World Bank-funded Tk 13b project to reform banking sector

The government is undertaking a new project to reform the country’s banking sector, strengthen supervisory capacity and enhance financial-sector safeguards. The project has an estimated cost of Tk 12.76 billion (1,276 crore).

The project will support the development of Bangladesh Bank’s technological infrastructure, bank restructuring, depositor protection and reforms at state-owned banks over five years. Titled the Financial Sector Support Project-2 (FSSP-2), Bangladesh Bank will implement the project.

The project is scheduled to be placed before the Executive Committee of the National Economic Council (ECNEC) at its meeting in Dhaka’s Secretariat today, Tuesday. The agenda includes a total of 15 projects for approval, including this one.

Of the project’s total cost, the World Bank’s International Development Association (IDA) will provide Tk 12.61 billion (1,261 crore). Bangladesh Bank will finance the remaining Tk 140 million (14 crore) from its own resources. The project will run from July this year to June 2031.

Asked about the project, Planning Division Secretary SM Shakil Akhter told Prothom Alo, “The project has been taken up to address mismanagement in the financial sector. Through this project, technological development in the banking sector and procurement activities will be modernised and made more transparent. In addition, various reform measures will be implemented at the policy level.”

According to the project proposal, the country’s banking sector has long suffered from high levels of non-performing loans, governance deficiencies and weak technological capacity.

Some banks are facing liquidity and capital shortages. Strengthening financial-sector safeguards and modernising the banking system are therefore essential to address these challenges.

Against this backdrop, the second phase of the project is being undertaken as a continuation of the earlier Financial Sector Support Project.

Officials concerned said the project would invest in improving information and communication technology (ICT) infrastructure to strengthen Bangladesh Bank’s supervisory capacity.

The plan includes installing necessary computers, technological equipment, software and databases.

The project will also provide training for officials involved in banking-sector supervision and engage consultants to strengthen institutional capacity.

The project has been proposed for implementation in three phases. The first phase will focus on strengthening banking-sector supervisory capacity and developing technological infrastructure.

The second phase will strengthen financial-sector safeguards, support bank restructuring and reform state-owned banks. The third phase will provide the necessary administrative and technical support.

One of the project’s key objectives is to strengthen the banking sector’s financial safety net. To this end, initiatives will be taken to enhance the financial capacity of the Deposit Insurance Trust Fund (DITF).

At the same time, the project will strengthen institutional capacity to protect depositors during bank resolution or restructuring, reduce the time required to repay depositors and support bank restructuring activities.

The project will also focus on improving governance and financial stability at state-owned banks. It also plans to introduce performance-based conditions (PBCs) for bank restructuring and reform. In other words, the project will establish a mechanism to advance reforms based on specified actions and outcomes.

The project summary highlights the weaknesses in the country’s banking sector, noting that some banks, particularly state-owned and Islamic banks, have faced liquidity and capital shortages. Several banks have fallen into negative capital positions.

Meanwhile, outdated ICT infrastructure and the lack of integrated information management systems are limiting banking-sector supervision. These limitations also pose challenges in addressing cyberattacks and cross-border financial risks.

A major portion of the project’s budget has been allocated to developing technological infrastructure. This includes a proposed allocation of Tk 7.11 billion (711 crore) for purchasing information and communication technology equipment and Tk 3.5536 billion (355.36 crore) for computer software.

Funds have also been earmarked for training, hiring consultants, developing databases and purchasing other technological equipment.

The project proposes an allocation of Tk 700 million (70 crore) for training. A total of 3,565 people will receive training under this component. The proposal includes Tk 290 million (29 crore) for hiring individual consultants and Tk 650 million (65 crore) for institutional consultancy services.

After reviewing the project proposal, the Planning Commission said its implementation would strengthen Bangladesh’s financial-sector safeguards. It would also help develop technology-driven banking and support reforms and restructuring in the banking sector.

Bangladesh Bank’s Financial Sector Support Project was approved in 2015. The project ran from September of that year to March 2021, with an initial estimated cost of US$300 million. The actual expenditure, however, amounted to US$262 million.

According to World Bank data, the first phase of the project covered three major areas. These included digital infrastructure for the financial sector and compliance with the Basel Core Principles, among others.

Asked about the matter, former Bangladesh Bank Chief Economist Mustafa K Mujeri told Prothom Alo, “If we can ensure the proper use of technology, it will be possible to address risks in the banking sector in the future. However, simply purchasing technology will not solve the problems of the banking sector. We must also develop skilled personnel to ensure its effective use.”

The economist also stressed the need to ensure transparency and accountability at every stage, from project planning through to implementation.