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 鈥� comprising state-owned commercial banks, specialised banks, private commercial banks, and foreign banks. This expansion has supported the country鈥檚 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鈥檚 resilience, transparency, and accountability.
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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鈥�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.
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鈥� lending capacity to productive sectors, such as SMEs, startups, and agriculture. The ripple effect on employment, innovation, and long-term economic growth is considerable.
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Political interference, weak governance
ONE of the most critical issues undermining the banking sector鈥檚 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.
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Cyber heists, regulatory failures
PERHAPS, the most high-profile blow to the sector鈥檚 credibility was the 2016 Bangladesh Bank cyber heist, in which hackers stole $81 million from the central bank鈥檚 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鈥檚 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 鈥� sometimes ignoring recommendations from the central bank. The result is a sector that is overbanked but underregulated.
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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 鈥� 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鈥� lists, faster judicial processes for recovery, and harsher penalties for default can deter abuse of the system.
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 鈥� 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.
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Shahidul Alam Swapan is a Geneva-based private banking financial crime compliance expert, columnist and poet.
