Why hasn’t there been significant change in banking sector?

The country’s banking sector has been in a state of crisis for quite some time. In particular, the condition worsened significantly during the previous government’s tenure. Eight months have now passed since the interim government took charge of state affairs. However, there does not seem to have been any notable change or improvement in the banking sector during this time. Several weak banks continue to operate, some of them barely surviving with the support of Bangladesh Bank. A few are managing to stay afloat to a moderate extent. But overall, the sector remains in poor condition. Dr. Ahsan H. Mansur, Governor of Bangladesh Bank, has commented that both the central bank and the government are trying to save the weaker banks—although some may not be salvageable at all.

The banking sector is riddled with problems, among which the most alarming is the overwhelming volume of non-performing loans (NPLs). The amount of defaulted loans has increased at an abnormal rate. According to newspaper reports, as of the end of last December, the total disbursed loans in the banking sector stood at Tk. 17,11,402 crore, of which Tk. 3,45,765 crore were defaulted—accounting for 20.20% of all loans. Among these, Tk. 2,91,537.75 crore were classified as “bad loans,” which represent 84.31% of the total NPLs. Loans that fall under the “bad” category usually have very little prospect of repayment. Many banks are facing provisioning shortfalls; they are unable to maintain the required provisions even if they wish to. Thirteen banks are currently under-provisioned, and the total shortfall across the banking sector amounts to Tk. 1,06,130 crore.

These figures alone indicate just how dire the situation has become. The burden of defaulted loans has crippled many banks, stripping the sector of its operational vitality. As a result, the banking system is failing to play its expected role in the broader economic landscape. In order to revive the sector, necessary reforms must be implemented so it can contribute effectively to national development. Without a robust banking sector, the economy cannot recover or grow sustainably. At present, 61 banks are operating in the country. Many argue that such a large number of banks is unnecessary for a country like ours. I don’t see the issue as one of numbers. What matters more is how these banks are functioning. Are they able to operate on their own strength, or are they surviving on external support?

Let’s look at neighboring India. Despite having a much larger population and economy, the number of banks in India is fewer than in Bangladesh. So, the number alone is not the issue. What truly matters is whether the banks are contributing meaningfully to the economy. In our case, the sector has fallen short of that goal. We all have a fairly clear idea of what the problems are—mainly the enormous presence of defaulted loans and weaknesses in management. Bangladesh Bank has failed to play the regulatory role it should have. A powerful group consisting of bank owners, board members, and individuals under political patronage has worked in tandem to destabilize the sector.

Recently, we’ve seen the banking sector being used as a conduit for money laundering by certain vested interests. With political backing, influential groups secured both legal and illegal loans from banks and siphoned off the funds abroad. This was a calculated attempt to destroy the banking system. The culture of loan default was fostered specifically to enable this type of financial exploitation. In fact, the definition of defaulted loans has been changed at different times to protect defaulters. Our banking laws, which were once aligned with international standards, have been amended to safeguard the interests of loan defaulters. Policies on loan rescheduling and write-offs have been relaxed, allowing the apparent reduction of NPL figures without any real recovery of dues. These legal changes were made to facilitate the agenda of those who were intent on exploiting the banking system, not to benefit regular, responsible borrowers.

The country’s banking sector is essentially under dual control. State-owned banks operate under the direct authority of the Bank and Financial Institutions Division of the Ministry of Finance. This division makes the final decisions on the formation or dissolution of the boards of state-owned banks, leaving Bangladesh Bank with little room to intervene. While the central bank does have regulatory authority over private banks—including appointing or dismissing board members and managing directors—it cannot exercise the same level of control over state-owned banks. Overall, the sector is governed primarily through the Ministry of Finance, limiting the central bank’s effectiveness.

During the tenure of former finance minister Abul Maal Abdul Muhith, nine new banks were approved based on political considerations. It is said that Bangladesh Bank had objected to these approvals at the time, but the objections were overruled. Muhith himself had admitted that while there was no real need for new banks at the time, political reasons were behind their approval. We have seen the consequences of setting up banks without evaluating actual needs—most of those nine politically backed banks are now struggling. The dual regulatory framework in our banking system has largely failed to deliver positive outcomes.

We must remember that banking is unlike any other business. Banks operate with the public’s deposits and thus demand the highest standards of integrity and accountability. Bank owners do not invest their own capital but instead collect deposits from the public and provide them with interest. These funds are then lent out to borrowers, and profits are made through interest margins. If depositors lose trust in the banking system, the entire structure is at risk of collapse. Trust and confidence are the bedrock of banking—a sector that must preserve this above all. It is therefore unacceptable to make policy decisions or approve new banks based on political agendas.

Questions often arise: what should be done with banks that are not performing well? In general, if a business cannot operate profitably, it should be shut down. In a free-market economy, it makes little sense to sustain a failing institution with state support. Weak banks should be advised to build their capabilities and survive through improved performance. If they fail to do so, then closure becomes inevitable. A strong bank may choose to acquire or merge with a weaker one, but this must happen with mutual consent. However, such mergers don’t always guarantee better performance.

Given the unique nature of the banking business, some alternative approaches may be considered. Still, weak banks must eventually become self-reliant or exit the market. Regardless of the route taken—whether liquidation or another measure—depositors must be protected. Their funds must be returned on time. Bangladesh Bank is currently providing liquidity support to keep some weak banks afloat, but this cannot be a long-term solution. Banks must survive on their own strength or not at all.

Dr. Mustafa K Mujeri is an economist and Executive Director of the Institute for Inclusive Finance and Development (InM). He is the former Director General of the Bangladesh Institute of Development Studies (BIDS) and former Chief Economist of Bangladesh Bank.
Transcribed by: M A Khalek