every kind of service that a branch provides.

What role can product diversification play in making the new banks more efficient?

Who are your customers? If you set a target to serve the same customers, what kind of product will you offer them? The customers may already have the products you are thinking about available in the market. Which is why you need to innovate and diversify.  

Why do we go to the shopping malls? Because there is product diversity. People with no shopping mall in their locality visit the New Market to access such diversity. 

If banks want to reach out to new people, there should be products, suited to their specific needs - in the form of loans, deposits, and other financial instruments, available in their localities. For example, urban banking points have better demographic factors like good income accessibility and education level. But the rural ones do not. Hence, a product designed for the urban people will not be explored by the rural people. 

Across the rural areas, you can find many families with relatives living abroad who send remittances. There might not be any foreign exchange branch over there. Rural people are compelled to access that service from an urban branch of banks. Bkash rightly addressed this issue and has now become very popular. Agent banking, in this regard, is also improving. These are big developments. 

The number of private banks has increased in the last decade but no foreign bank has opened a branch here during this period. Moreover, some of the existing nine foreign banks are struggling to survive. How do you see this?

Foreign commercial banks are offering limited products only to a target group of people. You don't have many options when you go to foreign banks. They mainly do business during foreign trade because if you want to open a letter of credit, you need to get in touch with these foreign banks.

All the local commercial banks have to open a rural branch against a certain number of urban branches. This is a regulation of the Bangladesh Bank. However, the foreign banks don't want to follow this kind of regulation because operating a branch in a rural area is costly. The foreign banks are here only to do business and make a profit. They are struggling to sustain as the customer base is limited, as I mentioned earlier. 

Do you think non-bank financial institutions (NBFI) are doing well? Is there any need for 34 NBFIs in Bangladesh?

The NBFIs' services are limited to the capital market. Only the IDLC is providing services to many rural areas. The NBFI's target customer base is still very limited. 

Moreover, there are some disturbing issues here as well. We know about what happened to International Leasing and Fareast Finance. There are a lot of companies that are already in trouble because their ownership is in question. They took away ordinary people's money. 

There are a lot of security firms providing brokerage services. One of these firms, Tamha Securities, also took away a lot of people's money. 

Rather than adding to the number of these kinds of NBFIs, we need to make sure that there is transparency and they are operating under regulations. The Bangladesh Bank and Securities and Exchange Commission needs to strengthen their supervision. 

When there is corruption and a lack of transparency [in the financial sector], regulators cannot stop the threats to financial security. They also need to take responsibility more seriously. Every time, you cannot blame the institutions alone who are providing services. There are flaws in regulation as well. Otherwise, how do scammers bypass regulations and get away with money laundering? 

The good news is that the Security and Exchange Commission, by reforming its financial system, is leading the capital market much better now, compared to the last decade. But there is still a long way to go. The Bangladesh Bank needs leadership that can regulate the system properly. Proper regulation helps the service providers flourish and contribute to the national economy. 

Industries are still mostly dependent on banks for financing. Do you think investment should come from the stock market too? 

The thing is that in the stock market there are regulations. New Companies can not go for IPOs directly in the very beginning. They need to be operational for at least some time. That regulation for a country like ours makes life a little difficult for new companies. But they can issue bonds. They can raise debt with the Stock market. This is called raising debt capital. 

We have an SME window now in the stock market. That can be really helpful. That can be an option for the industrial sector to raise financing through the capital market. 

People who are living abroad can't make any investments if all the financing is coming from the financial sector either. If the funding is coming from the capital market, the expatriates who want to invest money in our country can contribute. So now that there is scope for SME Financing through IPOs, that could be a good window for the industrial sector.