On August 5, 2024, Bangladesh’s political and economic landscape shifted in ways that have since put the country’s banking system under an intense microscope.
What followed was not simply a change of government: it triggered a sequence of regulatory moves, public inquiries, and emergency interventions aimed at stabilizing a sector weakened by years of weak governance, insider lending, and fast-rising defaulted loans.
Policymakers now say the challenge is twofold—to shore up immediate depositor confidence and to build a legal, institutional, and market architecture that prevents a relapse.
Whether the reforms underway—including proposed amendments to the Bank Company Act and the controversial state-led consolidation of five Islamic banks—can reconcile those twin goals is the central question facing bankers, regulators, and the wider economy.
The scale of the problem is stark. Over 2024 and into 2025, non-performing loans (NPLs) have surged to historically high levels, shrinking banks’ lending capacity and exposing capital shortfalls.
Official and media reporting show classified and defaulted loans ballooning: Bangladesh Bank and independent analyses recorded NPLs leaping into the trillions of taka—figures that, by some accounts, pushed the bad-loan ratio to roughly one quarter of all outstanding loans by March 2025.
The latest report from Bangladesh Bank states that aggregated non-performing loans (NPLs) hit Tk420,334.94 crore by the end of March 2025, accounting for 24.13% of the total loans worth Tk1,741,992.13 crore disbursed by 61 commercial banks.
This means that almost one-fourth of the total loans distributed by the banking sector have already become defaulted or will be classified as troubled.
The knock-on is predictable: squeezed credit, higher funding costs, and an urgent need for recapitalization.
Against that backdrop, the government and the central bank have moved on multiple fronts. Regulators have introduced a legal toolkit for crisis management—including a Bank Resolution Ordinance and other emergency measures intended to give the central bank greater powers to replace management, appoint administrators, and orchestrate mergers or resolutions when a lender is failing.
Simultaneously, draft amendments to the Bank Company Act (1991)—or new ordinances amending bank statutes—aim to tighten ownership rules, restrict related-party exposures, and enhance supervisory teeth. These legal changes are designed to make swift corrective action possible and to create legal pathways for restructuring problem banks without paralyzing the payments system.
5-bank merger
One of the most visible, and divisive, instruments has been a state-led plan to merge five Shariah-based banks whose liquidity and governance problems had reached acute levels.
The central bank’s decision to consolidate these lenders into a single, larger entity is being framed as both a depositor-protection measure and a practical way to pool capital, cut duplicate costs, and create a more manageable supervision target. But mergers are not magic bullets.
They carry legal, operational, and reputational risks—especially when the merging banks hold large, poorly documented loans and when their shareholders and creditors are at odds with regulators.
Legal challenges to the merger plan have already been filed, underscoring how politically fraught such consolidation can be.
So how—practically—can a five-bank merger work amid rising NPLs? The technical recipe has several essential ingredients:
- Transparent balance-sheet triage. Before combining banks, regulators must create a jointly agreed map of assets and liabilities: which loans are recoverable, which need restructuring, and which must be transferred to a bad bank or written off. Without this transparency, the merged balance sheet simply hides rather than removes risk. The ordinance and draft rules that allow temporary administrators to replace management are critical here—they enable stress testing and forensic audits.
- Ring-fencing toxic assets. A common approach is to isolate doubtful portfolios—by selling them to an asset management company, securitizing them with state guarantees, or creating a “bad bank.” Doing so clarifies the going-forward capital needs of the merged entity and can make it more attractive to external investors. International experience shows that properly financed asset management vehicles can accelerate recovery; poorly designed ones simply transfer contingent liabilities back to taxpayers.
- Fresh capital and credible investors. Mergers require capital—to meet regulatory ratios and to absorb loan provisioning. That capital should come from credible strategic investors or conditional state support with strict governance reforms tied to their injections. Without real capital, mergers are cosmetic. The central bank’s plan to sell stakes to strategic investors is consistent with this necessity but hinges on investor confidence—which remains fragile.
- Governance overhaul and performance contracts. New boards, independent directors, and transparent executive selection—ideally mandated for a transition period—help break patterns of insider lending and political interference. Performance contracts (for management and board members) backed by criminal consequences for fraud can change incentives. The proposed amendments to bank law aim to create stronger enforcement mechanisms for exactly this reason.
- Protecting depositors while disciplining shareholders. Resolution frameworks must prioritize small depositors to avoid runs while ensuring large shareholders and related parties take losses where appropriate. This balance is politically sensitive but essential for moral hazard control.
- A credible exit plan for state involvement. Temporary administrative powers and emergency capital must be accompanied by a clear timetable to privatize or sell the restructured bank. Otherwise, temporary nationalization risks becoming permanent and distorts markets.
These are the technical pillars. But the politics are unavoidable. The banking crisis emerged amid a tectonic political event—the change on August 5, 2024—and allegations of large-scale diversion of funds involving politically connected actors have stoked public anger and international concern.
Reforms, therefore, must answer not just technical deficiencies but also public demands for accountability.
International lenders and rating agencies are watching—and lending support from institutions such as the World Bank has been tied to credible reform commitments.
Pitfalls
Possible pitfalls are many. First, hasty mergers without full due diligence risk creating a “too-big-to-manage” entity with concentrated governance problems.
Second, if regulatory forbearance simply defers losses, the underlying fragility remains.
Third, legal uncertainty—illustrated by court challenges to the five-bank merger—can delay implementation and prolong market anxiety. Finally, macroeconomic stress (high inflation, tighter global liquidity) can worsen asset quality even after structural fixes are in place.
What should be the near-term priorities? Regulators must (a) finish forensic audits and publish aggregate findings; (b) ring-fence irretrievable assets; (c) design a transparent recapitalization plan that limits fiscal exposure while inviting private capital; (d) strengthen supervision and early-warning systems; and (e) conclude legal reforms—notably to the Bank Company Act and the Bank Resolution Ordinance—that clearly define resolution powers and protect depositors.
For the five-bank merger specifically, an independent verification of asset quality, a road map for capital injection, and legally enforceable governance covenants are prerequisites for success.
Longer term, the crisis offers an opportunity to rethink banking culture in Bangladesh.
That means stricter limits on related-party lending, stronger market discipline (including more honest provisioning and prompt loss recognition), better corporate records, and a modernized bankruptcy and creditor-rights regime that accelerates loan recovery.
It also means investing in supervisory capacity, data systems, and a market for distressed assets.
If these changes stick, Bangladesh’s banking sector could emerge leaner and more resilient; if not, the cycle of fiscal rescues and moral hazard will continue.
The human dimension should not be forgotten. Bank employees, small depositors, and credit-dependent businesses are already feeling the pinch of tighter credit and higher rates.
Thoughtful reform must protect these constituencies while changing the incentives that enabled earlier excesses. Policymakers need to tell a clear story: that short-term pain—temporary liquidity support, surgical restructuring, and legally enforced clean-ups—will buy a longer period of stable, sustainable credit growth. Without that narrative, even well-designed policies will struggle to win the social license they need.
The scale of the task is large, but the alternatives are worse. Unchecked, bulging NPLs and weak governance will continue to strangle lending, raise borrowing costs, and impose fiscal burdens.
Done right, the current reforms—legal upgrades, a stronger resolution regime, and carefully managed mergers—could reset Bangladesh’s banking sector for the next decade.
The coming months will show whether regulators and political leaders can match technical fixes with credible enforcement, decisive capital mobilization, and the transparency necessary to rebuild trust.
The country’s economic prospects, and the financial security of millions of depositors and borrowers, depend on it.
