Pressure mounting on banks as capital market is ‘almost non-existent’, former ABB chair says

Syed Mahbubur Rahman, former chairman of the Association of Bankers, Bangladesh (ABB), has said banks are taking short-term deposits and providing long-term loans.

He noted that because the capital market is virtually non-existent, pressure on the banking sector is increasing.

Speaking on Thursday at a seminar titled "Banking Sector Reform: Challenges and Way Forward," organised by the Economic Reporters’ Forum in Dhaka’s Paltan, he said: "Banks now receive deposits for three to six months. Deposits for one year or longer are almost non-existent.

“We are having to provide long-term loans using these short-term deposits. The lack of an effective capital market is increasing the burden on the sector."

The managing director of Mutual Trust Bank PLC added, "Commercial banks have been performing tasks they were not supposed to do. A commercial bank's role is to invest for three to six months. Because the capital market is inactive, we have had to move into long-term investments."

Noting that the country's industrialisation has relied on bank loans and that default loans have surged to a high rate since 2017, he said: "Even in 2008, the state of default loans was at a respectable level. Non-performing loans (NPLs) were around 8,000; everything was fine back then, though it is not to say there were no issues at all.

“The situation in the banking sector began to deteriorate after the takeover of Islami Bank. A 'mafia system' emerged."

Mahbubur highlighted that various changes are occurring in the banking sector following the change in the political landscape in 2024.

He said, "The reserves, which were declining, are now increasing. The central bank is no longer selling dollars; instead, it is buying from the market.

“The instability that existed in the dollar market is gone. The apprehension that the rate would skyrocket after making the dollar rate market-based did not materialise."

He said the primary challenge in the banking sector is default loans. Various initiatives have already been taken to reduce NPLs.

“Those taking loans must stop thinking that they do not need to repay the money," he said.

Mahbubur noted that if the government continues to borrow regularly, the private sector will shrink, and the resulting pressure will affect all banks.