[🇧🇩] Banking System in Bangladesh

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The Financial Express | First Financial Daily of Bangladesh

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Reform cannot wait as banking crisis deepens

Published :
Jun 22, 2026 00:30
Updated :
Jun 22, 2026 00:30

The country's banking sector continues to make screaming headlines. Recent media reports inform that, by the end of 2025, distressed loans across all scheduled banks had surged by more than 47 per cent to Tk 10.08 trillion --- an amount that exceeds the size of the proposed national budget for the fiscal year 2026-27. As mounting bad loans eroded earnings of most of the banks, the sector collectively posted a staggering net loss of Tk 1.3 trillion last year. Thus the banking sector's woes, stemming from years of systematic looting under the previous Awami League government, show little sign of abating. On the contrary, the sector now finds itself on the cusp of yet another crisis. According to recent report published in this newspaper, banks' profitability is being squeezed by a shrinking net interest margin (NIM), raising serious concerns about the long-term sustainability and stability of the banking industry.

The deterioration in banks' net interest margin offers a clear indication of the sector's worsening financial health. NIM, which measures the difference between interest earned on loans and interest paid on deposits relative to interest-earning assets, is a key indicator of the profitability of a bank's core business. According to the Bangladesh Bank data, the sector's aggregate NIM plunged from 1.30 per cent in 2024 to a negative 0.49 per cent in 2025. Officials attribute this sorry state of affairs largely to the explosion of non-performing loans. As things stand, many banks are earning little or no income from a significant portion of their assets stuck as NPL, yet they must continue to honour their obligations to depositors. The industrial slowdown in recent years has further exacerbated the situation by dampening credit demand and weakening borrowers' repayment capacity. Consequently, banks with ample liquidity are increasingly opting to invest in government treasury instruments rather than extending fresh loans in a high-risk environment, while those grappling with liquidity shortages are bearing the brunt of the crisis.

The implications of this crisis extend far beyond the banking industry itself. In his budget speech, the finance minister outlined a three-stage strategy for the economy --- recovery and stabilisation, followed by restoration and growth. However, experts are of the view that as long as the financial sector remains mired in crisis, the vision of economic recovery and sustained growth will remain out of reach. The banking sector is the lifeline of the economy, with its assets equivalent to roughly half of the country's GDP. The government, too, relies heavily on banks to finance its budget deficits. Nearly half of the proposed Tk 2.43 trillion budget deficit for the coming fiscal year is expected to be financed through borrowing from the banking sector. Therefore, a weak banking sector cannot support economic recovery and growth. Restoring the health of the financial sector must be a top priority.

The government has already injected around Tk 520 billion into five merged Islami banks and the central bank has extended special liquidity support to at least 12 troubled private banks. However, injecting public funds into troubled banks without addressing the underlying governance failures cannot provide a lasting solution. What the sector needs is a comprehensive reform aimed at prompt resolution of nonviable institutions, ensuring adequate depositor protection, reforming state-owned banks, strengthening governance and risk management etc. To this end, the government should consider establishing a high-powered banking reform commission comprising independent experts.​

 

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How to restore the moral compass of corporate banking

For years, corporate banking in Bangladesh has been built not simply on lending but also on stewardship.

www.thedailystar.net

How to restore the moral compass of corporate banking

Rahel Ahmed

VISUAL: MAGNIFIC

For years, corporate banking in Bangladesh has been built not simply on lending but also on stewardship. Branch managers and, later, relationship managers (RM) used to be trusted advisers who understood industries, warned against reckless expansion, and often served as an informal early warning system for entrepreneurs carried away by growth. They also supported businesses through the cycle’s ups and downs.

That culture is now, unfortunately, fading. Corporate banking has become increasingly transactional, profit-driven, and incentive-obsessed. In many banks, RMs are judged less on the quality of their judgement than on loan book growth, fee income, and balance sheet expansion. The result is a culture in which caution is often punished, aggressive lending is rewarded until stress emerges, and the relationship is treated as secondary.

Bangladesh’s recent corporate distress stories reveal an uncomfortable truth: many large business groups, excluding those that deliberately syphoned money from the system, did not run into trouble overnight. Their vulnerabilities were visible for years. Yet, banks continued to finance expansion, refinance obligations, syndicate facilities, and compete for exposure without the moral courage to say “no.” One reason may be the large number of banks chasing a limited pool of major corporate names.

As a recent example, the difficulties surrounding parts of the City Group ecosystem should prompt industry-wide introspection. Debt-fuelled diversification and ambitious capital expenditure don’t happen in isolation; they are enabled and repeatedly financed by banks. During the boom years, many lenders participated enthusiastically because no one wanted to lose market share or relationship prestige. Some senior bankers built reputations, and even careers, on this relationship. But when stress emerged, the same system shifted into self-preservation mode. Instead of coordinated rehabilitation, many lenders shortened tenors, restricted fresh facilities, intensified recovery pressure, and distanced themselves from clients they had once celebrated. That may protect individual balance sheets in the short term, but it can also deepen broader economic instability. There have been exceptions when relationship banks worked together to help a sound business through a difficult phase. That should be the rule, not the exception.

This is not how relationship banking was meant to function. Strong banking systems are built on the idea that banks remain partners through cycles, not merely financiers during prosperity. After the Asian financial crisis of 1997, several East Asian systems learnt hard lessons about indiscriminate lending and weak advisory oversight. Many also recognised the importance of restructuring viable businesses rather than abandoning them during temporary distress. Japan’s experience, despite criticism over “evergreening,” showed that coordinated lender support can sometimes prevent wider industrial damage during fragile periods. After the 2008 global financial crisis, many international banks similarly reassessed their relationship model. Institutions such as Standard Chartered and Bank of America Merrill Lynch openly emphasised that corporate banking could not remain merely product-selling oriented; advisory capability, industry understanding, and long-term partnership had to move back to the centre.

Bangladesh once had bankers who embodied that philosophy. Veteran bankers from foreign and leading local banks often played mentor-like roles for the first generation of entrepreneurs after independence. They advised clients against unrelated diversification, cautioned against excessive leverage, and sometimes refused financing for projects that lacked strategic rationale. As banker Mamun Rashid has observed, relationship managers once “went the extra mile” not merely to disburse loans, but to help clients run businesses prudently with an eye on the future.That culture mattered because the country’s corporate sector has long depended far more on bank financing than on deep capital markets. In such an environment, banks are not passive lenders; they are gatekeepers of economic discipline, with responsibilities that extend beyond credit approval and collateral documentation.

More than three decades ago, when I began my banking career at ANZ Grindlays Bank as a young RM, we were trained to evaluate conglomerates by looking at sector cyclicality, foreign exchange exposure, governance quality, succession risks, concentration risk, and debt sustainability. If a business group was expanding rapidly into unrelated sectors with rising leverage, it was the RM’s duty to flag that concern internally, even if doing so slowed the bank’s revenue growth.

Unfortunately, incentive structures often encourage the opposite. Aggressive loan growth wins immediate recognition; prudence rarely does. In many banks today, RMs are treated as sophisticated sales personnel rather than strategic financial partners. Credit risk teams are too often reduced to procedural gatekeepers instead of empowered institutional counterbalances. Meanwhile, the race to capture marquee corporate names weakens underwriting discipline across the sector. The cost is visible not only in rising stressed assets but also in the erosion of trust between banks and corporates.

Therefore, the banking sector in Bangladesh needs to rediscover the original meaning of relationship management. RM performance metrics must be redesigned so that evaluations reflect long-term asset quality, sustainability of financed projects, client governance standards, and early risk identification, not just annual business growth. Banks should also build sector-specialised advisory capability so that those covering textiles, power, FMCG, infrastructure, or commodities bring real industry understanding rather than only sales skills. During periods of corporate stress, lenders should pursue coordinated restructuring where viable businesses exist; disorderly withdrawal by all lenders at once often destroys value for everyone.

The Bangladesh Bank and bank boards must also recognise that banking is not merely a profit-maximising business. It is a public trust institution central to economic stability. The collapse of a large corporate borrower affects not just one balance sheet, but suppliers, employees, SMEs, export flows, investor confidence, and the wider economy.

Relationship managers carry responsibilities that are not only commercial but moral. The industry needs to remember that again.

Rahel Ahmed is a banker and banking industry analyst.​

 

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BB to re-impose interest rate spread cap to aid businesses

Bangladesh Bank (BB) has decided to re-impose a cap on the interest-rate spread of commercial banks to facilitate business activities by reducing lending costs. The decision was taken at the central bank's board meeting held on Tuesday with BB Governor Md. Mostaqur Rahman in the chair. A number of

thefinancialexpress.com.bd

BB to re-impose interest rate spread cap to aid businesses

A maximum average intermediation spread of 4.0 per cent is likely to be introduced

Jubair Hasan

Published :
Jun 24, 2026 08:42
Updated :
Jun 24, 2026 08:42

Bangladesh Bank (BB) has decided to re-impose a cap on the interest-rate spread of commercial banks to facilitate business activities by reducing lending costs.

The decision was taken at the central bank's board meeting held on Tuesday with BB Governor Md. Mostaqur Rahman in the chair. A number of issues, including spread and approval of the upcoming Monetary Policy Stance (MPS), were discussed in the meeting.

The latest regulatory move came at a time when business leaders have been urging the banking regulator to take immediate measures to cut policy rate and provide some relief amid the prolonged economic sluggishness.

The spread, also known as the net interest margin (NIM), represents the difference between what banks pay on deposits and what they earn from loans. In June 2018, the central bank introduced an upper ceiling on the spread, but it was withdrawn on November 28, 2023 following criticism from various quarters.

Requesting anonymity, a BB official said the board of directors decided to re-introduce a maximum average intermediation spread of 4.0 per cent between deposits and lending rates.

He said the measure is expected to support sluggish business activities by easing the burden of higher lending costs on entrepreneurs. "The BB may issue a circular on the matter at any time," he said.

However, commercial bankers have expressed their dissatisfaction with the possible move, arguing that it would undoubtedly affect banks' profitability at a time when net interest margin (NIM) across the banking sector has plummeted significantly.

On condition of anonymity, the managing director of a leading private commercial bank said it will definitely penalise the efficiency of the banks that are carefully managing liquidity in this struggling period of time.

The experienced banker also raised questions over the central bank's margin calculation method, saying that the regulator appears to be calculating the spread based only on the cost of deposits, which is not a right approach.

"There are other costs involved at the distribution level, which also needs to be taken into consideration, but it will definitely hurt profitability in this tough time when core business areas of commercial banks continue to shrink," he added.

According to Bangladesh Bank data, the banking sector's overall NIM declined from 1.30 per cent in 2024 to a negative 0.49 per cent in 2025.

In the calendar year 2025, the banking sector experienced an 8.10 percent decline in interest income alongside a 25.61-percent rise in interest expenses, the data show.

Director General of Bangladesh Institute of Bank Management (BIBM) Dr Md Ezazul Islam said the regulator had earlier capped the intermediation spread, but the outcome was not good.

The BB later withdrew the restriction and moved towards interest rate liberalization, which delivered benefits in terms of stabilising the exchange rate, strengthening forex reserve and supporting the local currency, he added.

It has also been decided in the board meeting that the policy rate will remain unchanged in the upcoming half-yearly Monetary Policy Statement (MPS) which will be announced on June 30.​

 

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World Bank to provide $450m loan for banking sector reforms

The World Bank will provide a loan of $450 million to strengthen the foundation of Bangladesh's banking sector. At the current market rate, this amounts to approximately Tk 55 billion Bangladeshi. In a press release issued by the World Bank today, Wednesday, it was stated that the...

en.prothomalo.com

World Bank to provide $450m loan for banking sector reforms

Special Correspondent
Dhaka
Published: 24 Jun 2026, 17: 47

World Bank File Photo

The World Bank will provide a loan of $450 million to strengthen the foundation of Bangladesh's banking sector.

At the current market rate, this amounts to approximately Tk 55 billion Bangladeshi.

In a press release issued by the World Bank today, Wednesday, it was stated that the organisation’s board meeting approved this loan.

The World Bank believes that a strong banking sector is a prerequisite for recovering economic growth and creating employment.

This loan is being provided under the Financial Sector Support Project–2. The main objective of this project is to strengthen the deposit insurance system to protect small depositors and enhance the supervisory capacity and framework of the Bangladesh Bank.

The World Bank believes that the project will also aid in building the foundation for bank restructuring and state-owned bank reforms.

Under this project, the World Bank states that the capital of the Deposit Protection Fund will be increased, and important priority reform activities, such as the development of deposit protection mechanisms, the establishment of an effective emergency liquidity assistance framework, the formulation of bank restructuring strategies, and the reform of state-owned banks, will be advanced.

The World Bank further mentions that the banking sector in the country faces challenges due to weak corporate governance, influence over regulatory agencies, and lending to related parties.

By the end of March 2026, the non-performing loan ratio stood at 32. 6 per cent, significantly higher than the South Asian banks' average of 7. 9 per cent. Similarly, by the end of December 2025, the capital-to-risk-weighted assets ratio of the entire banking system was a negative 2. 6 per cent.

Jean-Pesme, Director of the World Bank’s Bangladesh and Bhutan division, stated that a stable and inclusive financial sector is essential for Bangladesh to achieve its goal of becoming a trillion-dollar economy.

However, the banking sector, which holds about 90 per cent of the total financial sector’s assets, is under increasing pressure.

Jean-Pesme further mentioned that through this project, it will be possible to establish necessary tools, systems, and protective frameworks to safeguard and retain the confidence of small depositors. As a result, stability will return to the banking sector, contributing to economic growth and job creation.

Under the project, the information and communication technology (ICT) infrastructure of Bangladesh Bank will be modernized and upgraded. This will address the growing cybersecurity risks and fill significant gaps in sector-related information and analysis systems.

It will enhance Bangladesh Bank’s capability in risk monitoring, data-driven and risk-based supervision, and increase the resilience of the financial sector.

World Bank's Senior Financial Sector Specialist and Task Team Leader of the project, Toshiaki Ono, said that as part of a coordinated effort with development partners, including the International Monetary Fund (IMF) and the Asian Development Bank (ADB), this project will support strengthening the preparedness to manage bank sector crises and enhance the capacity of relevant authorities in handling sectoral pressures.​

 

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https://www.newagebd.net/post/editorial/303860/banks-should-not-abandon-their-core-responsibilities

Banks should not abandon their core responsibilities

A SHARP rise in banks’ investment in government securities reflects a deepening crisis of the banking sector. Banks’ investments in government securities, according to the Bangladesh Bank, increased by 35.5 per cent in 2025 to Tk 4,04,931 crore that year from Tk 2,99,001 crore a year ago. The increase indicates that banks, faced with soaring default loans and liquidity stress, are increasingly choosing the safety of treasury bills and bonds over lending to businesses. The strategy may appear rational from a risk-management perspective because government securities offer assured returns with virtually no risk. But, the trend is a problematic departure from the fundamental role of banks as financial intermediaries. Commercial banks exist primarily to mobilise deposits and channel funds into productive economic activities. When they shift overwhelmingly towards risk-free government securities, private investment and the economy at large inevitably suffer. The record low private sector credit growth, now at less than 5 per cent, stands testimony to that.

The consequences are sluggish growth and weak employment generation. The private sector employs about 85 per cent of the work force and depends heavily on bank financing for expansion. A prolonged contraction in credit availability discourages entrepreneurs, weakens economic growth and job creation.

The causes of banks’ growing aversion to lending are understandable. More than a third of outstanding loans have become defaulted, exposing years of governance failures. The violation of banking rules in loan disbursement, politically-motivated lending, repeated loan rescheduling, regulatory forbearance and inadequate supervision led to such a debilitating situation. During the Awami League regime, systemic corruption and undue political influence distorted credit discipline, leaving banks highly vulnerable. All this has led banks to prefer government securities to corporate lending. Such a retreat, however, cannot be the answer. Banks cannot and should not walk away from their core responsibilities. Excessive dependence on investment-related earnings rather than traditional lending distorts the banking business model and raises concerns about the sector’s long-term sustainability. What banks should do and the central bank should facilitate is to fundamentally reform lending and governance practices. Sound governance, professional management and rigorous credit assessment should replace politically driven and relationship-based lending. Loan proposals should be evaluated solely on commercial merit, repayment capacity and business viability. Strong internal controls, effective risk management systems and due diligence are essential to preventing the accumulation of bad loans.

Ensuring accountability for wilful defaulters and those responsible for imprudent lending decisions is also necessary.

The banking sector’s recovery depends not on avoiding risks but on managing it carefully. The regulators must enforce governance reforms; and, banks, for their part, must adhere to sound management practices and prioritise productive lending. Only a healthy and accountable banking system can support sustainable growth, employment generation and economic transformation.​

 

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Banks need higher operational risk capital

Operational risk is no longer a secondary concern for Bangladesh's banking sector. Under the Basel framework, it refers to the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. It includes legal risk but excludes strategic and reputati

thefinancialexpress.com.bd

Banks need higher operational risk capital

Shah Md Ahsan Habib

Published :
Jun 29, 2026 23:38
Updated :
Jun 29, 2026 23:38

A teller is counting notes at a bank in Dhaka —FE File Photo

Operational risk is no longer a secondary concern for Bangladesh's banking sector. Under the Basel framework, it refers to the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. It includes legal risk but excludes strategic and reputational risk. In practice, this means a bank may be damaged not only by borrowers who fail to repay or by movements in interest rates and exchange rates, but also by forged documents, weak controls, staff collusion, poor governance, cyberattacks, system failures, political pressure, vendor lapses and natural disasters. These are not routine back-office irritants. In Bangladesh, they have become central threats to banking stability.

The urgency is clear from the latest default-loan picture. By March 2026, defaulted loans in the banking sector had reportedly climbed to Tk 5.88 trillion, equivalent to 32.26 per cent of total outstanding loans. This represented an increase of Tk 314.87 billion in only three months from December 2025. Total outstanding loans stood at Tk 18.24 trillion. The deterioration was also broad-based, with non-performing loans rising across most scheduled banks during the first quarter of 2026. This is not merely a weakness of a few troubled lenders. It is a sector-wide warning about asset quality, governance, recovery discipline and risk management.

The conventional explanation is that Bangladesh has a credit-risk problem. That is true, but incomplete. In formal regulatory classification, defaulted loans remain credit risk because the immediate loss arises from a borrower's failure to meet contractual obligations. But the supervisory diagnosis cannot stop there. Many of the credit losses appearing in Bangladesh's loan books have operational-risk origins. They have emerged from weak origination, poor documentation, compromised collateral valuation, related-party lending, management override, delayed audit response, ineffective monitoring and politically protected default. The accounting loss may sit under credit risk, but the causal chain often begins in failed processes, failed people controls and failed governance.

This distinction matters. The argument is not that non-performing loans should simply be reclassified as operational risk. That would be technically incorrect and would blur Basel risk taxonomy. The more precise argument is that Bangladesh's NPL crisis contains a significant operational-risk component that has not been adequately recognized in supervision, capital planning or bank governance. When a loan is approved on fictitious documents, renewed despite warning signs, rescheduled under influence or monitored only on paper, the final default is merely the visible outcome. The control failure occurred much earlier. Treating such losses only as credit events leads banks to focus on recovery and provisioning while ignoring the institutional weaknesses that produced the loss.

The issue becomes even clearer in the case of wilful default. Classical credit risk assumes that a borrower may be unable to repay because of business failure, cash-flow stress or adverse economic conditions. Wilful default is different. It often involves borrowers who have repayment capacity but choose not to repay, or who divert funds, conceal cash flows, misuse collateral, transfer assets or rely on influence to escape discipline. Such conduct cannot survive without internal process failure and governance failure inside banks. A borrower may initiate misconduct, but a bank's people, systems and controls determine whether that misconduct is detected, prevented, escalated or silently accommodated. In Bangladesh, too many cases suggest accommodation rather than prevention.

This is why Bangladesh Bank's move to Risk-Based Supervision, effective from January 1, 2026, is highly significant. Risk-Based Supervision changes the supervisory question from 'Has the bank complied with the checklist?' to 'Does the bank understand, measure, monitor and control its material risks?' This shift is especially important for operational risk because many operational weaknesses are not visible in traditional compliance files. A bank may appear orderly on paper while suffering from captured decision-making, weak IT controls, poor audit follow-up, unreliable data and ineffective board oversight. Under RBS, such weaknesses should affect supervisory ratings, intervention intensity and capital expectations.

Banks, however, cannot rely on supervision alone. Operational risk discipline must be embedded in their own governance structures. Boards should approve operational risk appetite, review key risk indicators, demand root-cause analysis of repeated failures and hold management accountable for delayed remediation. Internal audit must move beyond manual sampling and checklist inspection toward data-driven, risk-based review. Risk management and compliance functions need independence, skilled staff and direct access to board committees. Operational risk should not be treated as a clerical matter belonging to audit, compliance or IT departments. It is a business risk that can destroy capital, confidence and institutional credibility.

Key Risk Indicators should become a standard part of this discipline. Banks should track loan documentation exceptions, unauthorised disbursements, loans approved without proper credit information checks, overdue audit findings, management override of controls, staff turnover in risk and compliance roles, cybersecurity incidents, system downtime, failed login attempts, vendor service breaches, regulatory penalties and complaints per thousand transactions. These indicators should be linked to thresholds, escalation rules and remediation deadlines. More importantly, they should influence supervisory assessment and internal capital planning. A dashboard that does not lead to action is not risk management.

The capital question now deserves serious reconsideration. Basel minimum capital requirements are international floors, not ceilings. Bangladesh's special circumstances justify additional operational risk capital under the supervisory review process of Risk-Based Supervision. The sector faces unusually high default loans, governance fragility, wilful default, political interference, weak recovery culture, legal delays, cyber vulnerability and climate-related disruption. These conditions may create operational loss patterns that standard Basel capital formulas do not fully capture. A Bangladesh-specific operational risk capital add-on, linked to each bank's actual risk profile, would therefore be prudent. It would not contradict Basel; it would apply Basel's risk-sensitive spirit to local reality.

This add-on must be designed carefully to avoid double counting. Banks already hold provisions and capital against credit losses. An operational risk capital add-on should not mechanically punish the same default twice. Instead, it should be tied to measurable control weaknesses that increase the probability or severity of operational losses. Relevant indicators may include high documentation exceptions, repeated regulatory findings, unresolved audit issues, weak cyber controls, abnormal related-party exposure, governance breaches, persistent system failures, excessive wilful-default concentration and poor operational loss reporting. Banks with strong controls, transparent data and credible remediation should face lower add-ons. Banks with recurring weaknesses should hold more capital until those weaknesses are corrected.

The broader capital stress in the sector strengthens this case. Public reporting in 2026 showed that Bangladesh's banking system entered the year with serious capital weakness, while policymakers emphasized the need to replenish bank capital for reforms to take hold. Governance reform, recovery reform and supervisory reform all require a capital base that can absorb loss. But higher operational risk capital must not become a substitute for reform. Capital can absorb losses; it cannot prevent fraud, political interference or board capture by itself. Bangladesh Bank should therefore combine capital add-ons with mandatory remediation plans, operational loss databases, scenario analysis, cyber resilience testing, climate-risk mapping, stronger fit-and-proper enforcement and board-level accountability.

Bangladesh's banking system is paying the price for years of treating operational risk as an administrative afterthought. Credit risk may record the loss, but operational risk often creates the conditions for it. Under Risk-Based Supervision, Bangladesh now has an opportunity to correct this blind spot. Higher operational risk capital should be used not as a blunt punishment, but as a risk-sensitive supervisory tool that prices weak controls, rewards credible remediation and strengthens institutional resilience. In Bangladesh's circumstances, requiring more capital for banks with higher operational risk is not regulatory excess. It is prudence catching up with reality.

Bangladesh's banking system is paying the price for years of treating operational risk as an administrative afterthought. The consequences now appear in default loans, capital erosion, fraud, cyber exposure and public distrust. The lesson for bankers and central bankers is direct: credit risk may record the loss, but operational risk often creates the conditions for it. Under Risk-Based Supervision, Bangladesh has the opportunity to correct this blind spot. That opportunity should include stronger governance, sharper KRIs, credible enforcement and, where justified, additional operational risk capital beyond Basel minimums. In Bangladesh's circumstances, that is not regulatory excess. It is prudence catching up with reality.

The writer is Professor at Bangladesh Institute of Bank Management (BIBM), Dhaka; and Chairman, Dnet.​