[🇧🇩] Banking System in Bangladesh

[Saif]

Not cosmetic reforms

In every country --- no matter developed or developing --- the central bank serves as the economy's nervous system. It regulates interest rates, controls money supply, maintains foreign exchange reserves, and fights inflation. Such responsibilities are critical to ensuring economic stability,

thefinancialexpress.com.bd

Not cosmetic reforms
CAF Dowlah
Published :
Sep 30, 2024 22:42
Updated :
Sep 30, 2024 22:42
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In every country --- no matter developed or developing --- the central bank serves as the economy's nervous system. It regulates interest rates, controls money supply, maintains foreign exchange reserves, and fights inflation. Such responsibilities are critical to ensuring economic stability, especially during times of crisis, such as inflationary spikes, recessions, or declining foreign reserves.

These roles are even more pronounced for the Bangladesh Bank as it has its finger prints in all aspects of the country's financial system --- from regulating commercial banks, bailing out nationalised banks, to managing non-performing loans and even making efforts to bring back laundered money from abroad.

But far too long Bangladesh has treated its central bank like a replaceable cog in the machine, swapping out governors as if a new face would fix the deep-rooted problems. This illusion of governance has allowed financial scandals, regulatory failures, and gross mismanagement to fester. The banking sector is in a dismal state, plagued by corruption, financial irregularities, and preferential treatment for powerful borrowers.

Non-performing loans (NPLs) are skyrocketing, inflation is surging, money laundering is rampant, and foreign exchange reserves are declining-the Bank's oversight has been frail, effectiveness is highly questionable, and public trust in the system has largely eroded. This is a crisis that demands immediate action. Simply put, the Bangladesh Bank, as it stands, is failing, and piecemeal reforms will not suffice.

THE NPL TIME BOMB: Default loans in Bangladesh have spiralled out of control, reaching a staggering Tk 1456.33 billion by the end of 2023, accounting for 9 per cent of total loans. This places Bangladesh among the worst offenders globally, with an NPL rate double that of most developing countries, where the rate typically ranges between 3.2 per cent and 4.5 per cent. Bangladesh's performance is even more dismal when compared to South Asia, where the average NPL ratios from 2012 to 2021 were 7 per cent in India and 3.94 per cent in Sri Lanka.

Even more troubling, the total amount of distressed loans-comprising NPLs, rescheduled loans, and restructured write-offs-amounted to nearly one-third of all outstanding loans in the banking system by the end of 2023. Much of this problem can be traced to the lenient policies introduced by the central bank allowing banks to reschedule loans with minimal down payments and extended repayment periods for borrowers.

In a bid to meet conditions tied to a $4.7 billion loan package from the IMF, Bangladesh Bank has recently committed to an unrealistic goal of reducing NPLs to 8 per cent by 2026. The Bank's strategy, which relies heavily on easing loan write-offs, is utterly reckless and ignores the underlying issues of a weakening economy and systemic corruption that fuel NPLs. Without addressing these root causes, any promise of reduction in NPLs may be superficial and unrealistic.

INFLATION IS A TICKING TIME BOMB: For decades, Bangladesh has struggled with persistently high inflation, averaging 6.57 per cent annually between 1994 and 2024. By mid-2024, inflation had surged to 11.66 per cent, easing only slightly to 10.5 per cent by August-still well above regional averages. A major donor bank has forecasted that Bangladesh's inflation rate will rise to 10.1 per cent in the next fiscal year, compared to 4.5 per cent in India and 5.5 per cent in Sri Lanka.

In response, the central bank has opted to tighten the money supply, as if that alone could control the soaring prices. Bangladesh's inflation is largely driven by supply-side disruptions and currency depreciation, not an overheated economy. The devaluation of the taka has only worsened the situation, diverting remittances into informal channels, and deepening the inflation crisis. Instead of relying on short-term fixes, the Bangladesh Bank needs to confront these underlying issues head-on.

RAPID DECLINE IN FOREIGN EXCHANGE RESERVES: Since September 2021, Bangladesh's foreign exchange reserves have been steadily declining, reaching a critical low of $20.46 billion in August 2024-barely enough to cover two and a half months of imports. More concerning is that the net international reserves have dwindled to a mere $13 billion.

The central bank's poor handling of exchange rates has exacerbated the issue, pushing remittances into informal channels and further depleting reserves. Although a recent shift to a "crawling peg" exchange rate system and the receipt of $2.11 billion in remittances during the first 28 days of September provide some relief, the reserve situation is unlikely to improve significantly without bold corrective measures.

MONEY LAUNDERING IS A NATIONAL EMBARRASSMENT: The scale of money laundering in Bangladesh is staggering and alarming. Official estimates suggest that over Tk 1.0 trillion has been illicitly transferred abroad. In 2021, Global Financial Integrity (GFI) reported that Bangladesh lost around $8.27 billion annually between 2009 and 2018 due to the mis-invoicing of import-export goods by traders to evade taxes and facilitate illegal cross-border money transfers.

Every year, billions of dollars are funnelled out of the country through schemes like hundi, over-invoicing, and under-invoicing. While the Money Laundering Prevention Act of 2012 exists in name, its enforcement has been weak and rare, with those responsible for drafting and enforcing the law often implicated in these very activities. Although the 2023 global Anti Money Laundering (AML) Index indicated some progress for Bangladesh, such reports are often based on unreliable data and fail to reflect the true scale of the problem.

The harsh reality is that illegal financial flows are critically draining the nation's wealth. The interim government has formed a committee, led by Bangladesh Bank, to recover laundered money. The Bank must take decisive action against these criminal networks. Yet, success is far from guaranteed, given the sophisticated methods and networks used to conceal assets in both offshore and onshore laundering operations.

RADICAL REFORM IS NON-NEGOTIABLE: Cosmetic reforms or half-hearted policy adjustments will not be enough to save Bangladesh Bank-it needs a comprehensive, top-to-bottom overhaul. The central bank must be freed from the political and bureaucratic interference that has crippled its effectiveness for years. It should become a fully independent and accountable institution-free from corrupt interests. Monetary policies should be crafted diligently by highly qualified experts, not by bureaucrats climbing the ranks without the necessary expertise.

The interim government must push for radical reforms. State-owned banks, long mired in political meddling and mismanagement, must be streamlined, or privatised to safeguard nation's scare resources. The culture of cronyism must be dismantled, and the Bangladesh Bank must shift its focus to real, sustainable solutions rather than donor-driven fantasies.

Most importantly, it is imperative that the Bangladesh Bank be governed by an independent board of governors, shielded from political and bureaucratic influence, to enhance its operational effectiveness. The reliance on a single governor must give way to a system of collective decision-making on critical policy matters. Only through such bold and structural reforms can the central bank restore its integrity and safeguard the nation's long-term economic stability.

Dr Dowlah is a retired Professor of Economics and Law in the United States. Currently, he serves as the Chairperson of the Bangladesh Institute of Policy Studies (www.bipsglobal.org).​

 

[Saif]

Reduce number of banks to 30

The number of banks in Bangladesh should be reduced from 61 to 30 as part of reforms in the sector, said Prof Moinul Islam yesterday.

www.thedailystar.net

Reduce number of banks to 30
Says economist Moinul Islam as part of reforms

Photo: Collected

The number of banks in Bangladesh should be reduced from 61 to 30 as part of reforms in the sector, said Prof Moinul Islam yesterday.

He termed Rooppur Power Plant as Awami League's "white elephant" and criticised the involvement of Adani Group in energy sector, citing these projects as examples of large-scale corruption.

Moinul made these remarks at the "Dialogue for Democratic Reconstruction", organised by the Centre for Governance Studies (CGS) at a hotel in the port city.

He said Sheikh Hasina's relatives and supporters had engaged in massive looting, particularly in the banking sector. He questioned why controversial figures, such as those associated with S Alam Group, had been allowed to control multiple banks.

"We don't need so many banks in the country. The number must be reduced to 30," he said, adding that corruption in Bangladesh has been a long-standing issue, not limited to the AL regime, with similar problems during the BNP's 2001-2006 tenure.

Nizam Uddin Ahmed, a former public administration professor at Chittagong University, stressed the importance of protecting fundamental rights through constitutional reform.

Zillur Rahman, CGS Executive Director, moderated the event, emphasising that while progress may be slow, the pursuit of a democratic state must continue.

Chattogram Jamaat Amir Shahjahan Chowdhury, Nasir Uddin Munir from Hefazat-e-Islam, and representatives from the Jatiyo Party and AB Party also attended.​

 

[Saif]

Banks mostly gave loans to their owners rather than creditworthy borrowers

Bangladesh’s banking sector was not well-managed in recent years. Banks mostly gave loans to their owners, rather than to creditworthy entities. Consequently, several banks are now in difficulty.

www.thedailystar.net

Banks mostly gave loans to their owners rather than creditworthy borrowers
World Bank’s senior official speaks on lending culture in Bangladesh

Bangladesh's banking sector was not well-managed in recent years. Banks mostly gave loans to their owners, rather than to creditworthy entities. Consequently, several banks are now in difficulty.

Besides, the previous administration could not effectively manage the exchange rate. It acted opposite to conventional economic wisdom.

They opted to defend a fixed exchange rate, even though the Reserve Bank of India (RBI) allowed the Indian rupee to depreciate to ensure that its competitiveness was not negatively affected.

"This caused losses of a lot of reserves. As a result, liquidity was getting tighter," said Martin Raiser, the World Bank (WB) vice president for South Asia region.

"If Bangladesh had instituted this kind of policy five-six years ago, it would not have faced the kind of liquidity shortages that the economy experienced."

In an interview with The Daily Star at the end of last week in Dhaka, he said the Bangladesh Bank is currently addressing these issues.

"I think they are doing a good job, but clearly, the financial sector needs to be one of the focuses of reform efforts now to create stronger banks and ultimately to provide more credit to SMEs [small and medium-sized enterprises]," he said.

Raiser, who visited Dhaka in the second half of the last month, also spoke about Bangladesh's economic performance, the reasons for persistent inflation, implications of low revenue collection, and necessary reforms to salvage the ailing banking sector.

The WB official also responded to questions regarding the overall support that the Washington-based agency is considering in response to a request from the interim government, which was sworn in after a mass uprising ousted the Sheikh Hasina-led government on August 5.

People here are ready to invest, to be busy and to try and improve their livelihoods. This could have led to more growth if they had access to credit.— Martin Raiser World Bank vice president for South Asia.

Raiser said Bangladesh has indeed done very well, not just recently. Its transformation has been remarkable since independence.

"We have always regarded Bangladesh as a success story."

He said in recent years, the Covid-19 crisis has adversely affected all countries and also had an impact on Bangladesh.

The country could not recover fully due to the slowdown in global trade.

Raiser said Bangladesh is getting more developed, so remaining specialised solely in readymade garments is not so sustainable. Because there are limits to the productivity increases that one can get from a single sector.

"Bangladesh has missed the opportunity to diversify the economy, bring in more foreign investment, bring more technologies, and create different kinds of jobs since the global financial crisis."

NEED A LEVEL PLAYING FIELD

Raiser said he visited Bangladesh five to six times and saw the strength of entrepreneurship.

"Lots of people are ready to invest themselves, to be busy and to try and improve their livelihoods, from the rickshaw drivers to, you know, small manufacturing to fashion designers to the gig economy. Now, a lot of dynamism could lead to more growth and more jobs if they had access to credit."

However, the nation is not getting all the benefits in the absence of a level playing field.

"So, those are some areas where Bangladesh didn't do very well in recent years and could have done much better.

"But there, you know that they can benefit. The last administration invested a lot in infrastructure and that got better. Connectivity is better, so there are some positive foundations on which Bangladesh can and should build."

OVERALL FUNDING ENVELOPE TO BE ROUGHLY $3.5 BILLION

Raiser said the interim government requested budget support for the energy sector and banking reforms.

The envelope of fresh money would be about $2.2 billion, including over $1 billion in repurposed loans, overall funding would be roughly $3.5 billion.

The official said the WB and the government have been in discussions on what will be done to support banking, tax reform, better governance, and transparency, to support the energy sector and social assistance.

"Some of these discussions predate the recent changes. Some of them are new."

BANKING SECTOR NEEDS TRANSPARENCY

Raiser said the multilateral lender wants to get more transparency in the banking sector.

He said people who park deposits in banks should know who the beneficiary owners of the banks are. When supervisors provide credit, they should know who the beneficiary owners of the enterprises are and to whom the money is lent.

"I mean, there are standards in the banking industry that impose strict limits on self-dealing. If you own a bank, you can't use that bank to benefit enterprises that you also own.

"Now, if you want to enforce those regulations, you need to know who owns what. The second is how you classify whether an asset is well-performing or not," Raiser said.

The WB Vice President said an asset becomes classified if a client cannot repay on time.

"And once the loan is classified, the bank has to keep provisions. They have to put capital aside," he said.

"That's expensive to the bank. Therefore, banks don't like to do that, but you have to force them, because if they don't have enough capital, at some point, depositors may not be able to get their money back."

He said Bangladesh has to have a better loan classification system.

Besides, measures should be taken to ensure that depositors are properly protected and to hold accountable shareholders who drive a bank in the wrong direction.

"These are the core elements of a modern and well-functioning banking system."

He said there should be better rules regarding insolvency legislation and management of distressed assets.

The purpose of all of this is to make sure that when some companies get into difficulties, the key for the policymakers is to ensure that resources are not locked up in companies that aren't producing any value, he added.

"So, you want to protect the people, but you don't want to protect every single venture. If it didn't work, take the capital resources, take the credit out and put it somewhere else where it has a better chance of success."

"That process of restructuring, of creating more competition, is complementary to the banking reforms. And it is something that we'd like to support, but that will take a bit more time," Raiser added.

On reforms, he said the interim government has to prioritise and respond to the expectations of the people.

"One of the things that I've heard very loudly is more accountability, more transparency, and better governance. That's something that I think they want to do, and they should do, because that's what the people are expecting."

He said the interim government obviously wants to make adjustments to the political and judicial systems and the rule of law and order, which is not the area of the WB's competence.

"Our area of expertise is the management of the economy," he added.

COLLECTING MORE REVENUE IS A KEY PRIORITY

Raiser said the WB can support improving economic management. Revenue management is an area Bangladesh should work on.

He said the revenue authority collects a fairly low level of taxes. As a result, it has limited public resources available to deliver better services.

"So, if you're talking about cleaning up the rivers, yes, that's a hugely important thing. But it's also expensive, so you're going to have to collect more revenue if you're going to do all of that."

The government also needs to spend more on education and healthcare.

"I think collecting more revenue is an important priority, and I think we can help both on the tax administration side and on the tax policy side," he said.

"Just to give you one example, Bangladesh has a lot of exemptions. Some of the exemptions are targeted to individual companies. That's not a very good tax policy."

Raiser also stressed the importance of better public finance management and procurement processes.

"What's the system whereby projects get approved? What's the scrutiny behind them, but then also, how efficient is the process?

"You don't want a lengthy approval process, but you want to make sure they're robust. There are proper checks and balances in place. That's another area that we can work on."

In the medium term, he said improving the business environment, making it easier for companies to get the permissions to invest and access to land is vital.

Raiser said the government needs to improve environmental regulations and ensure enforcement.

"It doesn't pay in the long run for a country to try and be competitive by polluting its own environment. Ultimately, people will pay."

INFLATION TO COME DOWN

The WB official, while responding to a question about why inflation in Bangladesh remained stubbornly high when neighbouring India managed to bring it down, said there had been major supply disruptions in July and August, which kept inflation higher.

Besides, he said until recently, monetary policy was also relatively loose.

"You know, real interest rates were negative, and all these factors combined probably led to a situation in which supply was restricted and demand was still supported and that has led to inflation."

Raiser said inflation rates have actually come down quite sharply in recent months.

"So, I think there's a good prospect with, you know, the new management and the Bangladesh Bank as they are committed to bringing inflation down. There's a good prospect that inflation will come down."

"It may not happen immediately. It takes a while for this to work through the system. But I think there are good prospects for inflation to reduce."​

 

[Saif]

Crisis-hit banks repaying depositors for emergencies, basic needs

As crisis-hit lenders have started getting liquidity support from the inter-bank money market, they are now repaying depositors for specific purposes, such as medical emergencies, and in the case of salary disbursement or remittance encashment.

www.thedailystar.net

Crisis-hit banks repaying depositors for emergencies, basic needs

As crisis-hit lenders have started getting liquidity support from the inter-bank money market, they are now repaying depositors for specific purposes, such as medical emergencies, and in the case of salary disbursement or remittance encashment.

Depositors regularly gather at the branches, head offices and ATM booths of cash-strapped banks, but are usually unable to get the amount of money they require.

However, officials of the banks said since they are now getting liquidity support from sound banks, they can repay depositors to some extent.

After obtaining a Bangladesh Bank (BB) guarantee to avail liquidity support from the inter-bank money market, First Security Islami Bank, Social Islami Bank, Global Islami Bank and National Bank received a total of Tk 945 crore in support from five sound banks.

In the second phase, First Security Islami Bank, Social Islami Bank, Global Islami Bank, National Bank, and Islami Bank Bangladesh received Tk 1,480 crore as liquidity support.

Depositors regularly gather at the branches, head offices and ATM booths of cash-strapped banks, but are usually unable to get the amount of money they require

Apart from National Bank, Chattogram-based conglomerate S Alam Group had a stranglehold on the board of directors of the other lenders that are now facing liquidity crises.

Following the installation of an interim government in August, all those lenders saw their boards of directors reconstituted.

So far, Union Bank has yet to get any liquidity support. As such, its new board of directors met with central bank Governor Ahsan H Mansur on Wednesday to avail the BB guarantee.

Contacted, Mohammed Nurul Amin, the new chairman of Global Islami Bank, told The Daily Star the bank was now repaying depositors based on emergency and priority.

"We request depositors not to withdraw money if there is no urgent need."

He added that the central bank should speed up the process of providing guarantees. Otherwise, he cautioned, it will be difficult to regain the confidence of depositors.

Mohammad Abdul Mannan, the new chairman of First Security Islami Bank, said normal banking activities were resuming after it received Tk 375 crore from the inter-bank money market.

He further added that the bank had already recovered around Tk 600 crore from borrowers since its board was reconstituted.

"We are repaying depositors to fulfil basic needs or for medical issues, any urgent cases and encashment of remittance."

The bank is now trying to repay large-scale depositors in phases, he added. "We are now trying to win back the trust of depositors."

Six banks that were under the grip of the S Alam Group have been facing liquidity crises for more than two years.

Under the previous government, which was ousted by a mass uprising on August 5, the central bank provided special liquidity support to ailing lenders by printing money, which fuelled inflation.

However, after being appointed to the top post at the central bank, Mansur said the BB would not provide liquidity support by printing money and would instead allow banks to seek support from the inter-bank money market.

As this process takes longer, the situation plaguing the troubled lenders intensified.

Global Islami Bank chairman Amin said it may take around one year to mitigate the crisis at ailing banks.​

 

[Saif]

The road to recovery

IN THE late 1920s, the world witnessed the collapse of the Weimar Republic, and with it, the German economy fell into disarray. Hyperinflation, a collapsed banking system, and...

www.newagebd.net

The road to recovery
by Md Junayed Hossain 20 October, 2024, 00:00

New Age/ Mehedi Haque

IN THE late 1920s, the world witnessed the collapse of the Weimar Republic, and with it, the German economy fell into disarray. Hyperinflation, a collapsed banking system, and massive social unrest paved the way for the rise of the Nazi regime — a stark reminder of how economic instability can lead to catastrophic socio-political outcomes. The lessons from history serve as a reminder that when financial systems are left to deteriorate, the consequences ripple far beyond the economy, shaking the foundations of society itself.

Today, Bangladesh stands at a critical crossroads, as its fragile banking sector faces mounting pressures that could destabilise the nation’s socio-economic fabric. Over the past decade, persistent malpractices, corruption, weak governance, and an alarming rise in non-performing loans have eroded trust in the financial system. Without decisive intervention, the country risks plunging into an economic crisis that could severely hamper business activities, deter investment, and ultimately harm ordinary citizens.

To avert such a crisis, the government, alongside the central bank, must urgently implement a series of targeted macroeconomic and structural reforms. These measures should focus on restoring confidence, ensuring liquidity, and safeguarding the long-term sustainability of the financial sector. Various strategic options, such as quantitative easing, capital injections, and targeted bailouts, should be considered to tackle the sector’s fragility.

Quantitative easing as a liquidity tool

ONE potential policy option is quantitative easing, a tool that has been used effectively by central banks worldwide during times of economic crisis. By purchasing long-term financial assets such as government bonds or high-quality bank assets, the central bank could inject much-needed liquidity into the banking system. The primary goal of QE would be to lower interest rates, expand the money supply, and provide struggling banks with the capital they need to meet withdrawal demands and expand credit to businesses and consumers.

This influx of liquidity would help avert a potential credit crunch, which would otherwise stifle investment and economic growth. However, QE must be implemented cautiously, as excessive liquidity could lead to inflationary pressures and a depreciation of the national currency. A carefully managed QE program could provide breathing space for banks to stabilise while spurring broader economic recovery.

Government bailouts: a delicate balancing act

IN EXTREME cases of banking sector insolvency, where liquidity issues evolve into solvency crises, the government may need to consider direct bailouts. A bailout involves the injection of government funds into struggling banks to prevent their collapse and restore solvency. While controversial, especially given the mismanagement and corruption that have plagued many of these institutions, a bailout may be a necessary measure to prevent widespread financial chaos.

However, any bailout must come with stringent conditions. These conditions should include the restructuring of management teams, the implementation of stronger governance protocols, and mechanisms for improved accountability. The failures of many banks in Bangladesh can be traced back to poor governance, political interference, and inadequate risk management practices. A bailout without addressing these root causes would only serve as a temporary bandage over a deeper wound.

To ensure the effective use of public funds, the government could implement a ‘good bank, bad bank’ model. In this approach, bad assets, primarily NPLs, would be transferred to a ‘bad bank’ for specialised management and eventual liquidation. This would allow the ‘good banks’ to focus on their core business operations without being burdened by toxic assets. By isolating bad loans, these institutions could rebuild trust and attract new capital for growth.

Addressing non-performing loans

ONE of the most pressing issues plaguing Bangladesh’s banking sector is the high level of NPLs, which have severely impacted the profitability and sustainability of many banks. These NPLs, often politically backed and devoid of effective recovery mechanisms, have become a systemic issue. To address this, the central bank must adopt stricter regulatory measures and implement legal reforms to expedite the recovery of defaulted loans.

In the short term, creating a dedicated asset management company to manage these toxic assets is essential. By isolating NPLs in a centralised entity, banks would be able to focus on rebuilding their balance sheets and pursuing profitable growth opportunities. Additionally, the central bank could incentivise banks to sell off their bad loans at discounted rates to specialised asset management firms, which would be tasked with the recovery and resolution of these distressed assets.

Transparency and restoring confidence

ONE of the greatest dangers facing Bangladesh’s banking system is the erosion of public trust. If depositors lose confidence in the safety of their funds, the risk of widespread withdrawals could trigger a liquidity crisis, exacerbating the already fragile state of the sector. Clear and consistent communication from both the government and the central bank is essential to reassure the public that their deposits are safe and that concrete steps are being taken to stabilise the sector.

Ensuring transparency in the restructuring process, including regular updates on reforms, capital injections, and asset recovery efforts, will go a long way toward calming public fears. The introduction of deposit insurance schemes could further enhance depositor confidence by guaranteeing that their funds are protected, even in the event of a bank failure.

Bangladesh’s fragile banking sector presents a formidable challenge, but it also offers an opportunity for meaningful reform. By employing a combination of quantitative easing, targeted bailouts, bank mergers, and enhanced regulatory oversight, the government can restore stability to the financial sector and set the economy on a sustainable path to recovery. Addressing capital shortages, tackling NPLs, and ensuring transparency will not only rebuild public trust but also lay the foundation for long-term economic growth. Just as history has shown the perils of inaction, today’s policymakers must take bold, decisive steps to secure Bangladesh’s financial future.

Md Junayed Hossain is a financial analyst.​