Md Mezbaul Haque, the Executive Director and Spokesperson of Bangladesh Bank, refuted claims that the central bank is resorting to money printing to resolve liquidity crisis in five specialized banks, simultaneously discontinuing loans to the government through the same method. He dismissed these allegations as mere propaganda, emphasizing the lack of factual basis in such assertions.
Mezbaul Haque pointed out that certain economists are circulating propaganda without conducting thorough verification. The senior official from the central bank underscored the importance of economists and media professionals playing a more responsible role. He urged them to contribute to maintaining the positive momentum of the country's economy and safeguarding public confidence in the banking system through accurate and verified information.
Barta24 sought clarification from Bangladesh Bank's spokesperson regarding the central bank's position on the matter. Md Mezbaul Haque addressed the issue in an exclusive interview with the news portal.
Barta24: Bangladesh Bank has ceased lending money to the government but is accused of printing money to assist five specialized banks. Could you clarify?
Md Mezbaul Haque: Here, we delve into the mechanisms ensuring bank liquidity. To maintain liquidity, banks are mandated to uphold a Cash Reserve Ratio (CRR) of 4%. Consider a scenario where a bank receives a deposit of Tk100; it must reserve 4% as CRR and an additional 13% as SLR in non-cash form, summing up to 17%. This reserve is a precautionary measure, anticipating the potential need for withdrawal by the depositor.
For instance, if a client requires Tk50, the standard practice dictates that Tk17 is readily available. However, if the need extends to Tk30, the bank covers Tk20 and seeks the remaining Tk10 from us (Bangladesh Bank). The intricacies of this process underscore the balance between maintaining financial stability and meeting the liquidity needs of banks. The decision to grant the requested Tk10 becomes a nuanced consideration, balancing the liquidity requirements of the bank with broader economic stability. Should I say no to the bank?
Bart24.com: Bangladesh Bank is the guardian institution...
Md Mezbaul Haque: The economy will not run if we do not assist them. Then all the banks have to sit with all the cash, and nobody can be issued a loan. In that place, the Central Bank has this assurance, that is to support a bank in case of any crisis. That is the job of the central bank.
The smooth functioning of the economy hinges on proactive assistance to banks. Without such support, banks would be compelled to sit with their cash; no loans could be issued. The Central Bank here provides an assurance – the commitment to support any bank facing a crisis. This, fundamentally, is the primary mandate of the central bank.
Barta24: So, then it's a standard procedure, right?
Md Mezbaul Haque: Certainly, this is a routine process of banking operations. Let's consider a scenario: if a bank borrows Tk10 one day to fulfill a Tk30 payment to a customer, and the following day it receives a deposit of Tk50, the immediate issuance of a loan is improbable. Loan processing takes time. Consequently, the bank retains the Tk50 deposit, uses Tk10 to settle the previous borrowing, and holds the remaining Tk40. This is the banking system (metaphorically, I highlighted the matter with a calculation of 100). How many banks will be in this situation? Suppose there will be three banks. The rest will be okay. The next day, five banks may face the same situation. Again, maybe a bank has made a mistake in liquidity management, pressure will be created for it, or people's trust in a bank has decreased. Then the customers of that bank will want to withdraw more deposits. All these are a part of the system, nothing new.
Barta24: What is the issue of giving loan by printing money?
Md Mezbaul Haque: Imagine... I provided Tk10 to a bank yesterday, and the next day, the bank returned the money. Does this mean that the initial money has vanished or been torn? Not necessarily. This process illustrates a temporary reshuffling of funds for short-term management within the system—a routine aspect of the financial landscape.
It's crucial to distinguish between short-term adjustments and the more concerning situation of a bank holding onto funds for an extended period without repayment. The notion of the central bank "printing money" comes into play when a bank retains funds for an extended period, not repaying for an extended duration, creating a more significant impact on the overall monetary system. Money given for today will be repaid tomorrow... so what is the meaning of printing money?
Barta24: What is the basis of 'printing money' propaganda?
Md Mezbaul Haque: The statement lacks a factual basis. It is some so-called economists, with only a shallow understanding of the system, said that the central bank's disbursal of money directly corresponds to an increase in money supply. These individuals may not comprehend that daily financial activities involve a continuous cycle of payments and withdrawals. Their misconception leads them to believe that the central bank is inundating a particular bank with money, without considering the ongoing dynamics of financial transactions and the role of routine banking operations.
Barta24: So, if it is true – then being an economist making such a statement, what message is it sending to the masses?
Md Mezbaul Haque: Who will step up to tackle this challenge? The economist who recently addressed this matter in the media seems to have a proclivity for speaking up whenever media cameras are present. However, he appears less concerned about the relevance of the topic to his expertise. It seems that economist lives by making comments without considering the appropriateness of the subject.
In contrast, many reputable economists exercise restraint and refrain from commenting on subjects beyond their expertise. They recognize that events occurring within a single day should not be hastily deemed as phenomena. The Central Bank is adept at day-to-day management, and the situation will be appropriately addressed. This adherence to the traditional principles of the Central Bank remains a steadfast rule.
Barta24: As it is being said that Islamic banks are falling apart, what is your assessment?
Md Mezbaul Haque: Governance issues may exist there, and it's not uncommon for banks to grapple with such challenges. Despite this, the foundational strength of Islamic banks remains robust. Notably, 40% of our foreign remittances flow through Islamic banks, a testament to their significance. For instance, if the total remittance amounts to 100 million, 40 million is routed through Islamic banks. Even a marginal profit of Tk1 per 40 million translates to a substantial Tk4 crore profit. When multiplied annually, the impact is noteworthy.
However, acknowledging some leakage in the system, it's crucial to recognize that this can be curbed with strategic measures. Closing down Islamic banks isn't the solution; rather, they should be sustained with support while addressing and rectifying the drainage issues.
As part of our policy initiative, we are actively adjusting the policy rate. Our goal is to streamline fund flows, reduce funds in banks, and subsequently alleviate inflation. Despite claims of a banking crisis, it's essential to note that the current 12 percent interest rate is a deliberate decision by Bangladesh Bank, reflecting our policy objectives. In times of financial hardship, such as a lack of funds for basic needs, the Central Bank intervenes to provide necessary support.
Barta24: What kind of responsibility do you expect from the media and economists?
Md Mezbaul Haque: Each of us carries a unique responsibility within our respective domains. Our commitment is to unveil the truth to the public. Every issue, like the liquidity problem I referenced, possesses both apparent and underlying facets. Our unwavering goal is to present the reality, shedding light on the complexities involved.
Consider a scenario involving 10 banks; their liquidity management strategies inherently differ. It is foreseeable that two among them might grapple with liquidity challenges. Picture this: I am tasked with repaying a significant sum to you today, but I appear at the last moment, deferring the payment from today to tomorrow. Can you instruct your customers to patiently wait until tomorrow? Inevitably, they would seek immediate solutions from the central bank, underscoring the urgency of addressing such issues to maintain customer confidence in the banking system. This falls within the purview of our routine functions.
Should anyone question why the central bank intervenes, I would assert that our mandate is explicitly defined in the monetary policy and the Bangladesh Bank order, guiding our actions to ensure the stability and integrity of the financial system.
Barta24: What kind of effect does this kind of propaganda have on the economy?
Md Mezbaul Haque: The potential repercussions of such incidents extend across various sectors, with foreign investment being notably susceptible. Presently, an eerie calm prevails. In the aftermath of events, people eagerly await a defining moment, contemplating the far-reaching consequences. Unfortunately, there is a growing tendency to sensationalize occurrences, signaling a pressing need for greater responsibility in reporting.
It is imperative to report news with genuine intent rather than merely pursuing sensational headlines. Behind every policy of the Central Bank lies a perspective, and each action is guided by a rationale. While interpretations and criticisms are valid, it is unacceptable to steer the Central Bank into an inaccurate narrative.
Overseeing around 60-61 banks, our approach to providing funds involves two primary methods: first, through the acquisition of collateral. However, Islamic banks face a unique challenge due to the absence of sufficient Islamic instruments in the country, limiting their collateral options. To address liquidity or management issues, the central bank proactively steps in, underscoring our commitment to managing challenges within the banking sector.
