Bangladesh’s banking sector has faced several serious challenges due to malpractices, scams, corruption and heists. It has demonstrated vulnerability over time, manifested through high loan default rates and sub-par performance across various indicators. This inherent fragility presents significant risks to the overall economy. Regrettably, the previous government did not keep its commitments to safeguard the banking sector, as expressed in various policy documents and election manifesto. However, the need for a strong banking sector is increasing as the size of the economy is expanding. There has been an erosion of public trust in the banking sector due to the continuous deterioration of the health of the sector and inadequate measures taken by the policymakers of the former government. Sporadic measures were not successful since the nature and depth of the problem require comprehensive due diligence and structural reforms. Reforms in the banking sector are urgent and must be backed by political will, as there will be resistance from vested interest groups.
In this context, the Centre for Policy Dialogue (CPD) organised a media briefing on 12 August 2024 titled ‘Bringing Discipline in the Banking Sector: What Should be Done Immediately’ under its flagship programme, Independent Review of Bangladesh Development (IRBD). Dr Fahmida Khatun, Executive Director of CPD, gave her welcome remarks and delivered the keynote presentation, which was co-authored by Mr Syed Yusuf Saadat, Research Fellow, CPD.
‘A goal-specific, time-bound, transparent, unbiased, inclusive and independent Banking Commission should be formed to bring transparency to the prevailing situation, identify the root causes of the manifest problems, and suggest credible measures for improving the situation sustainably’ recommended the Executive Director.
Dr Khatun highlighted the problems and discussed the recommendations for immediate actions that the interim government should undertake. She suggested that strengthening commercial banks is necessary and emphasised the importance of upholding the independence of Bangladesh Bank. Additionally, she stressed the need to create a conducive legal and judicial environment. Ensuring the integrity and availability of timely data should also be prioritised.
‘Credit-worthiness has been predominantly assessed based on political considerations rather than a thorough evaluation of the risks associated with borrowers’ underscored Dr Khatun. She suggested that to address this issue, loans must be sanctioned in alignment with the Central Bank’s ‘Guidelines on Internal Credit Risk Rating System for Banks’. For instance, Janata Bank’s BDT 10,000 crore loan to AnonTex Group, which represented over 25 per cent of the bank’s capital base, highlights the need for stringent risk assessment practices. Additionally, enforcing a strict single-borrower exposure limit for commercial banks is essential to mitigate excessive risk and ensure financial stability.
Several banks are clinically dead but have been kept afloat through bailouts. To address this, banks on the verge of collapse should be allowed to close down rather than be artificially sustained. Additionally, banks that are not on the brink of collapse but still performing poorly should undergo management and board of replacements. This approach is critical as several previously reputable banks have suffered a decline in performance following hostile takeovers by crony capitalists.
Dr Khatun pointed out that between 2008 and 2023, BDT 92,261 crore—equivalent to 12 per cent of the national budget for FY2024 or 2 per cent of the GDP for FY2023—was embezzled in 24 major banking scams. To address this grave issue, all individuals involved in these fraudulent activities must be thoroughly investigated and brought to justice.
While discussing a conducive legal and judicial environment for banks, the Executive Director addressed that Bangladesh Bank does not make independent decisions on its operations and monetary policy formulation and implementation. In this context, she suggested that the central bank’s autonomy should be upheld in line with the Bangladesh Bank Amendment Bill 2003.
‘In 2017, a single corporation gained control over seven private commercial banks in Bangladesh’, noted Dr Khatun, who also stated that a single individual or group of individuals should not be allowed to obtain majority ownership of more than one commercial bank.
From 2007 to 2014, illicit financial outflows from Bangladesh ranged between USD 47 billion and USD 67 billion, according to the Global Financial Integrity (GFI) Report 2005-2014. To address this issue, she suggested that the Bangladesh Financial Intelligence Unit should be strengthened to prevent further illicit financial outflows and to stop previously laundered money from re-entering the country, which could destabilise the new interim government or incite anarchy.
The mandate of the Financial Institutions Division (FID) is directly contradictory to the Bangladesh Bank Order, 1972, as it permits the FID to oversee the governance of the Bangladesh Bank. To rectify this issue, the Financial Institutions Division (FID) of the Ministry of Finance (MoF) should be closed immediately, and all current and former FID officials should be investigated for any wrongdoing.
According to Bangladesh Bank’s roadmap for reducing non-performing loans (NPL), released to the media in February 2024, 72,543 cases were pending in the Money Loan Court, with an outstanding amount of BDT 1,78,277 crore. To address this issue and reduce the backlog, the number of judges handling cases under the Financial Loan Court Act 2003 and the Bankruptcy Act 1997 should be increased to ensure the speedy disposal of loan default cases.
Bank-wise data on capital adequacy, asset quality, management efficiency, earnings, and liquidity have not been published since 2018. Dr Khatun suggested that reports and data on individual banks and financial institutions should be published regularly and publicly available to enhance transparency and accountability.
‘Between 2009 and 2013, BDT 4,500 crore was embezzled from BASIC Bank through fake companies and dubious accounts,’ highlighted Dr Khatun. To prevent such incidents in the future, a comprehensive risk management policy should be implemented across all commercial banks to detect and deter fraud, forgery, fake companies, false identities, and other malpractices.
A Q&A session with journalists followed the discussion, where the study team highlighted that Bangladesh’s state-owned banks have previously operated effectively without the Financial Institutions Division (FID). They argued that Bangladesh Bank should handle all banking oversight to avoid problems, inefficiencies, loopholes, and corruption associated with creating additional institutions like the FID. Oversight should remain with the Ministry of Finance (MoF), and legal issues should be managed by bodies like the Anti-Corruption Commission (ACC).
The main issues are administrative weaknesses and political influence. Many banks, especially fourth-generation ones, struggle and may need management changes. Appointments in all banks should be merit-based to improve transparency and efficiency. A temporary Banking Commission of experts would be able to evaluate banking issues without adding bureaucracy. Strengthening institutions and enforcing existing rules is key for reinforcing accountability and removing fears, regardless of changes in government.