A Policy Fallacy Rooted in Over-Licensing and Weak Oversight

Bangladesh, with a GDP of around USD 460 billion in 2025, has one of the most over-licensed financial sectors in South Asia. It currently hosts 61 scheduled banks, 38 non-bank financial institutions (NBFIs), over 750 licensed microfinance institutions (MFIs), alongside 13 mobile financial service (MFS) providers, 9 payment service providers (PSPs), and 12 payment system operators (PSOs). These institutions are regulated by four bodies: Bangladesh Bank (BB), the Insurance Development and Regulatory Authority (IDRA), the Microcredit Regulatory Authority (MRA), and the Bangladesh Securities and Exchange Commission (BSEC). Yet financial inclusion remains suboptimal. A substantial segment of the population, including many in urban areas, remains excluded from formal financial services.

This disconnect stems from a persistent policy fallacy: the assumption that issuing more licenses leads to better access. While initiatives such as agent banking and mobile money have been introduced, the structure, cost, and regulatory fragmentation of the financial ecosystem continue to constrain true inclusion.

Of course, there must be a sufficient number of banks and financial service providers in any economy to avoid monopolistic behaviour or the abuse of dominant positions. Too few players limit consumer choice, reduce service quality, and stifle innovation. However, the number and nature of financial institutions must be calibrated to match the size of the economy and its bankable population. Unchecked licensing introduces inefficiencies and cost burdens without corresponding improvements in outreach or service.

The Hidden Cost of Over-Licensing
Every financial license comes with a heavy operational footprint. Consider the 61 scheduled banks. Each operates a corporate headquarters often located in premium commercial areas of Dhaka with its own executive teams, compliance functions, IT systems, and boards. These structures rarely translate into wider financial access or innovation. The capital needed to sustain one such headquarters could support hundreds of rural branches or digital service points.

These overheads aren’t absorbed by the institutions, they’re passed on to customers through higher interest rates, fees, and service charges. The basic business model remains unchanged: take deposits, lend money, and process payments. More licenses simply mean more duplicated costs, not greater value for the end-user. Instead of competition driving down costs, over-fragmentation makes the system inefficient and increases the price of access.

Default Culture and Regulatory Apathy
Another major symptom of policy and regulatory failure is the alarming level of non-performing loans (NPLs). As of December 2024, defaulted loans had crossed BDT 3.45 trillion. More than 20% of all disbursed credit. This is not merely a technical or operational issue; it is structural and systemic.

A major cause is the unchecked conflict of interest, where bank directors and shareholders grant loans to entities in which they have a stake. This self-dealing has eroded trust and drained capital from the system. Bangladesh Bank’s recent move to introduce a Credit Scoring Agency License is a step in the right direction. But it must be grounded in genuine independence. No financial institution or its owners should be allowed any stake in a credit scoring or rating agency. Otherwise, it will merely replicate the current flaws in a different form.

Digital Banks or Just Digitised Banks?
The recent push for digital banking licenses reflects a tendency toward policy experimentation without adequate strategic clarity. The key question is: What can a digital bank achieve that a properly digitised conventional bank cannot?

Most existing banks already offer mobile apps, online services, and agent networks. MFSs have created a wide-reaching service network. With the right interoperability framework and regulatory support, existing players can offer better, more affordable digital services. Issuing fresh digital bank licenses creates yet another silo. New overheads, capital requirements, compliance demands without fixing foundational gaps.

Moreover, the prerequisites for successful digital banking, for example universal internet access, digital literacy, cybersecurity infrastructure remain underdeveloped in Bangladesh. Without resolving these, digital banks risk becoming high-cost, low-impact ventures. The focus must be on value-added services, interoperability (e.g., UPI, RAAST, PIX models), and strategic differentiation rather than cosmetic innovation.

The Way Forward: Optimisation, Not Expansion
The financial sector needs smarter, not more, institutions. A few core reforms can help achieve that:
● Rationalise licenses by phasing out dormant or shell institutions

● Consolidate weak banks to reduce duplicated costs and strengthen capital bases

● Digitise existing institutions rather than create parallel digital structures

● Enforce board-level accountability and governance in financial institutions

● Establish conflict-free credit scoring agencies for genuine credit evaluation

● Fix structural gaps first—before chasing the latest global fintech trends

Crucially, Bangladesh needs a harmonised policy architecture that aligns the national financial inclusion strategy with relevant laws, acts, rules, and guidelines. This requires synchronisation among regulators, forward-looking regulatory upgrades, and a clear roadmap that integrates sandbox testing and public-private collaboration. Without such alignment, even well-intentioned reforms may end up creating new inconsistencies.

Abu Nazam M Tanveer Hossain: Public Policy Advocate