I read the opinion piece which appeared on 5 September in this newspaper with the heading ‘Who really built Bangladesh’s economy? Time to give domestic banks their due credit’ with a lot of interest.
I must emphasise that the sterling contribution our domestic banks made towards the growth and industrialisation of the country cannot be denied, but in saying so, I see no contradiction or duality in accepting that the foreign banks (FBs) too extended a critically needed expertise in both the formative and continuing role in developing industries.
While in essence, the statement is partly factual, in his enthusiasm, the author has embellished it with half-truths and near-truths. Let’s look at the major premises of his opinion:
“Foreign commercial banks, including Standard Chartered, HSBC and Citi, cater mostly to multinational companies (MNCs), large corporations and low-risk, high-return transactions. Their operations are rooted in global trade finance, compliance-heavy corporate banking, and connections to international payment systems.”
Also, ” Crucially, they have lent to entrepreneurs with limited collateral — something foreign banks typically avoid. Without such flexible and risk-bearing facilities, Bangladesh’s RMG miracle could have faltered long ago.”
As if throwing a crumb off the table, he tries to be fair by saying ” FBs deserve credit for their own strengths: strong compliance, robust trade finance for MNCs, and seamless global linkages. But their role is specialist rather than foundational. They complement the economy; they do not drive it.”
First, let’s talk about his statement, “Standard Chartered, HSBC and Citi, cater mostly to multinational companies (MNCs), large corporations and low-risk, high-return transactions.”
He has congealed all the large corporations into an amorphous mass, which they are not. MNCs can be small and not all large corporations are MNCs.
In fact, most large corporations in the ’80s and ’90s were the state-owned corporations, like Petrobangla, BTMC, Titas Gas, Biman and so on. These corporations mostly did business with state-owned banks.
Foreign banks were indeed lending to a few MNCs that did borrow (many were depositors), but they were certainly not high return, since they invariably demanded and got the best pricing, which meant the lowest interest in the market or what could be described as ‘prime rate’. Their attraction was low risk, not high return. By conflating the issue, the author has stated a half-truth and distracted from the real story.
Next, the author says, “Crucially, they have lent to entrepreneurs with limited collateral, something foreign banks typically avoid” — wrong.
I can speak with authority that collateral was not the main driver of lending/credit decision-making in ANZGrindlays or SCB. The first and abiding concern was cash flow. The lending managers were taught “cash flow is king”.
If the borrower could, to a certain degree of certainty, ensure cash flow sufficient to satisfy the risk, the collateral/security became secondary. The emphasis was then put on ensuring that we secure the cash-flow by ensuring that the cash-flow typically comes directly to the bank (if possible) to liquidate the loan. Or keep the cash flow under close monitoring. This is indeed an international best practice.
I might say it is too much emphasis on collateral and too little attention to cash flow, in some banks, that has been one of the main reasons for the bad lending decisions.
The author goes on to say, “But their role (of foreign banks) is specialist rather than foundational. They complement the economy; they do not drive it.”
If one looks below at the list of many products foreign banks have introduced, I would hesitate to label all as “transactional” and not recognise many of them as “fundamental”.
The foreign banks, particularly ANZ Grindlays, Standard Chartered and to an extent Amex, played a very important and “foundational” role by bringing in new products and processes, such as lease financing, syndicated loans, club loans, security sharing through “pari-passu” legal documentation, foreign currency designated loans, structured finance, advisory service, retail banking credit rating and risk rating, disciplines, processes and products in retail banking — for example, savings, loans, lifestyle, education support, etc, concept of distribution through branch network, direct selling agents, cred/debit cards, ATMs, investment banking, forward cover hedging products in foreign exchange, discounting trade bills to name some of them.
These were totally unknown to domestic banks, which did only vanilla lending and trade business.
I am reminded of an encounter I had as the CEO of Standard Chartered with the then governor of Bangladesh Bank, Dr Fakhruddin Ahmed. He asked me why and how SCB, lending to the same names (corporate) and totally run by Bangladeshis, beat every other bank in all aspects, including profitability, but most importantly, NPLs.
I answered that it was our risk management and governance. When I joined Bangladesh Bank as a deputy governor, one of the first tasks assigned to me by Dr Fakhruddin is summed up by what he said, “Now you are here, let us start the process.” This led to the introduction of the “Core Risks Management Guidelines”. This I can easily attribute as a contribution of the foreign bank, namely SCB/ANZ Grindlays because we heavily borrowed the best practices from this bank.
Domestic and state-owned banks never followed these guidelines, nor was there any effective enforcement from the regulator of this very important risk management process that could have improved overall governance. We can see the unfortunate outcome of non-compliance in the sad state of some banks, which have a record-breaking 98% NPL.
The half-truth he has stated is the sweeping comment that foreign banks were only lending to MNCs. But in the ’80s and ’90s, many of the MNCs were depositors, not borrowers, and foreign could not have survived with a lending portfolio of just MNCs.
When I was running Standard Chartered Bank, which was the largest foreign bank with around 5% market share (of the industry), more than 65% of the lending assets were to local corporations and medium enterprises. MNCs were around 30%. This totally contradicts his statement
The author speaks of foreign banks contributing only 0.23% of remittances. With only 12 branches all over Bangladesh and the central bank not allowing opening a branch distribution network for foreign banks, one does not have to be a genius to understand why it was not possible for foreign banks to handle remittances due to the branch distribution limitation. Most of the beneficiaries were in semi-urban or rural areas.
Finally, I will say with emphasis that the role played by foreign banks in developing human capital for the banking industry is unique and phenomenal. All one has to do is look at the leadership of successful domestic banks and their MANCOMs. Most likely, the key positions have been held by ex-foreign bank senior executives.
I will add that most of the banks that failed in their objectives, particularly the state-owned banks, spawned a culture of default and allowed public money to be stolen. These banks may have helped in industrialisation, but it appears there was a severe mission-drift as their inadvertent support of a default culture and, to an extent, the trade-based money laundering, ended up enriching a few oligarchs in the country.
Having said that, I must point out that two significant facts are unique contributions of the domestic bank, which were fundamental and critical in nature.
First was the introduction of the so-called “Back to Back LC” for the RMG industry. This unique instrument, created by our industry, allowed our entrepreneurs to start an RMG business on a fairly low capital base. After funding the machinery with some capital (the entrepreneur’s contribution) and the rest was debt (bank), neither the bank nor the entrepreneur needed any more cash outlay except for salaries, fuel, power, etc.
This was very important because an RMG industry in those days would need a large amount of working capital for raw materials and debt. This was because the cash cycle was there for four months. This would have driven the cost of financing to a level which would have made the large-scale financing which we saw the domestic banks do difficult, if not impossible.
The other significant contribution was the long-term loans, which were, in reality, quasi-capital that our banks, particularly the state-owned banks, provided. Typically, bankers all over the world look for a 60/40 Debt/Capital Ratio. In Bangladesh, at best, projects were being financed around 80/20, which was through some creative tinkering presented as a higher figure.
In the absence of a strong stock market and debt papers such as bonds, etc, the banks took up the role of complementing with term loans to make these projects viable. This role was indeed of critical importance. Of course, the economy paid a large price due to the piling up of bad debt, but this role paved the way for setting up the first industries in Bangladesh.
In conclusion, I will say that it was the joint effort of both domestic and foreign banks. Let us not seek duality or a zero-sum game between the two. The focus for the future should be to clean up our act and enhance our game, if we as a country want to compete and move forward in the increasingly competitive and volatile global economy.
I feel I must mention a fact unknown to many of us. The first Letter of Credit in newly independent Bangladesh in early 1972 was opened by ANZGrindlays Bank, the forerunner of Standard Chartered Bank. This, surely, is a “fundamental” expression of a foreign bank’s commitment to the financial sector.
Muhammad A (Rumee) Ali is the Chairman of ICC Bangladesh Banking Commission.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of The Business Standard.