Institutional imperative and our banking industry

Corporate executives usually control their business operations through a standard operating procedure. However, on some occasions, executives act differently under the influence of an unseen force referred to as institutional imperative. 

American business magnate, investor and philanthropist Warren Buffet, in particular, termed this idiosyncrasy in his Berkshire Hathaway annual report of 1989 as "the tendency of executives to mindlessly imitate the behaviour of their peers, no matter how foolish it may be to do so".

Due to regulations and prudential guidelines, there is no room for such overbearing conduct in our banking industry, yet this occurs arbitrarily.

Take the example of banks impulsively introducing new products and services simply because a peer does so. Channel banking, popularly known as agent banking, is an example.

Successful banks rolled out channel banking after appropriate capacity-building and putting specific plans in place. Many other banks entered the race as an imperative, without skill and capacity. These banks have been suffering from loss of assets and diminished productivity.

In the 1990s, a foreign bank opened its Dhaka operation with the Bangladesh Bank governor in attendance as the chief guest. The governor graciously admired the quality of the bank's interior decoration. Other bankers in attendance, encouraged by this admiration, were impulsed to mimic the decorative style. The compulsive behaviour of outperforming the competitors' facial makeup, gave rise to a class of imitation interior decorators.

The inclination for wasteful extravagance in banking continues with product launching and ribbon-cutting. Launching a product is, at best, symbolises a debut, not a strategic accomplishment. One normally celebrates when a product achieves its goal. I have heard bankers talking about unsuccessful products that perished at the first phase of launching with little accountability taken for failures. 

Bankers deal with public money and are expected to follow conservative accounting principles. Conservatism in banking is not a reactionary process as this terminology is often misinterpreted. It connotes a banking norm of conserving or preserving the interest of stakeholders: depositors, shareholders, investors, vendors and regulators.

Furthermore, a new trend among banks includes making large expenses in the name of special donations. Banks usually make donations under standard corporate social responsibility (CSR) activities and the funds come from the net profit after the final accounts. On the contrary, when donations are made randomly under the guise of philanthropy, the management control function becomes irrelevant.

However unimportant the operational deviations cited above may appear at this time, the shady practices have the potential of upsetting the whole banking system.

Generally speaking, upper management in our banks is conversant and accomplished. To my knowledge, they are diligent and earnest. Then what went wrong was that some activities are not prudentially managed and control functions are not applied effectively by them.

In my judgment, we need to redefine our operating procedure and inculcate a cultural change. Under this cultural variation, management will be empowered to implement operational standards in their literal meaning and allowed to take charge free from constraints.

The author is an independent director of Bank Asia Limited. He can be reached at dhc707@gmail.com