Rampant corruption in Bangladesh makes it almost impossible for small companies to raise bank loans
By Syful Islam
DHAKA (TrustLaw) - Business is brisk at Abu Shahin’s three furniture stores in this teeming city of 18 million people, the most densely populated in the world. He is busy furnishing the homes of the emerging middle class as foreign companies attracted by cheap labor pump money into the Ganges delta.
After four years of healthy profits and rapid expansion, Shahin is ready to add a fourth furniture showroom and build his own factory to supply his stores. But there is one problem: he cannot get a business loan.
“I have three showrooms in the capital, for which I need to visit at least 6 to 7 factories each day to source furniture. I could not realise my plan to set up a factory because bankers create unusual complications for lending me only 1.5 million taka ($18,000),” Shahin told TrustLaw.
A tangle of gleaming towers of finance puncture the skyline of Dhaka, erected in the past five years. Yet, as money floods into the city, many small businessmen in Bangladesh cannot secure bank loans. They face what they say are unreasonable demands from the state-owned banks for huge amounts of collateral, masses of documentation, interest rates as high as 19 percent, and finally “speed money” – a bribe for the bank official worth 10 percent of the loan value.
Meanwhile, corrupt bankers are funnelling loans worth billions of taka to businessmen backed by the country’s political bosses, accepting forged documents and waiving the collateral rules. In August the central bank unearthed a 36 billion taka ($43 million) loan scam at the country’s largest bank, Sonali Bank Ltd, where loans were granted to a little-known business house without the minimum collateral required as security.
Corruption is holding back economic development in Bangladesh, which scored 2.7 out of 10 in Transparency International’s Corruption Perceptions Index last year alongside Iran and Kazakhstan. It has one of the lowest per capita incomes in the world with one third of the people living below the poverty line. While the country has grown at a steady 6.2 percent annual clip over the past decade, the gap between rich and poor is widening and annual GDP growth would need to accelerate to 8-9 percent to bring down the number in poverty, international agencies estimate.
The central bank investigation found that Sonali Bank staff, influenced by an adviser to Prime Minister Sheikh Hasina, granted the loans to Hallmark Group based on forged documents.
Hallmark said it has a huge export business and 34 affiliates. Tax records showed that it actually has a handful of small clothing factories and that of the 34 companies, only 14 had a Tax Identification Number and they either paid no taxes or failed to file tax returns. The investigation alleged that Hallmark executives used the loan money to buy 20 sports jeeps, paid sizeable bribes to political bosses and bankers who helped arrange the loan, and siphoned off the rest outside the country.
Sonali Bank is now facing an acute shortage of cash. It recently had to cancel a $10 million loan it had granted earlier due to a funding shortage, and every day it must borrow 30 billion taka ($36 million) from other banks just to carry out its day-to-day affairs.
The bank has yet to file a case to recover the money from the Hallmark Group, and no charges have been filed against bankers involved in the nation’s largest ever loan scandal. Civil society groups and economists suspect a cover-up, in which delays in recovering the money give the government more time to try to save senior politicians involved in the scam.
Loan scandals like this rob banks of the profits and capital needed to back fresh lending, and it is small and medium-sized businesses that pay the price. As of June 30 unpaid or non-performing loans in the banking system, called “classified loans” in Bangladesh, totalled 290 billion taka ($3.4 billion), and thousands of cases involving billions of taka were tied up in the courts as the banking authority tried to recover money from loans gone bad.
Abid Miah, an auto-rickshaw puller in the capital, said Bangladesh’s legal system hardly touches the rich, who manipulate law enforcement authorities and politicians to escape justice.
“Several months have passed since the scam related to the looting of billions of Taka was unearthed, but no case has been filed yet. I took a farm loan of just 5,000 Taka ($60) from a state-run bank but could not pay in time. Police came to my home at least twice to arrest me,” he said.
Abu Ahmed, an economics professor at Dhaka University, said corrupt businessmen have sucked billions of taka out of the banking system over the years. But for this, poor people and small to medium-sized businesses could have received bank loans at much lower interest rates, he said.
He questioned why it is taking so long to file a case against Hallmark. “The symptoms show that the scam will soon become a forgotten issue.”
Iftekhar Zaman, executive director of Transparency International in Bangladesh, shares these concerns and says circumstantial evidence shows that corruption is on the rise. The anti-corruption advocacy group says corruption among public officials and the police is chronic, and ranked Bangladesh among the most corrupt countries in the world in 2011, in 120th place. “We are still in almost the same position as we were a couple of years back,” he said.
“The influence of beneficiaries of corruption is very high in the policy structure. When politics is business and business is politics, corruption will automatically rise,” he said.
Zaman said the government took very positive steps to combat corruption in its first year in office. “But the government’s activities in the last two years have weakened its control on corruption.”
Bangladesh’s corruption watchdog, the Anti Corruption Commission (ACC), is failing to act properly due to government interference, he said, adding that the Hallmark loan scam is an example of collusion.
Corruption slows the country’s economic development. Some 49 per cent of the nation’s 150 million people live below the poverty line, even though gross domestic product (GDP) is expanding at between 6.4 and 6.7 per cent a year. Food prices are soaring, and rising sea levels in the delta are pushing people off their land and out of their homes, worsening economic disparities and widening the gap between rich and poor.
People are flocking to Dhaka in search of work, and for want of a bank loan many small and medium-sized businesses cannot expand to create the jobs they need and meet the growing demands of a rapidly expanding city. Bangladeshi bank data show the squeeze. The state-owned commercial banks distributed only 37 per cent of their annual target of loans to small and medium enterprises (SME) in the year ended June 2012 because of a liquidity crisis caused by heavy government borrowing. Lending by other financial institutions to SMEs was almost 30 per cent below target.
Back at his furniture store, Shahin said businesses like his hardly ever default on loans, yet they become the victims in the banking scandal. “Had the money (given to Hallmark Group) been granted as loans to the small and medium enterprises, they could have flourished as businesses and generated more employment. Corruption is really undermining the future of the country,” he said.
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