Originally posted in The Financial Express on 10 November 2026
Bangladesh’s banking sector has been vital to the country’s economic development. By mobilising savings and providing credit, banks have supported industrialisation, trade, investment and employment. Access to bank financing has helped Bangladeshi entrepreneurs establish businesses, expand production, adopt new technologies and reach international markets. The growth of the ready-made garment industry, other manufacturing activities and services has been closely tied to the expansion of banking services. Banks have therefore played a significant role in building a dynamic private sector and transforming Bangladesh’s economy.
However, weak governance, poor lending practices, political interference, and inadequate regulatory enforcement have undermined the banking sector’s potential to contribute further. High levels of non-performing loans (NPLs), serious capital shortfalls, and financial distress at several institutions now threaten the sector’s capacity to support productive investment.
NPLs accounted for 33.2 per cent of total outstanding loans as of June 2026, according to the Banking Sector Update of Bangladesh Bank (banking sector update june 2026.pdf). The Monetary Policy Review 2025-26 of Bangladesh Bank shows that the banking system’s capital-to-risk-weighted-assets ratio fell to negative 2.64 per cent in December 2025. This indicates serious weaknesses in asset quality and banks’ capacity to absorb losses.
Such crisis extends beyond banking. Weak banks struggle to finance businesses, and uncertainty about their financial health erodes depositor confidence. Private-sector credit growth has slowed sharply, contributing to subdued investment and economic activity. Credit to the private sector increased by 4.75 per cent in August 2026 compared to the previous year.
Bangladesh has pursued financial-sector reforms for more than three decades. Yet serious weaknesses persist. Hence, the central question is why successive reforms have failed to establish lasting financial discipline and what must change this time.
The roots of Bangladesh’s banking crisis: Weaknesses in the banking sector initially emerged in state-owned institutions, where politically influenced lending, poor credit appraisal and ineffective recovery were common. From the 1980s, the growth of private commercial banks increased competition, improved services and expanded access to credit, but also introduced new governance challenges.
In several private banks, concentrated ownership gave influential shareholders the power to interfere with lending decisions. Connected lending, excessive exposure to large business groups, and weak board oversight undermined credit discipline. Some banks became closely associated with their owners’ financial interests instead of operating as independent financial intermediaries.
Bangladesh Bank introduced prudential requirements for loan classification, provisioning, capital adequacy, and borrower exposure, but enforcement was inconsistent. Repeated rescheduling and restructuring allowed some borrowers to delay repayment without demonstrating a credible ability to repay. Lengthy legal proceedings further weakened recovery.
These failures reinforced one another. Poor lending generated NPLs, reducing earnings and eroding capital. Weak capital constrained new lending, while regulatory concessions often delayed the recognition of losses.
Stricter classification and disclosure requirements have recently revealed previously concealed weaknesses. The rise in reported NPLs reflects more accurate recognition of existing problems. But recognising losses must be followed by recovery, restructuring and accountability.
Financial indicators reveal deep weaknesses across banks: The CAMELS framework assesses banks across capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk. Bangladesh’s banking indicators show substantial differences across institutions.
Bangladesh Bank’s June 2026 data show NPL ratios of 43.2 per cent for state-owned commercial banks, 33.2 per cent for specialised banks and 31.6 per cent for private commercial banks. Foreign banks recorded a much lower ratio of 6.5 per cent.
Differences within private banking are also significant. Fourth-generation private banks recorded the highest NPL ratio of 51.6 per cent, compared with 35.2 per cent for first-generation, 19.9 per cent for second-generation, 30.4 per cent for third-generation and 3.1 per cent for fifth-generation banks. Full-fledged Islamic banks recorded NPL of 58.9 per cent. Although individual institutions within each category differ, these figures demonstrate the uneven distribution of banking distress.
These differences underscore the importance of professional management, prudent lending, and effective risk controls. Foreign banks generally have stronger internal controls, although their business models and customer bases differ from those of domestic banks. Some domestic banks have also performed relatively well, thanks to sound governance and diversified lending. Ownership alone does not determine performance. The decisive factors are independent credit decisions, effective board oversight and consistent regulatory enforcement.
Liquidity and solvency must also be distinguished. Some banks face acute cash shortages, while others have surplus liquidity. Temporary liquidity support may help a solvent bank, but it cannot restore an institution whose losses have depleted its capital. Such banks require restructuring or resolution.
Previous reforms failed to address governance weaknesses: The Financial Sector Reform Programme of the 1990s introduced major prudential and operational reforms. Later programmes aimed to modernise management and strengthen supervision. In 2007, major state-owned banks were corporatised to give them greater commercial autonomy.
These initiatives produced some improvements but did not fundamentally change institutional incentives. Political influence over appointments, management and lending continued, while accountability for poor decisions remained weak.
Repeated recapitalisation of state-owned banks highlights the limits of reform without accountability. Public funds were used to improve weak banks, but capital shortfalls returned because lending practices and governance did not improve enough.
Private banks faced similar problems from shareholder influence, connected lending, and weak supervision.
Recent reforms must be judged by their implementation: Since August 2024, the government has taken several important measures to address weaknesses in the banking sector. These include changes to the boards of troubled banks, independent asset-quality reviews, stricter loan classification, risk-based supervision, and the introduction of a bank-resolution framework.
The Bank Resolution Ordinance 2025 created legal mechanisms to restructure and resolve distressed banks. Such a framework is necessary because conventional supervision is insufficient when banks have already accumulated large losses. Resolution arrangements should allow authorities to protect essential banking services and depositors while ensuring that losses are recognised and allocated according to the law.
The International Monetary Fund (IMF)’s January 2026 Article IV assessment emphasised the need for a comprehensive banking reform strategy, including reliable estimates of capital shortfalls, clear arrangements for fiscal support, and legally sound restructuring and resolution plans. It also recommended asset quality reviews for systemically important and state-owned banks and cautioned against unsecured liquidity injections into weak institutions.
In June 2026, the World Bank approved US$ 450 million under the Financial Sector Support Project II. The project aims to strengthen deposit protection, modernise Bangladesh Bank’s supervisory systems, improve emergency liquidity arrangements, and support the restructuring of state-owned banks. Bangladesh economic report
These initiatives can strengthen institutional capacity, but their effectiveness will depend on implementation.
What must be done differently this time: First of all, the government must establish clear political ownership of banking reform by committing to end interference in bank appointments, lending decisions, and regulatory enforcement. This commitment must apply equally to state-owned and private institutions.
A comprehensive reform strategy should assess each bank’s financial condition, capital needs, governance weaknesses, and recovery prospects. It should distinguish viable institutions that need corrective measures from non-viable institutions that require resolution.
The Ministry of Finance should develop restructuring strategies tailored to each state-owned bank. Each strategy should set out commercial and public-service objectives, capital requirements, management responsibilities, and measurable performance targets. Any recapitalisation should be conditional on credible reforms and independent monitoring. The fiscal costs must be transparently disclosed. Public support should not become an open-ended commitment to cover recurring losses.
Bangladesh Bank must complete independent asset quality reviews, enforce provisioning requirements, monitor large-borrower exposures and act promptly when banks fail to meet prudential standards.
Risk-based supervision should be supported by reliable financial data and stronger analytical capacity. The planned adoption of expected-credit-loss accounting under International Financial Reporting Standard 9 (IFRS 9) should improve the recognition of potential losses, provided that implementation is supported by adequate training, data systems and supervisory verification. IFRS 9 is an international accounting standard that requires banks to estimate potential loan losses in advance and set aside sufficient funds to cover them, rather than waiting for borrowers to default.
Bank boards and management must take direct responsibility for maintaining lending discipline. Independent directors should exercise meaningful oversight, risk-management departments should have sufficient authority, and internal audit findings should prompt corrective action.
Loan recovery and insolvency proceedings should be more effective. Faster case resolution and stronger enforcement would limit deliberate delays and strengthen the credibility of repayment obligations.
Reforms should follow a clear sequence. During the first six months, priority should be given to transparent financial diagnostics, identifying non-viable institutions, and preparing recovery plans for major distressed loans. In the next phase, spanning one to two years, the focus should shift to restructuring weak banks, improving loan recovery, strengthening governance, and implementing supervisory reforms. Over the following three to five years, the goal should be sustained improvements in capital adequacy, profitability, institutional independence, and financial accountability.
Progress should be assessed against measurable indicators, including actual cash recovery, new loan defaults, provisioning coverage, capital adequacy, profitability, governance compliance and depositor confidence.
The present crisis offers an opportunity to break this pattern. Success, however, will depend on consistent rule enforcement, professional management, transparent acknowledgement of losses, and credible consequences for financial misconduct. The goal should be a banking system that protects savings, allocates credit efficiently, supports productive investment, and operates within enforceable rules.
The writer is an economist and Distinguished Fellow, Centre for Policy Dialogue (CPD).
