The curse of idle money

Raihan Amin | Update:

Banks worldwide grab headlines for the wrong reasons. They garner deposits which are costly-in terms of interest and administrative expenses. These costs are recouped through interest earned on loans. The difference is known is the spread. Bangladeshi banks have enjoyed attractive spreads historically. But spreads are narrowinglately making bank managements skittish.

There is more to worry about - a noticeable climb in idle deposits. An increase in deposits without a corresponding increase in loans squeezes profits and negatively affects dividends. Some observers worry that banks are being niggardly in extending loans, thereby crimping economic activities and, by extension, growth. I do not believe banks have hit the brakes; rather they are picky as always. As a herd, they chase large credit-worthy borrowers, easy pickings in a tricky landscape.

In an environment where the large ‘houses’ are courted the small fry are get shunted aside. It will be tragic if this is indeed so. From what we can glean from official pronouncements small and medium sized enterprises (SMEs) are indeed being served by banks backed up by continual pressure from Bangladesh Bank. Supporting SMEs is imperative because they are the backbone of our economy in terms of job creation.

Let’s also not forget that private sector investment has been sliding since early 2014. A slew of plausible reasons have been offered. It is worth unpacking them.

My gut feeling is if our ‘business climate’ looks up and entrepreneurship training is imparted on a massive scale demand for bank loans is sure to firm up.My first logic is this: capital shies away when the investor apprehends that his/her capital is somehow unsafe and/or unrewarding. Secondly, thousands of entrepreneurially minded people (with or without capital) do not know the nuts and bolts of business.Investors that are roaring to go lack knowhow, a crucial drag.

Business climate is a loaded word, the mention of which makes top mandarins queasy. Among other things, business climate refers to the law and order situation, steps and time taken for starting/registering a business, property rights, sanctity of contracts, communication backbone,utilities, regulations, skilled workers and business support services. The World Bank brings out a Doing Business report annually that ranks countries on these parameters. Bangladesh comes after 175 countries. New Zealand, Singapore and Denmark have captured the top three positions.

Heritage Foundation of the U.S. publishes Index of Economic Freedom that looks at the same issue somewhat differently.Bangladesh scored 128 in the latest report. Hong Kong, Singapore, and New Zealand came out on top. Countries that are highly competitive lead the pack. 

It is instructive to learn why Bangladesh is a laggard. International comparisons, and there are quite a few, are keenly followed.Remember nations are in a race to attract talent and capital for producing value-added goods and services leading to improvements in the standard of living. 

The obstacle to increased investment is not the supply of loanable capital,rather it is the demand.A cursory look at the above reports will open our eyes to the serious gaps in  the investment climate and factors standing in the way of increasing the required rate of private investment.

Property rights are a prime example. The introduction of electronic record-keeping is a step in the right direction which will usher in much needed transparency. On the other hand,anecdotal evidence suggests that powerful interests continue to muscle in on neighbour’s property. This tendency, left unchecked, will make people lose confidence in our institutions.

Coincidentally, Bangladesh is sitting on a gargantuan foreign currency reserve. Pundits have offered options about using it for nation building. The government has proposed to set up a sovereign wealth fund. I would demur as our basic needs remain unmet. Put another way, countries that do have such funds are at a much higher level of development. Norway and Abu Dhabi are notable examples.

However, we can surely think of funding part of our infrastructure gap with forex reserves. The assets to be built-ports, power plants, bridges, highways, transmission lines-should be able to generate revenues to repay the “borrowing” in local currency. Here public private partnerships (PPP) can play a salutary role with management being handedover to the private sector.


Raihan Amin is an adjunct faculty at United International University

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