Bangladesh stares at a banking meltdown amid an unresolved leadership crisis

Bangladesh’s banking sector is going through a severe crisis with non-performing loans (NPLs) reaching a massive Tk 345,764 crore ($2.83 billion) by December 2023, accounting for 20.20 per cent of all loans given out. According to the Dhaka Tribune, Bangladesh Bank Governor Ahsan H Mansur shared this figure at a press conference revealing deep problems in the financial system. Just three months earlier, The Daily Star reported that NPLs were Tk 284,000 crore, or 16.93 per cent of total loans, meaning they increased by Tk 61,000 crore in a short time.

Bangladesh pins hope on an ordinance

To tackle the growing crisis, Bangladesh Bank drafted a Bank Resolution Ordinance, which was published for public consultation on the Financial Institutions Division website of the finance ministry, according to a Dhaka Tribune report on Monday. This ordinance introduces the concept of bridge banks—temporary financial institutions that will take over weak banks to ensure banking operations continue while a suitable buyer is found. The proposed law gives Bangladesh Bank the authority to create bridge banks, appoint temporary administrators and raise capital through existing or new shareholders.

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Additionally, the ordinance allows the central bank to transfer shares, assets and liabilities to third parties without needing shareholder consent. This measure is aimed at resolving banking issues quickly and preventing long-term disruptions in the financial sector.

A Bank Restructuring and Resolution Fund will also be set up to support interventions with funding coming from government contributions, international financial institutions and risk-based levies on banks.

A key focus of the ordinance is depositor protection, which includes stopping insider transactions, preventing unauthorised loan write-offs for influential borrowers and avoiding artificial inflation of bank profits. Under this framework, Bangladesh Bank will have the power to restrict troubled bank shareholders from transferring or selling shares, ensuring accountability and stabilising the financial sector.

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Being candid in times of crisis

Governor Mansur’s candid remarks on Bangladesh’s fragile banking sector have sparked intense debate, as reported by Md Mehedi Hasan of The Daily Star. His tenure has seen major reforms, including the restructuring of 11 banks, some linked to the controversial S Alam Group. However, financial stakeholders worry that his blunt assessments could further shake public confidence.

Last September, Mansur warned that 10 commercial banks were near bankruptcy, triggering panic and mass withdrawals. His refusal to name the banks fuelled speculation, prompting concerns that his transparency might worsen instability rather than resolve it.

The controversy deepened during a virtual session on Macroeconomic Policy and Governance in the Banking Sector, where Mansur reiterated that not all struggling banks would survive. While he cited progress in Islami Bank Bangladesh and United Commercial Bank, his comments renewed uncertainty.

Prominent figures like National Bank chairman Abdul Awal Mintoo criticised his approach arguing that frequent discussions of bank failures could be harmful. Task Force member Monzur Hossain also urged regulatory bodies to be more cautious with public disclosures to prevent unnecessary panic.

But structural weaknesses is the problem

Bangladesh’s banking sector has faced deep-rooted problems for years. The sector has been plagued by financial scandals, mismanagement and irregularities worsening the crisis. While appointing Mansur as Bangladesh Bank governor was seen as a necessary step to address these issues, but despite ongoing reforms, doubts remain about their effectiveness in restoring stability.

Weak regulatory oversight has allowed powerful borrowers to exploit the system with little accountability. While Mansur is pushing for stricter financial discipline, the key challenge is whether the banking sector can rebuild depositor trust while tackling corruption and inefficiencies.

Call for reform in the middle of a turmoil

Reforming Bangladesh’s banking sector is crucial, but it must be done carefully to avoid negative side effects. According to Dhaka Tribune, the introduction of the Bank Resolution Ordinance is a major step toward improving regulatory oversight and ensuring that weak banks do not threaten the entire financial system.

While Mansur’s efforts to expose financial irregularities are commendable, the way this information is shared is important. In a sector where trust is already weak, even well-meaning statements can trigger panic.

Bangladesh’s media has been calling for reducing non-performing loans and ensuring the long-term health of its banking sector. Policymakers need to create a system that protects depositors, enforces strict regulations and rebuilds public trust. Without such strong measures, the current crisis could worsen posing serious risks to the country’s economic stability.

This comes amid an ongoing leadership crisis in Bangladesh, which saw an elected leader ousted through a student agitation in August last year. Nobel Laureate Muhammad Yunus was given the reins of power in the role of chief adviser, with the primary responsibility of holding parliamentary election.

The Yunus government lacks popular mandate but it has looked to delay the polls demanded by political parties. The continued leadership crisis is now causing stress in its armed forces, with the army chief saying he “had enough in the past seven-eight months”. The banking crisis of Bangladesh threatens the country’s economic stability while it is battling a political instability.