Bangladesh’s economic achievements over the past decades are at risk due to severe financial sector challenges. The banking sector faces a crisis with non-performing loans (NPLs) exceeding 30%, capital and liquidity shortages, weak governance, and regulatory inefficiencies. Meanwhile, the capital market remains underdeveloped, lacking investor confidence and proper oversight.
Without bold, structured reforms, these systemic weaknesses will lead to financial instability, economic stagnation, rising inflation, and increased business costs. Immediate actions are essential to restore banking sector resilience, rebuild capital market trust, and ensure long-term economic sustainability. A comprehensive financial sector restructuring strategy, prioritizing national interest over political and vested interests, must align with global best practices.
Key Challenges in Bangladesh’s Banking Sector
The banking sector faces critical challenges that threaten its stability and growth:
• Soaring NPLs – Averaging over 35%, with some banks exceeding more than 60%, compared to the global norm of below 10%.
• Capital & Liquidity Shortages – Many banks fail to meet Basel III capital adequacy requirements, limiting lending capacity.
• Weak Governance & Political Interference – Poor credit assessment, politically influenced lending, and fraudulent practices weaken financial discipline.
• Regulatory Inefficiency – Bangladesh Bank (BB) lacks enforcement power to penalize defaulters and prevent NPL surges.
• Technological Gaps – Slow digital banking adoption increases cybersecurity risks and limits financial inclusion, particularly in rural areas.
• Corruption & Fraud – High-profile scams and insider lending erode public trust and institutional integrity.
• Macroeconomic Instability – Inflation, currency depreciation (Taka devaluation), and global shocks (e.g., COVID-19, Ukraine war) strain borrower repayment capacity.
• Environmental and Social Governance (ESG) – Rising global pressure to adopt green financing and sustainable practices requires a strategic shift in lending models.
• Misalignment with Economic Goals—Banks fail to effectively align with national economic priorities, including SME growth, industrialization, and digital financial inclusion.
Strategic Reforms: Learning from Global Best Practices
Bangladesh must adopt proven reform models from countries like the USA, India, Japan, South Korea, and Indonesia, which successfully tackled banking crises through structured transformations.
1. Managing NPLs: The “Bad Bank” Approach
• Japan: Established the Resolution and Collection Corporation (RCC) in the 1990s to manage bad loans.
• India: Introduced the Insolvency and Bankruptcy Code (IBC) to streamline debt recovery.
• USA: Implemented the Troubled Asset Relief Program (TARP) to recapitalize banks and remove toxic assets.
• South Korea: Created KAMCO (Korea Asset Management Corporation) to absorb bad loans.
2. Strengthening Governance & Reducing Political Interference
• USA: Enforced the Sarbanes-Oxley Act (2002) to ensure corporate accountability.
• South Korea: Established the Financial Services Commission (FSC) with zero tolerance for political meddling.
• Indonesia: Created the Otoritas Jasa Keuangan (OJK) for independent bank supervision.
3. Enhancing Regulatory Frameworks
• USA: Enacted the Dodd-Frank Act (2010) to strengthen risk management.
• India: RBI’s Prompt Corrective Action (PCA) framework rescued weak banks early.
• South Korea: Adopted Basel III early, enforcing stringent capital adequacy requirements.
4. Digital Transformation & Cybersecurity
• South Korea: Deployed AI-driven fraud detection and real-time payment systems.
• India: Unified Payments Interface (UPI) revolutionized digital transactions.
• Indonesia: Partnered with fintech firms like GoPay to enhance financial inclusion.
5. Financial Inclusion & Literacy
• India: Jan Dhan Yojana opened 500 million bank accounts for the unbanked.
• Indonesia: Branchless Banking (Laku Pandai) leveraged mobile agents for rural areas.
• USA: The Community Reinvestment Act (CRA) ensured financial services for low-income communities.
6. Managing Macroeconomic Risks
• Japan: Used quantitative easing to stabilize markets.
• South Korea: Built $423 billion in forex reserves to counter economic shocks.
• USA: The Federal Reserve’s interest rate policy controlled inflation effectively.
7. Combating Corruption & Fraud
• USA: The SEC and DOJ aggressively prosecuted financial fraud (e.g., Enron case).
• India: Aadhaar-linked KYC reduced identity fraud.
• Japan: The Financial Services Agency (FSA) conducted surprise audits.
8. Green Financing & ESG Compliance
• South Korea: Issued $12 billion in green bonds in 2022.
• USA: Implemented ESG disclosure mandates for listed companies.
• Indonesia: Developed a Sustainable Finance Roadmap.
Bangladesh’s paths to Banking Sector Reforms:
To resolve the high levels of Non-Performing Loans (NPLs), capital shortages, liquidity constraints and to put full stop on no more NPL beyond standard percentage (fixed by Regulator) in Bangladesh’s banking sector, the country can adopt globally tested strategies from the USA, India, Japan, South Korea, and Indonesia stated as above. Bangladesh must adopt tested global best practices alongside country-specific strategies:
1. Rationalizing and Specializing Banking Licenses
Bangladesh should categorize banks by specialization to prevent excessive diversification:
• Retail Banks – Consumer-focused services.
• Corporate & SME Banks – Industrial financing.
• Islamic Banks – Shariah-compliant financial models.
• Digital & Fintech Banks – Mobile financial services.
• Remittance & Expatriate Banks – Serving the NRB community.
• Implementation Roadmap for Banking Sector Recovery
2. Ensuring Proper Banking Operations
• Capital and liquidity shortage Banks must be allowed to conduct their core banking activities effectively within their capacity / without limitation.
• As such, Bangladesh Bank should extend necessary regulatory and liquidity support to them.
3. Managing NPLs Through a Block Account
• All NPLs should be transferred to a “Block Account” in the balance sheet until fully adjusted from the bank’s future profit without impacting FSs.
• This will help prevent distortions in the regular financial statements and allow better focus on operational growth. The regulator should be relaxed while calculating ratios on them.
4. Restricting Dividend Payments
• No bank should be allowed to pay dividends until its NPLs are fully adjusted.
• This will ensure that profits are reinvested in strengthening financial health rather than distributed to shareholders.
5. Government Intervention in NPL Resolution
• The government should buy back NPLs from banks or issue low-interest bonds to absorb the bad assets.
• Alternatively, the government can issue long-term bonds to the general public and use the proceeds to replace NPLs on bank balance sheets.
• This will inject liquidity into the system while ensuring public participation in financial stability. In addition, the striker legal penal action will be initiated against the willful defaulters/bank loan fraudsters.
6. Bank should Issue Long-Term Bonds/ preference share convertible to equity share
• Banks can issue long-term bonds/equity shares to depositors against their deposits, backed by NPLs.
• This will help convert bad loans into a structured financial instrument, easing the pressure on bank balance sheets. If the share is issued against the deposit, which NPL erases, then the bank’s liquidity will be increased, and which will be used to adjust its NPL.
7. Liquidity Support for Economic Growth
• The government must take appropriate action to ease liquidity constraints at a low cost, ensuring the banking sector can support economic expansion.
• This will help to restore financial order and boost economic activity.
8. Stricter and Low-Cost Lending Policies
• To maintain inflation at a stable rate and ensure sustainable economic growth, stricter lending criteria should be enforced.
• However, lending should also be made available at lower costs to productive sectors to stimulate business growth.
By implementing these measures, Bangladesh can restructure its banking sector, eliminate NPL burdens, ensure liquidity flow, and create a more resilient financial system for steady economic growth.
A structured, phased approach is required to reduce NPLs, stabilize the financial sector, and align with global best practices.
Short-Term (0-1 Year) – 2025
• Establish a National Asset Reconstruction Entity (Bad Bank).
• Strengthen Bangladesh Bank’s enforcement powers.
• Implement AI-driven monitoring for large loans.
• Identify banks for mergers and capital restructuring.
Medium-Term (1-3 Years) – 2026-2028
• Implement sector-specific banking licenses.
• Enforce corporate governance reforms (independent board members, digital loan monitoring).
• Introduce structured settlement programs for NPL recovery.
• Launch public-private partnership initiatives to attract foreign investment.
Long-Term (3-5 Years) – 2029-2030
• Align banking operations with national economic priorities.
• Better management of NPLs.
• Establish Bangladesh as a regional financial hub.
Key Takeaways for Bangladesh
• Institutional Reforms – Strengthen Bangladesh Bank’s autonomy and create specialized agencies.
• Technology Adoption – Prioritize digital infrastructure and cybersecurity.
• Global Standards – Align with Basel III, FATF AML guidelines, and ESG frameworks.
• Public-Private Partnerships – Collaborate with fintech firms for financial inclusion.
• Political Will – Decouple banking decisions from political influence.
• Public Accountability – Publish NPL data and involve civil society in oversight.
Final Thoughts: A Nation-First Approach to Banking and Economic Stability
The banking sector is the backbone of Bangladesh’s economy, and its restructuring must be driven by national interest, financial discipline, and long-term sustainability. Without immediate reforms, investor confidence will weaken, business costs will rise, and financial instability will persist.
Bangladesh must replicate global successes by strengthening institutions, leveraging technology, and enforcing zero tolerance for corruption. By adopting global best practices and ensuring governance reforms, Bangladesh can build a resilient, liquid, and efficient banking sector, supporting SME growth, industrialization, and foreign investment.
The time for debate is over—bold, immediate, and structured actions are necessary to secure Bangladesh’s financial future.
M Fazlur Rahman
Ex Managing Director of private commercial bank.
