The Bangladesh banking sector is experiencing its most severe crisis in decades, marked by a debilitating capital shortfall of approximately $15.5 billion and the unfortunate distinction of having the highest rate of non-performing loans (NPLs) in Asia. This alarming situation has been starkly revealed by the sector’s ongoing transition to the BASEL III regulatory framework.
In a pivotal move to align with global standards, Bangladesh Bank has revised its loan classification criteria, reducing the default period for labelling a loan as non-performing from six months to three, effective from April 2025. While this regulatory tightening is a necessary step toward greater transparency and financial discipline, it has also served as a diagnostic tool—exposing long-concealed defaults and a chronically weak recovery infrastructure.
The result has been a predictable, yet alarming, surge in officially recognized bad debts, which soared to Tk 5.30 trillion by June 2025. This now accounts for a staggering 27.09 per cent of total loans, cementing the sector’s status as the most fragile in the region.
One fundamental and immediate reform needed to address this crisis is the abolition of the dual regulatory structure—currently shared by Bangladesh Bank (BB) and the Banking Division under the Ministry of Finance. This overlapping and often contradictory oversight is a root cause of regulatory inefficiency, political interference, and institutional unaccountability.
This solvency crisis is not isolated; it fundamentally undermines the effectiveness of national monetary policy. A banking sector plagued by insufficient capital adequacy and burdened with NPLs cannot serve as a reliable conduit for monetary signals.
When the central bank attempts to stimulate the economy, these weakened institutions are incapable of expanding credit to productive sectors. Conversely, efforts to tighten monetary policy often fail to curb in speculation, as credit continues to be channelled toward well-connected, unproductive borrowers.
This creates a vicious cycle: liquidity stress, coupled with eroding public confidence, deters deposits. In turn, this reduces banks’ lending capacity, which stifles both investment and savings. To break this cycle, a re-evaluation of the central bank's role is critical.
While stricter regulation is a prerequisite, it is an insufficient remedy. Bangladesh Bank must undergo a strategic evolution, transitioning from a traditionally constrained and often reactive regulator into an active facilitator of market discipline, consolidation, and systemic healing.
The history of bank mergers in Bangladesh reveals a pattern of reactive, ad-hoc measures rather than strategic, long-term vision. The nation’s journey with consolidation can be segmented into four distinct, crisis-driven phases.
- Early consolidation (1983–1990s)
This era was dominated by rationalising state-owned banks (NCBs). Mergers during this period were administrative in nature—intended to streamline sprawling branch networks and reduce operational losses. The goal was not to create stronger, more competitive entities, but to manage the cumbersome legacy of nationalized institutions, often merely merging weaker NCBs into slightly larger, but not fundamentally more robust, ones.
- Post-privatization era (1990s–2000s)
The licensing of private banks led to a crowded, competitive sector. Mergers during this period were often rescue operations. A notable case was the absorption of the collapsed Bank of Credit and Commerce International (BCCI) by Sonali Bank in 1991—triggered by a global scandal rather than strategic consolidation.
- Crisis-driven mergers (2000s–present)
This period has been shaped by institutional failures and systemic weaknesses. The unresolved case of merging BASIC Bank—marred by scandals—with a stronger peer highlights how political resistance can paralyze essential reforms. Meanwhile, so-called ‘zombie banks’ have survived only through central bank liquidity support despite poor governance and soaring NPLs. The IMF and other international bodies have long recommended their consolidation.
- The current push (2023–onwards)
Bangladesh Bank is now formally encouraging mergers between weak and strong banks in response to the deepening NPL crisis and the threat of systemic collapse. While this represents a more assertive policy stance, its success is far from guaranteed, given the complex implementation challenges.
The challenges of bank mergers are merely symptoms of deeper systemic flaws:
Political interference and crony capitalism: Banks are frequently pressured to issue large loans to politically connected individuals without adequate due diligence. Governance is compromised by board appointments based on loyalty rather than expertise. A culture of impunity for influential defaulters has eroded credit discipline.
Regulatory capture and non-compliance: Bangladesh Bank’s ability to enforce regulations is often undermined by political pressure. This allows for widespread "evergreening" of loans—where bad debts are repeatedly rescheduled under lenient terms, masking the true extent of the NPL crisis. Weak supervision has also enabled banks to routinely violate exposure limits and capital adequacy requirements with little consequence.
Operational failures: The officially reported NPL ratio—already above 8–10 per cent—is widely believed to be a serious underestimate when rescheduled and written-off loans are factored in. A significant portion of banking capital remains locked in unproductive assets, contributing to persistent liquidity shortages. High-profile scandals, such as the Hall-Mark loan scam and the looting of BASIC Bank, illustrate how corruption and weak governance siphon funds from depositors and shareholders. These failures have severely eroded public trust in the safety of deposits.
The ethical crisis in Islamic banking: Islamic banking in Bangladesh has also fallen short of its ethical commitments. Several institutions have been implicated in scandals that reveal practices virtually indistinguishable from conventional interest-based banking. Overreliance on markup-based contracts like Murabaha—rather than genuine profit-and-loss sharing models such as Mudaraba and Musharaka—has stripped Islamic finance of its ethical investment dimension. Weak and ineffective Sharia supervisory boards have further compounded the problem.
Addressing this multifaceted crisis requires a comprehensive and coordinated reform strategy:
Governance and regulatory overhaul: The first step must be a demonstration of genuine political will to depoliticize the banking sector and grant Bangladesh Bank operational independence. This must be accompanied by strict accountability—laws against willful defaulters and corrupt officials must be enforced without exception. Strengthened regulation, including the adoption of risk-based supervision and automated loan classification systems, is essential to end loan ever-greening.
Protection of the financial base: A robust and well-funded explicit deposit insurance scheme is critical for preventing bank runs and protecting small depositors, especially during the turbulent process of consolidation. Managed mergers must be guided by a transparent framework. Bangladesh Bank must ensure fair asset valuations, prevent toxic asset transfers to stronger banks, and prioritize depositor protection over the interests of powerful shareholders.
Building a sustainable and inclusive banking system: Public engagement is critical. Community-based initiatives like ‘Uthan Baithak’ can help rebuild trust, improve financial literacy, and mobilize grassroots savings. Fintech and mobile financial services should be leveraged to formalize micro-savings and investments, integrating the unbanked into the financial system.
Islamic banking must be reformed through mandatory independent Sharia audits and the development of authentic ethical products. The concept of societal banking must be redefined to genuinely serve rural communities—fostering employment and retaining capital locally rather than transferring it to urban centres.
The directive to end the supervision of banks by the Ministry of Finance’s Banking Division should be implemented without delay.
Five Islamic banks—First Security Islami Bank, Global Islami Bank, Union Bank, Social Islami Bank, and EXIM Bank—are poised to merge into a single state-backed entity, likely to be named United Islami Bank. The government has approved the merger to rescue these financially distressed banks, with completion expected within 1 to 1.5 months. The new institution will become the largest in Bangladesh by assets, backed by substantial government capital injections to safeguard depositors.
The initiative to return up to Tk 200,000 to affected clients is commendable. Additionally, providing Tk 500,000 to individuals with disabilities, such as paralysis, would demonstrate a socially responsible approach. It is vital that this merger is executed swiftly, transparently, and with integrity.
Reform in banking education is also essential. The current banking diploma certificates issued by the Institute of Bankers, Bangladesh (IBB), have lost credibility and should be discontinued. A qualified and experienced individual from Bangladesh Bank should be appointed as Director General of BIBM. The current Chief Economist of Bangladesh Bank, who brings both international academic credentials and practical banking experience, would be a suitable candidate for the position.
The crisis facing Bangladesh’s banking sector is undeniably severe—but it is not beyond repair. The roadmap for reform—from governance overhaul to strategic mergers—is clear and well-documented. The real obstacle lies in the absence of political will to implement changes that challenge entrenched interests. Restoring stability and public trust requires a collaborative, courageous, and transparent effort from the government, a newly empowered Bangladesh Bank, and the banking institutions themselves. Only through such a unified approach can the banking sector be transformed from a source of systemic risk into an engine of sustainable economic growth.
The writers is a macro and financial Economist, IT expert and entrepreneurial specialist. He is a Professor of Economics, Bangladesh University of Business and Technology. He can be reached at pipulbd@gmail.com
