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[🇧🇩] Banking System in Bangladesh

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[🇧🇩] Banking System in Bangladesh
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BANKING REFORMS
Time for govt to act now

Shahidul Alam Swapan 08 July, 2025, 00:00

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Bangladesh Bank. | New Age

THE banking sector has for decades been grappling with persistent challenges that have left it teetering on the edge of credibility. Despite being a vital pillar of the economic growth, the sector remains marred by corruption, poor governance, political interference, and a weak regulatory framework. As a result, public trust has eroded significantly and urgent reform is necessary to prevent a deepening crisis.

Since the independence in 1971, the banking sector has expanded significantly. From a few state-owned banks, the sector has grown to include over 60 banks — comprising state-owned commercial banks, specialised banks, private commercial banks, and foreign banks. This expansion has supported the country’s remarkable economic progress, including improvements in infrastructure, remittance flows, and SME financing.

However, this growth has come with serious structural flaws. These flaws have been left largely unaddressed, and over time, they have weakened the sector’s resilience, transparency, and accountability.

Non-performing loans

AT THE heart of the credibility issue lies the persistent problem of non-performing loans. Bangladesh has one of the highest non-performing loan ratios in South Asia. Official figures put non-performing loans at around 9–10 per cent of total loans, but many analysts and insiders believe the real number may be significantly higher due to rescheduling, restructuring, and window-dressing practices.Bangladesh-themed souvenirs

Large corporate defaulters, often with political connections, account for a disproportionate share of non-performing loans. Repeated loan rescheduling, sometimes without proper risk assessment or recovery effort, has created a culture of impunity. In effect, wilful defaulters continue to access fresh credit while honest borrowers struggle, creating an uneven and unjust financial environment.

This trend endangers financial stability and reduces banks’ lending capacity to productive sectors, such as SMEs, startups, and agriculture. The ripple effect on employment, innovation, and long-term economic growth is considerable.

Political interference, weak governance

ONE of the most critical issues undermining the banking sector’s credibility is political interference. Appointments to bank boards, particularly in state-owned banks, are often based on political affiliations rather than merit or experience. This practice compromises corporate governance and opens the door to misuse of banking facilities.

Private banks, too, are not immune. Several banks have been established by politically connected businesspeople that sometimes treat these institutions as personal vaults rather than public trusts. There have been instances of insider lending, poor risk management, and inadequate oversight from regulators.

The central bank, Bangladesh Bank, has often been criticised for its soft-touch regulation. While the institution has a critical role in maintaining financial discipline, it has frequently failed to enforce rules robustly or penalise errant institutions. Some analysts argue that the central bank has been kept deliberately weak or politically constrained, limiting its ability to act independently.Bangladesh-themed souvenirs

Cyber heists, regulatory failures

PERHAPS, the most high-profile blow to the sector’s credibility was the 2016 Bangladesh Bank cyber heist, in which hackers stole $81 million from the central bank’s account at the Federal Reserve Bank of New York. The incident exposed serious lapses in cybersecurity and internal controls at the very heart of the banking system.

Although some recovery efforts were made, the incident damaged the international reputation of Bangladesh’s financial institutions. It raised alarms about how even the central bank could fall victim to lax oversight and negligence.

Over the last two decades, the number of private commercial banks has surged, often driven by political lobbying rather than market need. Critics argue that Bangladesh has too many banks for the size of its economy. Many of these newer banks struggle to remain competitive, leading to risky lending practices, low profitability, and increased vulnerability to shocks.

Rather than encouraging consolidation or focusing on strengthening existing institutions, successive governments have often granted new licences — sometimes ignoring recommendations from the central bank. The result is a sector that is overbanked but underregulated.

Public trust

FOR ordinary citizens, the repeated scandals, poor governance, and lack of accountability have sown deep distrust in the banking system. The idea that influential defaulters can avoid consequences, while ordinary depositors face hidden charges, poor service, and limited protection, has created a sense of injustice.

While Bangladesh Bank provides a deposit insurance scheme, many consumers remain unaware of it, and concerns persist about its adequacy in case of large-scale bank failures. Confidence, once lost, is difficult to restore — and in banking, public confidence is everything.

The credibility crisis in the banking sector is not inevitable. It is the result of years of policy neglect and mismanagement. But it is not irreversible either.

Here are a few key reforms that could help restore confidence and stability:

Strengthen regulatory oversight: Bangladesh Bank must be given greater independence and resources to regulate the sector effectively. Its monitoring mechanisms, audit functions, and enforcement capabilities need to be significantly enhanced.

Crackdown on wilful defaulters: Transparent publication of loan defaulters’ lists, faster judicial processes for recovery, and harsher penalties for default can deter abuse of the system.Bangladesh-themed souvenirs

Improved governance in state-owned banks: The appointments of the board should be merit-based and transparent. Politicisation of bank management must end to restore professionalism.

Mergers and consolidation: Instead of issuing more licences, the government and regulators should promote strategic mergers to create stronger, more efficient institutions.

Modern risk management systems: Banks need to invest in stronger risk assessment tools, cybersecurity infrastructure, and professional training to keep up with global standards.

Transparency and disclosure: More regular, honest disclosure of financial performance, loan classification, and recovery rates is essential to build public and investor confidence.

The banking sector in Bangladesh is at a critical juncture. Left unchecked, the erosion of credibility could culminate in a broader financial crisis that affects not just banks but the wider economy. Rebuilding trust will require political will, regulatory courage, and a commitment to long-term reform over short-term gains.

A credible, efficient, and transparent banking sector is not just a financial necessity — it is a moral imperative for a country aspiring to reach middle-income status and beyond. Bangladesh cannot afford to let its banking institutions remain fragile, politicised, and mistrusted. The time to act is now.

Bangladesh-themed souvenirs


Shahidul Alam Swapan is a Geneva-based private banking financial crime compliance expert, columnist and poet.​
 

FOREX-CRUNCH-TIME CREDIBILITY GAP CLOSES
Foreign banks enhancing credit backup to BD counterparts


JUBAIR HASAN
Published :
Jul 10, 2025 00:52
Updated :
Jul 10, 2025 00:52

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Banks now enjoy a feel-good ambiance in external trade financing as foreign counterparts open line-of-credit backup mainly as Bangladesh sees significant improvements in foreign-exchange receipt, officials and bankers say.

After the changeover in state power following last year's July-August mass uprising, large international banks that typically act as correspondents for commercial banks here squeezed or suspended limit of their lines of funds for the Bangladeshi banks.

And it put the country's commercial lenders in serious trouble in dealing with international trade, according to them.

As the country's macroeconomic health started improving from early this year following payment of overdue import bills amounting to around $2.50 billion, foreign correspondent lenders began easing their line-of-credit support for their responding banks in February last. Now, majority of such overseas banks open their forex-backing supports for local banks here in a turnaround, according to the market players.

Correspondent banking is the provision of banking services by one bank (correspondent bank) to another bank (respondent bank). Bangladeshi banks mostly act as respondents.

By establishing multiple correspondent relationships globally, banks can undertake international financial transactions for themselves and for their clients in jurisdictions where they have no physical presence.

Seeking anonymity, the treasury head of a private commercial bank says, "Majority of the corresponding banks have already opened their credit lines for a number of Bangladeshi banks in recent months."

Among the corresponding global banking biggies are Mashreq Bank, Citi N.A, HSBC, Standard Chartered Bank, JP Morgan Chase Bank N.A, RAK Bank, First Abu Dhabi Bank, Emirates Nbd Bank Pjsc, Emirates Islamic Bank, Commerzbank AG, Duestsche Bank AG, Ajman Bank and Zuercher Kantonalbank.

Only Indian corresponding banks have not eased the credit supports for their Bangladeshi counterparts yet, probably because of the prevailing strained relations between the two next-door neighbours, the banker adds.

The inflow of foreign currencies, the American greenback in particular, continues to rise riding a remarkable growth in remittance and export receipts. And this rebound prompted the foreign banks to change their line- of-credit policies regarding Bangladeshi banks, according to him.

Managing Director and CEO of United Commercial Bank (UCB) Mohammad Mamdudur Rashid says many foreign banks either tightened or suspended their credit lines for Bangladeshi banks, including his one, after the shakeup in power through the mass uprising.

But they kept in touch with their foreign partners continuously sharing their target-centric plan of actions to improve the fundamentals of the bank.

Satisfied with the progress of the bank, he says, all the foreign banks have opened their lines of credit for UCB, which processes 7.0 per cent of the country's overall international trade.

"Apart from existing correspondent banks, new foreign banks have joined in the lines of credits, which is a good sign for the economy," says the experienced banker.

Managing director of Shahjalal Islami Bank Mosleh Uddin Ahmed says a top executive of Dubai-based Mashreq Bank called him last month and assured him supporting line of credits the respondent required in processing international trade.

"It clearly indicates that the confidence of foreign banks in their Bangladeshi peers continues to rise," the seasoned banker told the FE writer.

On condition of not disclosing identity, a BB official says rising inflow of foreign currencies over the last several months is bolstering the country's forex reserves despite clearing huge overdue import bills.

And it ultimately enhances banks' capacity to meet their overseas payment obligations in this post-import-compression regime, the official adds. "Look at net open position (NOP) of the banking sector, which keeps ballooning because of the rising forex inflow," the central banker cites an example.

In banking jargons, NOP represents the difference between a bank's foreign assets and liabilities. It reflects the bank's risk exposure to currency movements.

According to the central bank, the volume of NOP in banks came to around $1.10 billion now from $500 million recorded couple of months ago. The volume is the highest after the pandemic period of 2021.

The central bank's statistics also show the country's gross forex reserves still stand at $29.53 billion and $24.45 billion in accordance with BB and IMF calculations as on July 07 even after the payment of $2.02 billion in import bills through the Asian Clearing Union (ACU).​
 

Importers' failure to clear LC payments
BB governor asks banks to create forced loans
Executives of commercial lenders alerted to money laundering through under-invoicing


FE REPORT
Published :
Jul 09, 2025 09:50
Updated :
Jul 09, 2025 09:50

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Governor of the Bangladesh Bank (BB) Dr Ahsan H Mansur has asked commercial banks to create forced loans against importers who have failed to make letter of credit (LC) payment on maturity dates.

He gave the instruction at the bankers' meeting held on Tuesday in light of reports that some banks are not complying with the directive to create forced loans to cover LC payments, which may cause the country to lose its reputation overseas, according to meeting insiders.

The central bank high-ups also asked the top executives of commercial lenders to be careful so that no exporter can get the opportunity of money laundering through under-invoicing.

Seeking anonymity, a central bank official who attended the meeting said a circular issued earlier instructed banks to craft forced loans against importers for failing to fulfil LC payment obligations.

But there are a few banks that do not follow the directive and try to clear LC payments in other ways. Thus the country may lose its reputation abroad due to payment delays, he said.

"That is why the governor emphasised it," he added.

Emerging from the meeting, Managing Director and Chief Executive Officer of Mutual Trust Bank Syed Mahbubur Rahman said the central bank asked bankers to remain alert to avert any possible incident of money laundering through under-invoicing during exports.

The experienced banker said the regulator also suggested that bankers create awareness among the people to popularise digital payment tools in order to discourage cash usage and achieve the greater objective of creating a cashless society.

He also said the central bank informed them that the inflationary pressure had started easing in recent months, though the target has not been achieved.

"But the Bangladesh Bank is confident about bringing down inflation to its targeted levels in the coming months," added Rahman.

Commercial banks' over-reliance on government securities was also discussed at the meeting. The banking regulator advised bankers to spread the holdings of treasury bills and bonds to the retail level to reduce liquidity pressure on banks.

Meeting sources also said the central bank shared its initiative to create a special fund of Tk 250 million for the families of those killed in the 2024 July-August mass uprising and also the treatment of the injured victims.

Of the total fund, the central bank alone will contribute Tk 140 million from its own resources, while banks have been asked to provide the rest.​
 

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