There are several serious deficiencies in the way financing the private sector is organised in Bangladesh. Such deficiencies call for urgent reform. Some of these are old issues where past attempts have been unsuccessful. Some are the consequences of the strong development of the economy. To change the spirit of the capitalistic society making it more productive reforms such as these are needed. Without such change it is unlikely that Bangladesh will ever be able to achieve middle income levels for its citizens. The problems are:Fixing private sector financing in Bangladesh
Successful reform of the private sector financing will improve the financing of industry, reduce the level of non-performing loans, raise the return on capital, and increase the economic growth rate
Forrest Cookson
There are several serious deficiencies in the way financing the private sector is organised in Bangladesh. Such deficiencies call for urgent reform. Some of these are old issues where past attempts have been unsuccessful. Some are the consequences of the strong development of the economy. To change the spirit of the capitalistic society making it more productive reforms such as these are needed. Without such change it is unlikely that Bangladesh will ever be able to achieve middle income levels for its citizens. The problems are:
1. Failure of the judicial system to support the banks in loan recovery and the related inability of firms to exit i.e. to fail. This includes a weak mergers and acquisitions component of the financial system, a failed bankruptcy system, and money loan courts unable to collect unpaid loans.
2. Failure of the accounting systems and audited reports to present reliable estimates of the condition of a firm. BSEC has been unable to convince the international investors that the audited accounts correctly reflect the condition of the business.
3. Maintenance of chaotic land ownership records, distorting the land markets; this combined with a poorly designed land tax system means the market for this key asset in Bangladesh works poorly.
4. High corporate tax rates that encourages tax evasion and avoidance. Tax policy concentrates on revenue collection and is largely unconcerned with the impact on saving and investment of these high corporate tax rates.
5. Commercial banks destruction of the corporate veil, undermining one of the most vital aspects
of capitalism.
6. Inability or unwillingness of the banks to combine loan rescheduling with proper work out analysis and careful monitoring and supervision of the operations of a rescheduled company.
7. Distortion of the interest rate structure arising from the massive interventions in the financial markets by the National Saving Directorate.
8. Excessive uproar and concern by civil society for Social Corporate Responsibility.
9. Failure to promote competition and remove special access. The Government too often falls victim to politically directed regulatory actions while regulators misunderstand their task. The regulators sole responsibility is to promote principled competition. It is not to raise revenue for the Government or to make political judgments with respect to income distribution or other emergent objectives Government.
Successful reform of the private sector financing structure in these nine areas will improve the financing of industry, reduce the level of non-performing loans, raise the return on capital, and increase the economic growth rate. Failure to reform will place a continuing and rising burden on the economy through rising non-performing loans, misdirection of capital, high interest rates, continued social conflict over land, and failure of the private sector to invest enough to achieve higher growth rates. The needed reforms are painful demanding strong, courageous leadership determined to withstand politically supported opposition.
A market driven, capitalistic economy is based on the straightforward principle that it is the responsibility of the businessman to maximize his profits while following the rules of the market. To deliberately fail to maximize your profits is a strike against the society. South Asia has suffered for decades from the naive view that doing good is useful for the society. Directing resources away from the highest return investments is simply a way to remain poor. Allowing such practices to continue to waste resources imperils the economic welfare of all.
Proof of this is simple: Compare countries like India and Bangladesh with Korea, Taiwan, and Thailand. In 1950 these five countries [East Pakistan for Bangladesh] were more or less the same economic level. By 1960 there was still little difference. In 2015 these are different worlds. [I could include China in this but there are other issues for that country.] Why? The ideology in one group was greed, investment, and get rich. In the South Asian countries during most of the period socialist do good ideas dominated political economic thinking. Even where private enterprise and competition were recognized as the way forward, there was continual working within the society against these ideas. The results are there for everyone to see. What has happened has happened. There is no need for arguing about the past, the task for the present is to create an economy that will create wealth in which everyone can participate.
I will review these nine policy failures in a series of articles. The overall environment in which the financial system operates is now distorted by these. Execution of the needed reforms can be achieved in a quite short time. The result will be a strong resurgence of private sector driven growth.
There are two themes that run through the interaction of these nine points: The security of private property and the recognition of responsibility for debt. Every financial system attempts to balance the interests of the investors [borrowers of funds] and savers [those that have foregone consumption now to make resources available to those who have projects to implement]. In a competitive market the interest rate determines the balance. However, within the banking system deposit rates are maintained at a level above market rates driven by the rates established for the National Saving Directorate instruments. High deposit rates require high lending rates; high lending rates are further enhanced due to the high volume of non-performing loans. The judicial system is unable to help the banks i.e. the representative of the savers to recover the loans that do not get paid. Part of the high level of NPLs arises from the high interest rates that make successful manufacturing projects difficult to implement successfully, leading to all kinds of financial manipulation. The banks are oblivious to the need for a project taking a loan to make economic sense, too often loan appraisal is not a serious activity. Instead collateral and crony influence dominate . The chaotic condition of the land records makes transfer of land from defaulter to bank or creditor difficult to execute, resulting in meaningless collateral. Further, the land market is distorted by the poor record management so that real land values are unknown.
Turning to the capital market the weak performance of the BSEC in demanding quality audits results in many financial reports being distorted versions of the truth. With the financial condition of the companies uncertain the share market investors are only interested in increased share prices caused by waves of sentiment that sweep the market. Despite the hype against speculation, a large volume of share market involvement is speculative. The market has little interest in the underlying performance of the company as it is so difficult to know what is actually going on. Companies that make profit are subject to very high tax rates. If you invest in a listed company and you are paying 25% at the margin on personal income taxes then the actual taxes you are paying on the earning of your investment are 50%. If you invest in a non-listed company then your tax is 57%. Such tax rates encourage fake accounting, speculative investments in the share market and real estate investments where increasing land values guarantee high returns. Why bother to get a difficult manufacturing company running when the Government wants more than half of your profits. Further, the banks violate the concept of the corporate veil demanding that borrowers place their personal assets as collateral. Bangladesh will never develop a successful stable manufacturing sector when this is allowed to happen.
Regulators are meant to act to maintain a competitive market. Competitive markets work very well in Bangladesh. However, all businesses want an environment of restricted competition making entry of new competitors more difficult and as much as possible allowing agreements with competitors to get around the competitive pressures. Regulators also mismanage exit. The company law and the Banking Companies define clearly when exit is necessary. The regulators make exceptions to allow the continued trading of companies both state and privately owned to continue in business wasting resources in the naive expectation that change willtake place.
The writer is an economist
