Banking on change: key reforms transforming Bangladesh's financial sector

Bangladesh is currently experiencing a wave of crucial financial sector reforms, moving its banking system closer to global standards. The central bank, the Bangladesh Bank (BB), is spearheading a massive overhaul focussing on fixing bad loans, professionalising management, and preparing for the digital future.

The core of this reform is twofold: fixing the problems of the past through tighter governance and preparing for the future by modernising supervision and technology.

In the past year, the focus has been squarely on arming the central bank with powerful new legal tools designed for stability and compliance. This legislative push ensures the BB has the necessary firepower to manage crisis and guide the market.

This new law, the Bank Resolution Ordinance, 2025, is one of the most significant power-ups for the Bangladesh Bank. Think of it as installing a financial sector emergency response mechanism, an instant safety net that protects the financial system when a single bank is about to collapse.

In the past, when a bank failed, the process was slow. Regulators often had to wait for lengthy, time-consuming court procedures. This delay created panic and allowed problems to spread, much like a fire that can't be put out quickly. The new ordinance gives BB full legal authority to step in swiftly and manage a failing bank immediately. The BB no longer has to wait for courts; it can take control right away. Another key feature is the ability to create a Bridge Bank keeping critical functions of the failing bank running.

In essence, this move aligns Bangladesh with international best practices for crisis management, moving the BB from being a reactive spectator to a proactive crisis manager.

Alongside stability, the legal structure is being updated for modernisation. New legislation, such as the Payment and Settlement System Act, 2024, has formally defined and legalised the landscape for digital finance activities. This step clears the path for the licensing of new, tech-focussed Digital Banks (DBs). The licensing of DBs will accelerate competition, drive down costs, and is designed solely to boost financial inclusion through efficient, mobile-first services. These branchless institutions must have high capital, such as Taka 3.0 billion.

In a bid to attract foreign investment and boost international trade, the Offshore Banking Act, 2024, was introduced. This provides a separate, favourable legal and tax structure specifically designed to encourage foreign capital and business transactions, streamlining international financial activities.

The reforms are not purely commercial; they embed environmental accountability as well. A significant Green Finance Mandate now requires banks to dedicate a minimum of 5 per cent of their total lending to direct green finance projects. This is coupled with new rules for mandatory climate and sustainability reporting, effectively integrating environmental risk into financial accountability. Furthermore, recognising the interconnected risks in the financial system, the Finance Company Act, 2023, was introduced to strengthen the BB's regulatory oversight of Non-Banking Financial Institutions (NBFIs).

WHAT'S COMING NEXT: The next phase of reforms is focussed on sweeping structural changes to governance, credit quality, and how banks are monitored. This is the phase that will determine the long-term success of the entire roadmap.

BB is forcing banks into an unprecedented level of transparency regarding bad loans (Non-Performing Loans or NPLs). This is being driven by two powerful mechanisms:

o Strict deadlines (June 2026) are set for NPL reduction. State-owned banks must drop their ratio to 10 per cent, whilst private banks must aim for below 5 per cent. This forces banks to aggressively pursue loan recoveries and clean up their balance sheets.

o The mandatory transition to IFRS-9 (Expected Credit Loss or ECL) is the most significant structural change. With full compliance due by December 2027, banks can no longer hide losses under the incurred loss model. Instead of waiting for a loan to go bad, banks must now proactively predict future losses and set aside funds now. Whilst this will cause NPL figures to spike initially by revealing the true, unvarnished scale of the problem, it creates a much more honest and resilient financial system.

Governance reforms are squarely on the chopping block, driven by planned amendments to the Bank Company Act of 1991, all designed to radically reduce insider influence and boost professionalism across the sector. Proposals include directly addressing two major points. The first is curbing family dominance and significantly limit the number of directors from a single family permitted on a bank's board and to reduce the maximum continuous term a director can serve, for instance, dropping it from 12 years down to six years. This crucial step introduces mandatory rotation and fresh oversight, directly challenging deeply entrenched power structures that have often prioritised personal interest over institutional health. Concurrently, the Bangladesh Bank has initiated a clear roadmap for enforcing mergers and acquisitions (M&A). This strategic policy is designed to encourage or compel weaker, struggling banks to consolidate with stronger, healthier entities. This aims to stabilise the entire sector by creating a smaller, more robust set of institutions, effectively weeding out those that are chronically undercapitalised or mismanaged.

The reform roadmap, whilst ambitious and globally aligned, has only laid the groundwork; the hardest part, the execution, lies ahead. The success of this transformation depends on navigating several critical and interconnected challenges.

The drive towards true professional governance will inevitably be met with opposition from powerful, established banking groups who will resist the planned curbs on family ownership and director tenure. Overcoming this influence is a fundamental political struggle, and the Bangladesh Bank's ability to withstand this pressure will be the measure of its independence.

Simultaneously, the sector faces the NPL (Non-Performing Loan) and capital reckoning. Implementing the IFRS-9 model will force banks to recognise the true, full extent of their bad loans, necessitating that they raise significant capital. The initial shock of these high NPL figures could severely test public and investor confidence, making the sector's ability to absorb this shock and recapitalise appropriately a major financial risk.

Sustaining the momentum behind these tough, unpopular decisions, including enforcing mergers and holding powerful defaulters personally liable, requires unwavering political commitment. The sheer size of the sector's problems necessitates firm and consistent political backing to ensure the reforms are not stalled or reversed.

Finally, there is a significant technical capacity gap. The IFRS-9 model and Risk-Based Supervision demand highly specialised skills, complex data analytics, and robust modelling expertise. Banks and the BB itself must therefore urgently invest in talent and technology to effectively implement these complex international standards. Without sufficient technical capacity, even the best laws will remain ineffective.

Ultimately, these reforms offer Bangladesh a clear path to a more resilient financial future. The coming years will be the definitive test of whether the country can translate excellent regulatory policy into hard, lasting financial reality.

Sameera Mahmud is an Advocate of the Supreme Court and the Co-managing Partner at the Legal Circle (www.legalcirclebd.com). She can be reached at sameera@legalcirclebd.com