Our banking sector is still in dire crisis

The banking sector in Bangladesh has been facing systematic failures over the years for lack of good governance and strong management. The sector has not collapsed, but it is in a severe crisis, thus brought to the brink of collapse due to the systemic failure of “gatekeepers”. These failures virtually enable widespread corruption, political influence and massive loan defaults, thereby steadily keeping depositors away from the formal banking transactions and channeling funds through informal ways like hundi,under-and over-invoicing, and unusual cash transactions.

Banking gatekeepers: Who are actually financial sector gatekeepers?Inthe banking sector, gatekeepers are key individuals or institutions responsible for ensuring compliance, transparency, and integrity in financial operations. They help prevent financial crimes, maintain regulatory standards, and protect stakeholder interests.Key gatekeepers include regulators like Bangladesh Bank and Securities and Exchange Commission, external auditors, internal auditors andcompliance officers, board of directors andaudit committees, rating agenciesand institutional investors. These gatekeepers act as safeguards to maintain trust and ethics in the banking system.

Gatekeepers’role and failure: Experts and audit reports have identified several key failures among the institutions responsible for oversight.Details have been given below.

Bangladesh Bank (Central Regulator): The central bank’s authority was eroded by political pressure and interference from influential business groups. Instead of enforcing regulations, it granted excessive “regulatory forbearance,” such as relaxing rules on loan classification and provisioning, which concealed the true extent of the crisis for years.

Auditors: External auditors repeatedly issued “unqualified opinions,” certifying bank financial statements as “true and fair” despite clear evidence of massive fraud and misstatements. This collapse of auditor independence was often due to financial dependence on the banks they were auditing and pressure from authorities, betraying their professional duty and public trust.

Board of Directors: Many bank boards like those of state-owned commercial banks were filled through political patronage rather than competence, leading to poor corporate governance. Again, some boards of privately-owned banks like Premier Bank, United Commercial Bank, Exim Bank and several shariah-based Islami banks, which were dominated by a few influential figures, did not bother to ensure good governance in their banks. This facilitated reckless lending to connected borrowers and insider lending schemes where loans were often sanctioned using forged documents or without proper collateral.

Government and Policymakers: Successive governments have been accused of sustaining systemic problems through political lending, weak enforcement and protecting powerful individuals who looted banks.

Consequences: Banking sector gatekeepers’ failures have led to catastrophic outcomes. Non-performing loans (NPLs) is one of them. According to media reports, Bangladesh has the highest NPL ratio in Asia, with official figures soaring to over 24 per cent and total distressed assets reaching nearly 45 per cent of all lending by March 2025. Another issue is capital shortfall as many banks, including five troubled Islamic banks which have recently merged and formed a new bank named ‘SammilitoIslami Bank PLC’. They were earlier placed under administrators, thanks to suffering from severe capital shortfall and low capital adequacy ratios which were far below international standards. Erosion of public trust is another underlying reason behind this failure. The ongoing crisis has deeply eroded public confidence in the banking system, leading to anxiety among depositors about the safety of their money.

Concluding remarks: Since August 2024, an interim government and new central bank leadership have initiated reforms, including dissolving the boards of several weak banks and attempting to force mergers. The central bank has been injecting emergency liquidity as well as policy support to prevent an outright collapse of banks, although critics argue this merely postpones the reckoning without addressing the fundamental structural issues.Time is high for stakeholders to address banks’ failure to stem their collapse through initiating a national dialogue, even though a high-profile task force was set up to overcome this full-blown crisis. The quicker the better.

The writer is a managing partner of C-Net (Consultant Network)