State-driven merger of 5 Shariah-based banks: Promise, pitfalls, and prospects

In a landmark and unprecedented move, the Bangladesh Bank has initiated the merger of five financially distressed Islamic banks—First Security Islami Bank, Social Islami Bank, Global Islami Bank, Union Bank, and EXIM Bank—into a single state-owned entity tentatively named “United Islami Bank”. The decision, taken at a special meeting of Bangladesh Bank’s Board on 16 September, marks the beginning of a massive overhaul of the country’s banking landscape.

The central bank moves towards the merging process in a bid to prevent systemic collapse of the country’s banking sector burdened with chronic corruptions, accumulated mismanagements, politically motivated lending, and record levels of non-performing loans (NPLs). At the time of merger, NPL ratios in these banks reportedly ranged between 70 per cent and 90 per cent threatening the stability of the financial system and eroding public confidence on banking sector.

Globally, mergers and acquisitions (M&A) in banking are often pursued for strategic reasons—to build scale, expand reach, and enhance efficiency of banks, and similar organisations. When Standard Chartered acquired ANZ Grindlays Bank, for instance, the focus was on integrating systems, processes, and client portfolios to achieve synergy and improve profitability.

In Bangladesh, however, mergers are typically driven by necessity rather than opportunity. With 62 scheduled banks in operation, many are small, weak, or poorly governed. A number of them face liquidity shortages, capital erosion, and governance failures. The central bank’s decision to consolidate these troubled shariah-based lenders reflects both a sense of urgency and an attempt to restore oversight and discipline.

While the merger aims to stabilize the system, it faces immense challenges on multiple fronts.

Financial fragility: The new bank inherits the toxic legacy of five deeply troubled institutions, with an estimated 77 per cent of their combined loans classified as non-performing. The government’s planned capital injection of Tk 250 billion (25,000 crore)—part of a Tk 350 billion (35,000 crore) provisioning shortfall—will help absorb immediate losses. Additional funds may come from developing partners, insurance funds, and international lenders such as the World Bank and IMF. However, without structural reform and accountability, these financial infusions risk becoming mere stopgaps.

Operational integration: To bring in a single platform of merging five banks with distinct IT platforms, regulatory systems, and corporate cultures is a monumental task. The new institution will have over 16,000 employees, 779 branches, 698 sub-branches, and roughly 1,000 ATMs. Aligning processes, eliminating redundancies, and migrating data securely across incompatible systems will require enormous technical and managerial effort. History shows that merging weak banks does not automatically create a strong one.

Governance and political influence: At the root of the crisis of these banks lies chronic governance failure. Several of the merging banks are accused of irregular lending and insider transactions involving politically exposed groups, notably S. Alam Group, Sikder Group and NASSA Group. For the new bank to succeed, it must be insulated from political interference and run by professionals with ethical standards, and proven integrity. Without this, the same governance culture that led to collapse could resurface under a new name.

Legal and institutional uncertainty: Questions have emerged about whether Bangladesh Bank possesses the legal mandate to enforce such a large-scale merger. Some stakeholders have already filed petitions in court, potentially delaying the process. Legal clarity and a well-defined regulatory framework will be vital to sustain confidence.

Employee morale and public trust: Merging five organizations inevitably leads to anxiety among employees over job security, pay scales, and career progression. While the central bank has pledged that no jobs will be cut, operational streamlining will be unavoidable. Simultaneously, depositors’ apprehension about the safety of their funds must be addressed. A clear, consistent communication strategy is essential to reassure both employees and the public.

Shariah compliance and identity: Since the merged institution will operate as a Shariah-based entity, maintaining strong Shariah governance will be critical. Given the past record of non-compliance among some of the merging banks, the new bank must restore credibility through a transparent and unified Shariah governance framework.

Bangladesh is not alone in using consolidation to stabilize the banking sector. In 2021, India merged ten public sector banks into four, aiming to enhance capital efficiency, profitability, and scale. Sri Lanka, too, has considered merging small and mid-sized banks to strengthen financial resilience.

Yet, Bangladesh’s own history offers cautionary lessons. The merger of Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha into Bangladesh Development Bank Ltd (BDBL) failed to deliver meaningful reform.

The merged entity still struggles with default loans, demonstrating that structural weaknesses cannot be resolved by mergers alone. The then government’s merger initiative of distressed Padma Bank with EXIM Bank went into futile.    

Strategic recommendations for success

To ensure that the creation of United Islami Bank may be a success story rather than another failed experiment, several key measures must be taken:

• Autonomous regulatory body: Full autonomy of central bank must be ensured to complete the ongoing reformation process, so that no political or outside interference can hurdle the overhaul drives. To this effect, the BB board, however, has already approved the draft amendment to the Bangladesh Bank Order, which will be passed in the government’s next advisory council meeting. This order will empower the BB full autonomy. Earlier, the government passed the Bank Resolution Ordinance, 2025 empowering the BB to proceed for financial sector resolution.      

• Independent and professional board: A new board of directors must be formed, composed of professionals with proven expertise, Islamic banking knowledge, and unbiased independence. Political or vested interest appointments should be strictly prohibited.

• Strong risk and credit management: The bank should adopt international best practices in credit appraisal, risk management, and provisioning to reduce NPLs and ensure asset quality.

• Robust Shariah governance: A credible and empowered Shariah Supervisory Board must oversee compliance, ensuring all products, investments, and governance processes adhere to Islamic principles and governance.

• Legal clarity: The central bank and Ministry of Law should expedite the legal framework for the merger, eliminating uncertainties and protecting depositor rights.

• Employee engagement: Transparent communication on roles, compensation, and transition plans will help retain talent and minimize morale issues.

• Public confidence and communication: The government must launch a comprehensive awareness campaign assuring depositors of the safety of their funds and the bank’s long-term viability.

• Technology-driven integration: Implementing modern IT and data systems will streamline operations, prevent fraud, and enhance customer experience.

• Performance-based governance: Compensation for management should be tied to measurable performance indicators such as NPL reduction, profitability, and service quality. Over time, the government should consider partial privatization by bringing in institutional investors to ensure sustainability and accountability.

The creation of United Islami Bank represents one of the boldest financial restructurings in Bangladesh’s history. While the merger is necessary to contain systemic risks, its success will depend on execution, integrity, and transparency.

If implemented prudently—with professional leadership, sound governance, and effective oversight—this merger could mark a turning point for the banking sector, restoring trust and stability. But if old habits persist, the risk remains that five troubled banks will simply become one large troubled bank.

The path ahead demands discipline, transparency, and unwavering political will. The future of Bangladesh’s financial stability may well depend on how this historic consolidation is managed.

* Khairul Hasan  is an Islamic Banker and Financial Sector analyst, and can be reached hasan.khairul@gmail.com.

* The opinions expressed here are the author’s own.