Bangladesh’s Banking Crisis: The Road to Reform

When economist and former caretaker government adviser Dr Wahiduddin Mahmud addressed the 11th Annual Bank Conference in Mirpur, he outlined the long-standing structural weaknesses that have contributed to Bangladesh’s banking crisis.

Organised by the Bangladesh Institute of Bank Management (BIBM), the conference highlighted concerns about governance failures, political influence and weak regulatory safeguards in a sector central to the national economy.

Dr Mahmud described two major phases in the banking sector’s deterioration: the emergence of a persistent loan-default culture, followed by what he characterised as widespread bank looting after 2010.

The scale of the problem is reflected in Bangladesh Bank’s reported figures. According to the data cited in the draft, non-performing loans (NPLs) reached Tk 6.07 lakh crore by mid-2026, accounting for 32.78% of total loans.

The figures point to significant weaknesses in loan recovery and banking governance. Analysts have also raised concerns that loan rescheduling and lenient accounting practices in previous years may have obscured the true scale of distressed assets. More rigorous asset-quality reviews and audits have since brought additional irregularities and governance concerns to light.

### From loan defaults to alleged bank looting

Reflecting on earlier reform efforts, Dr Mahmud said restoring discipline in previous decades had required sustained regulatory work. He argued that banking-sector safeguards weakened after 2010, allowing vested interests to exploit financial institutions and divert funds.

He also pointed to weaknesses in the initial approval and regulation of private commercial banks. According to his account, inadequate safeguards enabled directors and business interests to obtain substantial loans from banks they controlled. He cited estimates suggesting that insider lending had accounted for approximately 35% of deposits in certain historical circumstances.

The lack of effective safeguards against excessive concentration of ownership and control, he argued, allowed families and interest groups to gain influence over multiple banking institutions.

The consequences have extended beyond bank balance sheets. Dr Mahmud highlighted the difficulties faced by depositors whose money was held by financially distressed institutions, including funds linked to public-sector organisations, teachers’ salaries and pension arrangements.

He drew particular attention to the financial losses suffered by teachers working at monthly pay order (MPO)-listed educational institutions whose funds had been deposited with troubled institutions.

The episode, he argued, illustrated how weak oversight, questionable lending and political patronage can put the savings and financial security of ordinary people at risk.

### Political influence and banking governance

Dr Mahmud also criticised the use of state-owned banks to distribute political favours, arguing that such practices can undermine financial discipline and damage the wider economy.

“If political administrations wish to dispense political favors, they should choose sectors that do not inflict major damage on the national economy,” he said, stressing that the financial sector should not be used as an instrument of political patronage.

State-owned banks, specialised lenders and Islamic banks have faced challenges associated with non-performing loans and governance weaknesses. At the BIBM conference, speakers, including Bangladesh Bank Deputy Governor Dr Md Kabir Ahmed, Bangladesh Association of Banks Chairman Abdul Hai Sarker, World Bank Country Director Abdoulaye Seck and Association of Bankers, Bangladesh Chairman Mashrur Areffin, discussed the need for stronger governance and greater central bank autonomy.

Keynote presenter and Policy Research Institute Chairman Dr Zaidi Sattar also addressed the issues facing the sector.

### Balancing support for distressed banks with reform

As Bangladesh faces liquidity pressures, high levels of non-performing loans and slower economic growth, policymakers must balance the need to stabilise distressed banks against the risk of weakening financial discipline, Dr Mahmud said.

Although exceptional circumstances may require temporary regulatory flexibility, he cautioned that any relaxation of rules must not create opportunities for further abuse.

He called for stronger screening and monitoring mechanisms to ensure that bank financing reaches viable businesses and genuine entrepreneurs rather than speculative interests.

He also warned against adopting international reform models without considering Bangladesh’s institutional conditions and local economic realities.

Ultimately, he argued, laws and regulations alone cannot guarantee integrity. Banking institutions, corporate leaders and political authorities must demonstrate a genuine commitment to ethical conduct and accountability.

Without sustained political will to protect the financial sector from partisan influence and address the growing burden of non-performing loans, Bangladesh risks repeating the governance failures that have contributed to the current crisis.