Bangladesh Defense
Saif
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Banking crisis laid bare in 2025, lasting fixes hinge on next govt
When bankers entered the new year and opened their books for 2025, many quickly realised that the scale of long-buried damage was too large to hide any longer.
Banking crisis laid bare in 2025, lasting fixes hinge on next govt
When bankers entered the new year and opened their books for 2025, many quickly realised that the scale of long-buried damage was too large to hide any longer.
Years of political interference, widespread lending irregularities, loan scams and an overall lax regulation had hollowed out the balance sheets.
What followed was not a recovery year, but somewhat of a reckoning. The interim government took bold steps to confront the financial sector crisis, pushing through a bank merger, non-bank liquidations, new laws and tighter supervision.
Yet by the end of the year, the financial sector readings tell a sobering story. Bad loans are at a record high, depositor confidence is shaken, and reforms are still constrained by old power structures.
These constraints became painfully clear as the year progressed, culminating in alarming data by the third quarter.
As of September, non-performing loans (NPLs) in the banking sector surged to Tk 6.44 lakh crore, nearly 36 percent of total outstanding credit. This was more than double the ratio a year earlier, and the highest level since 2000.
Besides, more than a dozen commercial lenders reported default ratios above 50 percent, showing that distress was no longer confined to a handful of weak institutions.
Large corporate groups accounted for a massive share of new defaults, especially after the fall of the Awami League government in August 2024.
The rise in bad loans came amid a broader macroeconomic squeeze.
Inflation remained high at around 8 percent, well above the central bank's target, while private sector credit growth slowed to record lows as lenders pulled back.
Throughout the year, new investment remained stalled, as borrowing costs climbed with the central bank holding the policy rate at 10 percent -- the highest among neighbouring economies.
Lending rates reached 16 percent to 17 percent, further dampening business activity. Confidence, already fragile, eroded further as depositors started to question the safety of their savings.
Faced with mounting stress, the interim government opted for emergency repair rather than incremental change.
The most discussed move was the merger of five troubled shariah-based lenders into the state-run Sammilito Islami Bank PLC.
Licensed on 30 October, the new bank became the largest Islamic lender in the country overnight, with paid-up capital of Tk 35,000 crore, including Tk 20,000 crore from the government.
The merger dominated public attention throughout the second half of the year. Depositors rushed to branches, overwhelming staff and triggering chaos in several locations. Although the Bangladesh Bank provided liquidity support multiple times, withdrawals continued, while many customers were unable to access their funds.
Four of the banks -- First Security Islami Bank, Social Islami Bank, Union Bank and Global Islami Bank -- had been dominated by the controversial S Alam Group, while EXIM Bank was controlled by Nazrul Islam Mazumder of Nassa Group.
This ownership concentration highlighted how political patronage had shaped the crisis.
Authorities assured depositors that their money would eventually be recovered, but the central bank governor made clear that general shareholders would receive nothing, declaring their scrips worthless.
Alongside the merger, the banking regulator moved to shut down nine troubled non-bank financial institutions. Together, these actions marked a break from the long-standing practice of keeping weak institutions alive through regulatory indulgence.
To support the reform initiatives, the government also strengthened the legal framework for crisis management.
The Bank Resolution Ordinance 2025 gave authorities the power to intervene in failing banks, protect depositors and impose losses on shareholders. The central bank set up a dedicated Bank Resolution Department to implement the law.
In November, the Deposit Protection Ordinance 2025 doubled the insured deposit ceiling from Tk 1 lakh to Tk 2 lakh, covering about 93 percent of depositors nationwide.
Governance reform, however, proved more contentious.
Bangladesh Bank Governor Ahsan H Mansur initiated steps to amend the Bangladesh Bank Order 1972 to strengthen central bank autonomy and align it with global standards.
The draft proposal included removing bureaucrats from the board and reducing political influence. Resistance from within the bureaucracy and the finance ministry quickly followed, slowing progress.
Economists argued that genuine independence of the central bank would require abolishing the Banking and Financial Institutions Division under the finance ministry, but officials opposed the idea.
By year-end, the push for BB's autonomy had slowed, leaving the future of reform uncertain without strong political backing.
Meanwhile, other regulatory measures advanced more quietly.
The central bank updated loan classification rules, conducted asset quality reviews to assess the actual health of bank balance sheets and prepared to shift toward risk-based supervision.
Moving away from checklist inspections toward continuous risk monitoring, a key condition of the International Monetary Fund (IMF) for its ongoing loan programme, is scheduled for full implementation in January 2026.
Draft amendments to the Bank Company Act, which are intended to tighten eligibility for bank owners and directors, were prepared but left for the next elected government as the country entered the election cycle.
While banking reforms dominated headlines, the external sector offered some relief.
A crackdown on illegal money transfer channels like hundi and hawla helped stabilise the foreign exchange market, while lower import costs eased pressure on reserves.
Expatriate Bangladeshis sent a record $30.04 billion in remittances in the fiscal year 2024-25, the highest ever in a single fiscal year.
Gross foreign exchange reserves rose to $32.57 billion by mid-December, up from $24.94 billion a year earlier, reversing the sharp decline seen under the previous regime.
In 2025, new technologies also began to appear in the banking conversation, though more as a promise than a right-now solution.
Some banks rolled out early AI-powered services, and the Bangladesh Bank reopened applications for digital bank licences, attracting interest from telecom operators, financial institutions and conglomerates.
These initiatives signalled a longer-term shift but did little to address the immediate crisis of governance and asset quality.
Now, as the country ends 2025 and prepares to enter another new year, one conclusion stood out. The outgoing year did not fix the banking sector, but it stripped away illusions.
The true scale of bad loans was revealed, political protection weakened, and the first tools for orderly resolution were put in place. Whether these patchwork repairs evolve into lasting reform will depend on political will after the election and the willingness to confront entrenched interests. For now, the system remains fragile, repaired but far from healed.
When bankers entered the new year and opened their books for 2025, many quickly realised that the scale of long-buried damage was too large to hide any longer.
Years of political interference, widespread lending irregularities, loan scams and an overall lax regulation had hollowed out the balance sheets.
What followed was not a recovery year, but somewhat of a reckoning. The interim government took bold steps to confront the financial sector crisis, pushing through a bank merger, non-bank liquidations, new laws and tighter supervision.
Yet by the end of the year, the financial sector readings tell a sobering story. Bad loans are at a record high, depositor confidence is shaken, and reforms are still constrained by old power structures.
These constraints became painfully clear as the year progressed, culminating in alarming data by the third quarter.
As of September, non-performing loans (NPLs) in the banking sector surged to Tk 6.44 lakh crore, nearly 36 percent of total outstanding credit. This was more than double the ratio a year earlier, and the highest level since 2000.
Besides, more than a dozen commercial lenders reported default ratios above 50 percent, showing that distress was no longer confined to a handful of weak institutions.
Large corporate groups accounted for a massive share of new defaults, especially after the fall of the Awami League government in August 2024.
The rise in bad loans came amid a broader macroeconomic squeeze.
Inflation remained high at around 8 percent, well above the central bank's target, while private sector credit growth slowed to record lows as lenders pulled back.
Throughout the year, new investment remained stalled, as borrowing costs climbed with the central bank holding the policy rate at 10 percent -- the highest among neighbouring economies.
Lending rates reached 16 percent to 17 percent, further dampening business activity. Confidence, already fragile, eroded further as depositors started to question the safety of their savings.
Faced with mounting stress, the interim government opted for emergency repair rather than incremental change.
The most discussed move was the merger of five troubled shariah-based lenders into the state-run Sammilito Islami Bank PLC.
Licensed on 30 October, the new bank became the largest Islamic lender in the country overnight, with paid-up capital of Tk 35,000 crore, including Tk 20,000 crore from the government.
The merger dominated public attention throughout the second half of the year. Depositors rushed to branches, overwhelming staff and triggering chaos in several locations. Although the Bangladesh Bank provided liquidity support multiple times, withdrawals continued, while many customers were unable to access their funds.
Four of the banks -- First Security Islami Bank, Social Islami Bank, Union Bank and Global Islami Bank -- had been dominated by the controversial S Alam Group, while EXIM Bank was controlled by Nazrul Islam Mazumder of Nassa Group.
This ownership concentration highlighted how political patronage had shaped the crisis.
Authorities assured depositors that their money would eventually be recovered, but the central bank governor made clear that general shareholders would receive nothing, declaring their scrips worthless.
Alongside the merger, the banking regulator moved to shut down nine troubled non-bank financial institutions. Together, these actions marked a break from the long-standing practice of keeping weak institutions alive through regulatory indulgence.
To support the reform initiatives, the government also strengthened the legal framework for crisis management.
The Bank Resolution Ordinance 2025 gave authorities the power to intervene in failing banks, protect depositors and impose losses on shareholders. The central bank set up a dedicated Bank Resolution Department to implement the law.
In November, the Deposit Protection Ordinance 2025 doubled the insured deposit ceiling from Tk 1 lakh to Tk 2 lakh, covering about 93 percent of depositors nationwide.
Governance reform, however, proved more contentious.
Bangladesh Bank Governor Ahsan H Mansur initiated steps to amend the Bangladesh Bank Order 1972 to strengthen central bank autonomy and align it with global standards.
The draft proposal included removing bureaucrats from the board and reducing political influence. Resistance from within the bureaucracy and the finance ministry quickly followed, slowing progress.
Economists argued that genuine independence of the central bank would require abolishing the Banking and Financial Institutions Division under the finance ministry, but officials opposed the idea.
By year-end, the push for BB's autonomy had slowed, leaving the future of reform uncertain without strong political backing.
Meanwhile, other regulatory measures advanced more quietly.
The central bank updated loan classification rules, conducted asset quality reviews to assess the actual health of bank balance sheets and prepared to shift toward risk-based supervision.
Moving away from checklist inspections toward continuous risk monitoring, a key condition of the International Monetary Fund (IMF) for its ongoing loan programme, is scheduled for full implementation in January 2026.
Draft amendments to the Bank Company Act, which are intended to tighten eligibility for bank owners and directors, were prepared but left for the next elected government as the country entered the election cycle.
While banking reforms dominated headlines, the external sector offered some relief.
A crackdown on illegal money transfer channels like hundi and hawla helped stabilise the foreign exchange market, while lower import costs eased pressure on reserves.
Expatriate Bangladeshis sent a record $30.04 billion in remittances in the fiscal year 2024-25, the highest ever in a single fiscal year.
Gross foreign exchange reserves rose to $32.57 billion by mid-December, up from $24.94 billion a year earlier, reversing the sharp decline seen under the previous regime.
In 2025, new technologies also began to appear in the banking conversation, though more as a promise than a right-now solution.
Some banks rolled out early AI-powered services, and the Bangladesh Bank reopened applications for digital bank licences, attracting interest from telecom operators, financial institutions and conglomerates.
These initiatives signalled a longer-term shift but did little to address the immediate crisis of governance and asset quality.
Now, as the country ends 2025 and prepares to enter another new year, one conclusion stood out. The outgoing year did not fix the banking sector, but it stripped away illusions.
The true scale of bad loans was revealed, political protection weakened, and the first tools for orderly resolution were put in place. Whether these patchwork repairs evolve into lasting reform will depend on political will after the election and the willingness to confront entrenched interests. For now, the system remains fragile, repaired but far from healed.
