How banking sector stabilised

Infographic: TBS

Restoring depositors' confidence in the banking sector was a major challenge for the BNP government as it inherited the most troubled financial sector in the country's history, with the default loan ratio exceeding 36% and dozens of banks unable to repay depositors.

However, in the first six months of the new government, the country's banking sector gradually stabilised, while a majority of depositors of the five merged banks received their money from government allocations. The Bangladesh Bank also moved to repay depositors by liquidating five non-bank financial institutions that are no longer viable.

The cabinet also approved the draft of the Bank Resolution (Amendment) Act, 2026, repealing the controversial provision that allowed former directors or owners of banks undergoing or slated for mergers to regain control under relatively favourable terms.

Under the amended law, the Bangladesh Bank moved to restructure the troubled financial sector by restricting, merging and liquidating ailing financial institutions, sending a strong message to owners to strengthen corporate governance.

However, managing default loans remained a major challenge for the banking sector as more than 20 banks have been facing a combined capital deficit of over Tk2 lakh crore, constraining their lending capacity.

In this context, the Bangladesh Bank introduced a Tk60,000 crore stimulus and refinancing package to revive closed factories, support struggling industries and restore private-sector investment. The package includes a Tk41,000 crore fund pooled from banks with excess liquidity and a Tk19,000 crore direct allocation from the central bank.

The foreign exchange market has also remained broadly stable, with the dollar rate holding steady while foreign exchange reserves increased by over $2 billion to more than $32 billion in the last six months, according to International Monetary Fund calculations.

However, inflation, which is one of the central bank's core monetary policy objectives, has not yet fallen to the expected level despite some decline.

Inflation fell to 8.32% in July from 9.13% in February, when the BNP government took office. 

Muhammad A (Rumee) Ali, former deputy governor of Bangladesh Bank, said the government would have to take some tough decisions to address problems regarding capital adequacy, non-performing loans (NPLs), and lack of governance.

He questioned the policy of using taxpayers' money to keep weak banks afloat, saying it would require a huge amount of funding, the burden of which would ultimately fall on taxpayers.

He also placed particular emphasis on the autonomy of the central bank and the government's control over state-owned banks.

Rumee said, "The government will have to set specific targets and implement them while taking political realities into account."

Bangladesh's risk has increased internationally because of weaknesses in the banking sector, he said. "As a result, the cost of LC confirmation has risen, imported goods have become more expensive, and the overall supply chain is facing additional costs."

Despite these challenges, however, Rumee believes the government is making its best efforts to address the situation.

Fahmida Khatun, executive director of the Centre for Policy Dialogue, said several positive steps had been taken to improve the banking sector during the government's first six months. In particular, the government introduced a stimulus package worth around Tk60,000 crore to create employment and expand banking business, she said.

"The Bangladesh Bank now needs to properly monitor the implementation of these packages and ensure that the funds are used appropriately, Fahmida said.

She said restoring depositors' confidence must be given the highest priority. "Without regaining depositors' trust, there is no scope for the banking sector to recover. In particular, the new bank created through the government's merger initiative is a major test for the government. The initiative must be made successful at any cost."

Fahmida said as export earnings have not recorded significant growth, the government needs to take initiatives to engage expatriate Bangladeshis more closely in strengthening the economy. It should focus on improving their skills and ensuring non-stop services for expatriates, she said.

Referring to the government's commitment to ensuring Bangladesh Bank's autonomy and keeping state-owned banks free from the intervention of the finance ministry, the economist said the government must prioritise these issues and take effective steps within a short period.

"Above all, full transparency and good governance must be ensured in the banking sector. The government must ensure that the scale of losses suffered in the past is not repeated and that there is no further misuse or misappropriation of loans," she said.

Measures taken to revive the economy, accelerate digital transformation

During the government's first six months, the key positive initiatives in the banking sector included recovering defaulted loans, expanding digital transactions, stabilising the foreign exchange market, and increasing the flow of funds to productive sectors.

The integrated stimulus package introduced to increase the flow of funds to various critical sectors of the economy is expected to help create around 25 lakh new jobs.

While the normal lending rate in the banking sector stands at around 13%-14%, loans under these stimulus packages are being offered at much lower interest rates of just 4%-6%. This has provided significant relief to industrial entrepreneurs and is expected to support the revival of industries and new investment.

Special lending programmes through banks have been strengthened to ensure timely financing for farmers and widen access to loans for startups, young entrepreneurs and small businesses, moving beyond collateral-based lending.

The central bank has taken major steps to expand and make "Bangla QR" more effective as part of efforts to reduce reliance on cash and expand the use of digital transactions across the economy. Until now, it has primarily been used for payments at shops and merchant outlets. However, preparations are now underway to introduce person-to-person transactions through the system.

Recent Bangladesh Bank data also show a sharp rise in the use of Bangla QR. In January this year, around 723,000 transactions were conducted through Bangla QR, but the number surged to 6.255 million in July. Over the same period, the value of transactions increased from Tk212 crore to around Tk1,476 crore.

Long-term roadmap to reduce NPLs, strengthen governance

When the BNP government took office, non-performing loans (NPLs) accounted for around 32% of total loans, placing Bangladesh among the countries with the highest NPL ratios in the world. To reduce bad loans and restore good governance in the banking sector, both short- and long-term reform measures are being prioritised.

To expedite loan recovery, steps are being taken to speed up the resolution of pending court cases and strengthen banks' own recovery mechanisms.

In March 2026, detailed guidelines were issued for implementing the international accounting standard IFRS 9. Under the framework, banks will have to calculate potential credit losses in advance using the Expected Credit Loss approach from 2028. In addition, a fresh Asset Quality Review is being undertaken to accurately assess banks' loan portfolios, the actual quality of their assets, non-performing loans and potential losses, without concealing the extent of the risks.

Facilitating foreign transactions and preventing money laundering

During the first six months of the BNP government, the Bangladesh Bank took several notable measures to facilitate foreign currency transactions, bring remittances and export proceeds into the country, and restore stability to the dollar market.

The Bangladesh Bank has allowed authorised dealer banks to partner with cross-border digital payment service providers, such as PayPal and Payoneer, to facilitate foreign transactions and the processing of outward remittances. This has made it easier for freelancers and online businesses to bring their earnings into the country. The process for making tuition fee payments to foreign universities through banking channels has also been made easier.

Efforts to recover money allegedly siphoned abroad have been significantly strengthened through international legal initiatives in the banking sector. For the first time, banks have been directed to engage international law firms to identify funds and assets linked to the country's top 10 business groups accused of siphoning money abroad. Subsequently, another 42 companies – each with more than Tk200 crore in default loans – were brought under the initiative, with plans underway to engage eight more international law firms.

Moves that drew criticism

Alongside its positive initiatives, several weak policy decisions, controversial appointments and institutional short-sightedness on the part of the government have further deepened the crisis in the banking sector.

Amid efforts to reform the banking sector, a government decision sparked widespread controversy. Section 18(a) was newly inserted into the Bank Resolution Act, 2026, which was passed by parliament on 10 April this year. The controversial provision allowed former shareholders or disputed owners of banks undergoing mergers or resolution to apply, subject to certain conditions, to regain shares, assets and liabilities of those banks.

The provision drew strong criticism from bankers, economists, governance advocates and others amid concerns that it could create an opportunity for former owners linked to irregularities, loan fraud and poor management in the banking sector to regain control. Transparency International Bangladesh described the provision as posing a risk of "impunity" in the banking sector and the recurrence of past irregularities.

Ultimately, following intense criticism, the government was forced to reconsider its position. On 11 August, the Cabinet approved the draft Bank Resolution (Amendment) Act, 2026, which completely repealed the controversial provision.

During this period, the Bangladesh Bank issued a controversial "exit policy" or circular as part of its efforts to reduce non-performing loans. Under the circular, defaulting borrowers of banks and financial institutions have been given a significant one-time concession, allowing them to have both accrued and unaccrued interest waived if they repay only the principal amount of their loans.

While the measure may temporarily help clean up banks' balance sheets by reducing the burden of non-performing loans, it has raised concerns among bankers and economists who warn that the measure could significantly increase the risk of wilful default becoming more widespread across the banking sector.

The BNP made a major commitment in its election manifesto to increase the autonomy of the Bangladesh Bank as part of financial-sector reforms and to remove state-owned banks from the administrative control of the Financial Institutions Division of the finance ministry, placing them fully under the control of the central bank. However, even after the first six months of the government, no major or effective steps have yet been seen in this regard.

Central bankers and stakeholders in the banking sector have stressed that practical institutional reforms are needed to end political and administrative interference in the appointment of the governor and senior officials, the formation of boards of directors, policymaking and the management of state-owned banks.

The lack of progress on these reforms during the first six months means that political and administrative influence over state-owned banks remains largely unchanged, which is considered one of the major factors behind the rise in non-performing loans.