Weak banking sector is a major obstacle to achieving economic goals

Finance Minister Amir Khosru Mahmud Chowdhury has presented an ambitious budget with an expenditure of Tk 9.38 trillion to achieve 6. 5 per cent growth. He also said that from now on, the country's economy will be investment-driven.

This is because the government's long-term goal is to make the economy worth one trillion dollars by 2034, which is currently exactly half of that. However, none of these goals will be achieved if the country's banking sector remains severely distressed and fragile.

This is because Bangladesh's economy is entirely dependent on the banking sector. The assets of the banking sector constitute 50 per cent of the total GDP. Of these assets, 85 per cent are loans and investments. Even the government relies on the banking sector. This time, 46 per cent of the budget deficit will be funded from the banking sector.

The finance minister himself highlighted the dismal state of the banking sector in the budget. For example, the banking sector has non-performing loans amounting to Tk 6.44 trillion, making up 35. 73 per cent of total loans. The capital adequacy ratio has fallen to a negative 2. 64 per cent. The growth rate of private sector loans has also decreased to 6. 5 per cent.

However, at the time of presenting the budget, this rate further fell to 4. 75 per cent, the lowest in the country's history. Currently, private loans comprise only 21. 53 per cent of the total GDP, the lowest in the last decade.

Furthermore, new instability in the banking sector has emerged due to issues centering around Islami Bank. In this situation, if the banking sector is not fixed now, according to the finance minister, economic recovery in the first year and transition in the next three years will not be possible.

In the late 1980s, Japanese banks over-lent on shares and land. When their value declined, non-performing loans increased, and investment fell, leading to a long economic stagnation in Japan, which is still referred to as the "Lost Decade. " Various studies have also shown that a banking crisis can disrupt the entire economy of a country. Two economists from the International Monetary Fund (IMF), Luc Laeven and Fabian Valencia, conducted a study on 151 banking crises worldwide between 1970 and 2017.

In their 2018 publication, they stated that if more than 20 per cent of total loans in a country default or if government expenditure to save the banking sector exceeds 5 per cent of GDP, it indicates a severe crisis.

If steps like deposit suspension, bank nationalisation, special liquidity support, or government guarantees are required, it is considered a systemic banking crisis. The biggest victims of this banking crisis are the general public and businesses, leading to reduced employment and increased economic inequality.

In Laeven and Valencia's study, it was also observed that, on average, a banking crisis results in a production loss equivalent to about 7 per cent of GDP per year.

Moreover, the cost of dealing with a banking crisis is enormous. Governments spend an average of 8.7 per cent of GDP to handle crises, and central banks provide liquidity support equivalent to about 17 per cent of total deposits.

Every aspect of the definition of a severe crisis is occurring in Bangladesh. According to official reports, the non-performing loan rate in Bangladesh has exceeded 35 per cent. Different types of support are required from Bangladesh Bank to sustain weak banks.

For instance, between 2009 and 2017, the government provided Tk 157. 10 billion from the budget to state-owned banks. In November 2024 and March 2025, Bangladesh Bank was forced to provide liquidity support of approximately Tk 250 billion to six troubled banks.

Additionally, the government must provide another Tk 200 billion to merge five Islamic-style banks. In the budget, the finance minister has stated that over Tk 400 billion are being spent to address the capital crisis in the banking sector in this fiscal year.

After the fall of the Awami League government, the interim government and Bangladesh Bank implemented several initiatives to reform the banking sector. The impact was mixed. One of the most challenging tasks was merging five troubled banks to form a government bank, whose success is still in doubt.

However, during the interim government, the situation of Islami Bank Limited was improving, with rising deposits and no need for assistance. But after the election, the situation started to change.
Since its inception, Islami Bank was known to be under the control of the political party Jamaat-e-Islami.

During the previous Awami League government, its ownership was taken over as part of a strategy to free it from Jamaat control. With direct support from the state, ownership was secured by former Prime Minister Sheikh Hasina's close businessman S Alam. He then strategically took control of seven banks one by one. However, after taking massive loans under false pretenses, the banks fell into extreme financial distress.

When the government passed the Bank Resolution Act after the election, a clause for returning banks to their previous owners was included, raising confusion and suspicion about its purpose. Later, resignations and new appointments at the bank’s top positions further complicated the situation.

Additionally, political tension over the bank has resurfaced. Jamaat-e-Islami has taken a stance openly. In the National Assembly, during the election, the Home Minister accused Islami Bank of using funds politically. In this context, Islami Bank has requested a fresh 100 billion takas of financial support from the central bank.

However, the Bangladesh Bank governor has assured at a post-budget press conference on Friday that Islami Bank customers will receive their funds and also mentioned providing liquidity support.

However, analysts believe that although temporary crises can be mitigated by liquidity support, a final solution is necessary. This includes distancing banks from politics. The finance minister has stated in the budget that political interference in bank operations will be stopped. Implementing this will be his biggest challenge.

In 2025, the World Bank published a separate analysis report on Bangladesh’s banking sector. According to that analysis, state-owned banks are the most vulnerable part of the country's banking sector. These state-owned banks control approximately 27 per cent of the country's total banking assets, which is about 12 per cent of GDP. Therefore, the stability of these banks is crucial for the entire financial sector. The latest data shows that the non-performing loan rate in state-owned banks is 46 per cent.

On the other hand, Islami Bank Bangladesh, the country’s largest private sector bank, alone controls 8.7 per cent of the total banking assets. This asset is equivalent to approximately 4.4 per cent of GDP. Therefore, if these two types of banks are not quickly sorted out, the economic risk will increase, spreading the crisis to the entire banking sector. The Association of Bankers, Bangladesh (ABB), which is the organization of bank CEOs, has already expressed concern about such a possibility.

Twenty years ago, former IMF banking expert David Hoelscher and former Swedish central bank governor Stefan Ingves demonstrated through research that the quicker a banking crisis is identified, and measures are taken against problematic banks, the lower the cost of dealing with the crisis.

If delayed, damages increase, and eventually, government expenditure also rises. Referring to that research, the World Bank stated in its 2025 report that delay in intervention will further deteriorate the financial situation and increase the cost of resolution. This is because deeply distressed banks rarely recover on their own strength.

Many promises made by the BNP in their electoral manifesto have attracted voters. The implementation of some promises made in the manifesto has already begun. Even the new budget reflects this. However, though the manifesto mentioned forming a reform commission for the banking sector, there is no mention of it in the budget.

The manifesto stated that an economic reform commission would be formed, comprised of expert economists and researchers, experienced bankers, corporate leaders, and people with administrative expertise. In addition, the manifesto mentioned enhancing the capabilities and powers of Bangladesh Bank and abolishing the Financial Institutions Division of the Ministry of Finance to entrust the governance and supervision of state-owned banks to the central bank.

The last Banking Reform Committee or Commission in Bangladesh was formed 30 years ago, in 1996. It was headed by economist and former advisor Wahiduddin Mahmud. Subsequently, during the last Awami League government, when loan scandals occurred one after another, then-Finance Minister Abul Maal Abdul Muhith announced the formation of a banking commission in the 2015-16 fiscal year's budget.

Later, in the 2019-20 fiscal year's budget, subsequent finance minister AHM Mustafa Kamal again mentioned forming a banking commission. However, due to opposition from influential groups, that commission never came into existence, worsening the situation.

The World Bank made 10 recommendations as part of banking sector reform in its report: strengthening the bank restructuring framework, reinforcing deposit protection systems, enhancing governance and risk management in banks, reforming state-owned banks, establishing a strong non-performing loan management framework, enacting comprehensive bankruptcy and resolution laws, enforcing banking regulations strictly, creating an emergency liquidity support framework, following international best practices, and strengthening the independence of Bangladesh Bank.
Now, it remains to be seen whether the new government will form a reform commission or delay further.