5 July 2006
Up to 160 industrial banks in 33 developing countries are on the verge of collapse after experiencing persistent default problems, a Monash University researcher fears.
Writing in the current issue of Monash Business Review, Dr Mohammad Ziaul Hoque uses as a case study his two-year investigation of 56 firms with loans from the Bangladesh Shilpa Bank (BSB) totalling $US154.15 million. BSB is the largest industrial bank in Bangladesh.
Industrial banks, also called industrial loan companies, may be owned by commercial companies and are not subject to standard bank regulations despite being able to take deposits and make loans.
Dr Hoque, a lecturer in Monash's Department of Accounting and Finance, saysdefault problems occur because entrepreneurs in developing countries lack the knowledge and skills to conceive, execute and operate viable businesses.
"Budding or inexperienced entrepreneurs are being left unguided and undirected, having to rely on their limited knowledge and experience," Dr Hoque says.
"In the case of BSB, the persistent level of loan defaults and loan losses rendered the bank moribund and its survival dependent on a massive capital injection from the government."
If industrial banks are to improve the ability of borrowers to repay loans, the banks must provide entrepreneurial guidance that emphasises creativity, innovation, market discovery and strategy, he says. The cost of such guidance would be small but could have a significant impact on loan defaults.
"The continued absence of entrepreneurial guidance from the banks is a major contributor to loan defaults and loan losses. More than half of the entrepreneurs in the study experienced cost over-runs attributable to their limited project implementation knowledge and skills," Dr Hoque says.
Although 85 per cent of the borrowers from BSB were looking for entrepreneurial development training, the bank provided none.
Dr Hoque says industrial banks in developing countries need to accept that conventional remedial measures such as supplying fresh loans and loan rescheduling are not preventing loan defaults and loan losses. Entrepreneurial guidance could be a cost-effective solution.
For more information contact Dr Mohammad Ziaul Hoque on +61 3 9903 1786 or Ms Jacqui Golding, Faculty of Business and Economics, on +61 3 9903 2265.
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