The banking sector: Confronting rough patches in the context of global economic and financial instability

Illustration: TBS

High inflationary pressure is hurting global economies and causing market instability. Both developed and developing economies are facing an inflationary burden and attempting to address the situation by raising their policy rates.  Since the US consumer price inflation rate is increasingly likely to remain high as its core rate reached 6% in May, the US central bank has announced unusually large interest rate hikes to rein in soaring prices in the world's largest economy. 

The European Central Bank has also announced its intention to raise its policy rate in July as the Euro area's core inflation reached 3.8% in May. However, it also means the risks of a decrease in investment and less economic activity. Already there are reports of falling consumer confidence, slowing job market, and contraction in business activities. Fears are rising that the trends and the moves might push several global economies into recession.

Several factors have been contributing to the current volatility. Multiple adverse external shocks, including Covid-19 devastations, high international commodity prices, and the Russia-Ukraine war, pushed most developing countries into instability and vulnerability. Following Sri Lanka, which defaulted on external debt in April, several other global economies are in unwarranted situations facing high commodity prices, balance of payment difficulties, and market uncertainty. 

Rising inflation is affecting the consumption trends of the low-income sections. Turbulence in developed countries' financial markets might further affect these countries negatively and may further deteriorate financial conditions and growth prospects. High inflation and strong depreciation pressures have become concerns for several global economies. 

The inflationary surge in Bangladesh tends to follow the trends in the movement of commodity prices in global and domestic markets. The annual inflation rate in Bangladesh is underpinned by soaring prices of both food and non-food items. The war in Ukraine and associated sanctions are also contributing to rising inflation in Bangladesh as global commodity prices surge. High trade deficit and depreciation have implications for the trade-centric foreign exchange market of Bangladesh and the banking industry of the country. 

Although the Covid-19 situation has improved remarkably, economic recovery faltered due to these pressures. Inflationary pressures might create barriers to attaining the goals and targets of the most recently passed budget by the national parliament. Current monetary policy rightly recognised the challenge of inflation that intended to pursue a cautious policy stance with a tightening bias to contain inflation and exchange rate pressures and promote the economic recovery process, providing the flow of funds to the employment-generating activities. And, policy efforts are on to incentivise remitters to improve inflows of foreign currency to the foreign exchange market of Bangladesh. 

Global economic turbulence is strongly felt in the global banking and financial industry. The exogenous shocks came up at a time when visible transformations were taking place in terms of embracing the new normal recovery efforts, adopting newer technology, and accommodating more recent compliance requirements. The necessity of sound corporate governance in banks is being proven again and again. 

Diverse regulatory frameworks are compelling banks to care about risk appetite, customer protection and capital management and the requirements are becoming even more stringent. It means the business strategies of banks have undergone significant changes and talent strategies are required to be changed accordingly. 

And the expectations for the senior leadership in banks have also changed drastically. Banks are looking for leadership qualities to handle issues about how the business interacts with customers alongside innovation with products and processes. In the changing scenario, technology-driven financial services and sustainable banking and financing are among the major areas to draw the attention of policymakers and stakeholders.

Even in this challenging situation, the forward march of the banking industry cannot be forgotten. The financial sector of Bangladesh and its institutional financing activities expanded over the fifty years. By that time, the country's financial sector grew remarkably in terms of a greater number of formal institutions, a higher number of financing instruments, bigger volumes of assets, and instances of consolidations. 

Banks have been the main segment of the country's financial system, though other crucial broad components of the sector covering non-bank financial institutions (NBFIs), capital market intermediaries, insurance companies, and microfinance institutions (MFIs) have also enhanced their roles and activities over the period. 

Unlike in developed economies and sophisticated markets, the banking industry meets the country's long-term and short-term financing needs. The situation indicates considerable dependence of the Bangladesh economy on the banking sector of Bangladesh. Thus, having a sound banking industry is a necessity for the sustainable growth of the country. 

In response to the changing situations, bank managements are consistently busy accommodating the newer risks and changes. They also have to deal with regulatory implications and capacity development. There is no alternative but to have the right and capable people or develop an appropriate skill-set to address the challenges and developments. Regulatory expectations continue to rise and regulatory supervision is implemented with higher assigned accountabilities to respond to potential financial difficulties. 

Though the human resource management function is considered responsible for the quality and ethics of the bank employees, the role of the leadership network comprising boards and top management is crucial in this connection. Top leadership networks must create a congenial environment for developing and nurturing future leaders. The chief executives and boards with transformational or participatory leadership approaches can tackle any challenging situation. More specifically, banks having capable leadership and sound governance culture can carry on by absorbing immense market pressures and risks. 

Like other countries around the globe, the banks of Bangladesh have no option but to concentrate on improving risk and governance culture and capacity development to sustain. Banks are expected to focus on capacity development efforts to meet such challenges and to address barriers associated with growing global business complexities.  It is now essential to bring all key stakeholders within the fold of capacity development, financial education and knowledge platforms. 

In Bangladesh, the arrangement for data gathering, knowledge creation, capturing, storing and application is not widely practised by banks. In the long run, the 'knowledge development and information storing and dissemination' helps minimise risks and create a sustainable banking sector. 

And very importantly, banks and regulators need to allocate resources for offering research-based education and arranging knowledge management forums for sharing and learning. The annual Banking Conference of Bangladesh Institute of Bank Management (BIBM) is that type of forum to facilitate research-based operational knowledge sharing amongst bank executives, regulators and researchers.   

BIBM is organising the Annual Banking Conference 2022 during August 27-28 and this is the Ninth Conference of the annual event. This is really inspiring for BIBM and also personally for me. Back in 2011, BIBM's then management and Governing Board responded positively to my proposal and conceptualization for having a platform of knowledge sharing amongst bank practitioners, researchers, and academicians. 

On the way to arrange the Annual Banking Conference 2022, we called for papers in April and received tremendous responses from researchers from Bangladesh and some other countries. Finally, the review team selected 30 papers for presentation.  BIBM invited selected senior industry experts and top-level bank executives to add value to the business sessions as session chairmen, moderators and designated discussants. 

'Towards Sustainability' has been identified as the theme of the conference considering the necessity of adopting economic, environmental, and social concerns in business and financing activities in this challenging environment. 

In this connection, the partnering of GIZ Bangladesh in BIBM's efforts is highly appreciated; they are actively promoting sustainable and climate financing in the country. BIBM appreciates the cooperation of the Business Standard and Bonik Barta in organising the event.

We believe that the key stakeholders of the banking sector would immensely benefit from the interactions of bank executives, academicians, and researchers in the ABC 2022 knowledge platform. And the banking industry would be able to come out from the rough patch to the smooth path of stability very soon.

Dr Shah Md Ahsan Habib. Sketch: TBS

Dr Shah Md Ahsan Habib is a Professor at Bangladesh Institute of Bank Management (BIBM)

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.