Introduction:

As the banking system of any country mobilizes public fund from the surplus units

(lenders/depositors) of the society to the deficit units (borrowers); the transparency and

accountability of this sector are vital for the survival of this financial system. The management of

a bank is responsible to run the banking business with sound ethical practices and hinder any sort

of corrupt practices to gain the public trust. Depositors’ confidence is the bloodline for the

survival of the banks as it is the money of the public that spins the wheel of the banking cycle. A

bank can maintain the soundness by nurturing good corporate governance. Corporate governance

can benefit both the shareholders of a banking system as well as the depositors.

What is corporate governance in bank?

Corporate governance in bank means the system of internal controls and procedures used to

define and protect the rights and responsibilities of various stakeholders. It is such a precondition

that affects the financial soundness of a banking institution. Corporate governance can affect the

asset quality, capital adequacy ratio. The failure of corporate governance means that one or more

banks are devoid of transparency, accountability and oversight of their own managerial practices.

We know that there is always a possibility of agency problem in an institution. Financial

institution like bank is no exception. Agency problem in banks materializes when the MD, DMD

and higher level management do not act in the best interest of the shareholders of the banks. The

separation of ownership and control has given rise to an agency problem whereby the

management operates banks in their own interest out of those shareholders. Again the

relationship among management the board of directors, shareholders and other stakeholders in a

bank provides a structure through which the objective of the bank is set. And the means of
attaining those objectives and monitoring performance are determined. Here, good corporate

governance should provide proper incentives for the board and management to pursue objectives

that are in the interest of the bank and shareholder and should facilitate effective monitoring.

Corporate governance in banking sector of Bangladesh:

Banks do business with the money of other people. Thus the risk of banking sector is actually the

risk of those peoples who make deposit with them. In banks, risk management and strict

regulation is important; because the short term liabilities like demand deposits are often invested

in long term risky asset (such as mortgage loan) and may take several years to mature. There are

several reasons for which it is imperative to practice effective corporate governance in this

sector.

Practicing corporate governance strictly can maximize the value of the shareholders by

introducing internal control in operational process, transparency and accountability in doing

business. The banks should disclose the financial reporting properly and timely to maximize

value for all stakeholders.

The board of the banks is responsible for ensuring and encouraging compliance, ethical standard

and integrity. There should be very clear segregation between the responsibilities of the board of

directors in the management. The board should provide the leadership and direction of the bank,

approve strategic plans and major policy decisions. The duty of the management is to work

towards the goals and objectives of the board in order to materialize them. The board should

supervise the management and guide them if necessary. Moreover, the banks should properly

delegate authority to managing director, CEO, other senior and functional managers and held

them responsible for encouraging compliance, ethical standard and integrity.

Corporate governance involves the manner in which business and affairs of banks are governed

by their board of directors and senior management. However, the BASEL committee’s principles

on corporate governance for banks are as follows.

1. Expand the guideline on the role of the board of directors in overseeing the implementation of

effective risk management system.

2. Emphasize the importance of the board’s collective competence as well as the obligation of the

individual board members to dedicate sufficient time to their mandates and to keep abreast of

developments in banking.

3. Strengthen the guideline on risk governance.

4. Provide guidance for bank supervisors in evaluating the process used by banks to select board

members and senior management.

5. Recognize that compensation systems from a key component of the governance and incentive

structure through which the board and senior management of a bank convey acceptable risk

taking behavior and reinforce the bank’s operating and risk culture.

So the bank directors have specific responsibilities to manage the risks at their financial

institution. The board of directors should also have the impartial internal management audit

report in order to judge the internal control and compliance managed by the management. In a

word, the board is responsible for the time to time assessment of the banks integrity, ethical

standards and effective audit process to judge whether the management is fulfilling the

shareholder’s objective and protecting depositor’s interest.

Importance of corporate governance in the banking sector of Bangladesh:

In the last few years we have seen the deterioration of ethical standards, various deviations of

rules about sanctioning loan by management. Undue influence from the members of the board

regarding loan disbursement was also prevalent. There is visibly a lack of good corporate

governance. A lot of widely discussed financial scams were unearthed recently in banking

sectors. Basic Bank, Sonali Bank, Farmer’s Bank are few examples of sheer absence of good

corporate governance in banking sector. As a result, a stunning amount of loans are defaulted in

Bangladesh. Chances of recovery of the loans are very slim as well. During the first nine months

of 2017, loan default increased by tk. 181.35 billion. Cumulative loan default is an astonishing

800 billion. If we add the written off amount of tk. 450 billion, the actual amount of defaulted

loan is over 1200 billion. Dr. Zahir Hussain, a lead economist of the World Bank said that board

of directors often approves loans without proper assessment. As a result, non eligible borrowers

who have no intention to make repayments gets loan. The banking sector of Bangladesh is

clearly passing a critical time due to the lack of good governance. As a result, non performing

loans are on the rise. And the depositors’ interests are being compromised. In some cases even

the eligible borrowers could not get loans because in the some banks loans are disbursed if a

borrower has political link or family connection with the board of members. Clearly these types

of practices are clear violation of minimum required corporate governance. Predictably this bad

governance leads to liquidity crisis of the banks. Recently Farmer’s Bank has failed to honor

both the individual and institutional depositors’ cheque. As a result, the depositors’ confidence

eroded not only from this particular bank but also from other private commercial banks. Such is

the massive effect of one or few banks’ faulty corporate governance has over the whole banking
industry as a whole. This type of situation is primarily liable for the liquidity crisis and collapse

of banks. And whole banking industry as well as economy suffer.

Strict monitoring by the central bank and presence of good corporate governance in the

commercial banks are imperative to combat the NPL and liquidity crisis. All banks must have to

follow the corporate governance rules and regulations directed by the regulatory authorities.

They should not manipulate their annual reports to show overstated profit. The board of directors

should refrain from the unsolicited influence over the management. The management also should

ensure good governance inside the banks. They should work independently and professionally.

If the banks follow the rules of the central bank and ensure compliance, none of them will fall

into problem.