Anatomy of a collapse: Banking crisis and road to reform
When eminent economist and former adviser to the caretaker government Dr. Wahiduddin Mahmud took the podium at the 11th Annual Bank Conference in Mirpur, he did not merely diagnose the ailments of Bangladesh’s financial architecture; he laid bare a multi-decade chronology of systemic decay.
Organized by the Bangladesh Institute of Bank Management (BIBM), the gathering served as a sobering reminder that the banking sector—the beating heart of the national economy—has been pushed to the brink not by sudden misfortune, but by calculated structural failures and unbridled political patronage.
For readers accustomed to sterile economic data, Dr. Mahmud’s address offered a refreshing, unsparing narrative. He divided the downfall of Bangladesh’s banking sector into two distinct, progressively destructive eras: the original sin of the loan-default culture, which later metastasized post-2010 into an unmitigated bank-looting culture.
The empirical weight underpinning Dr. Mahmud’s warnings is starkly reflected in the central bank's latest disclosures. According to Bangladesh Bank reports, the country's non-performing loans (NPLs) surged to Tk 6.07 lakh crore (606,555 crore) by mid-2026, pushing the default loan ratio to an alarming 32.78 percent of total disbursed loans.
This means that nearly one in every three-taka lent across the banking sector has turned sour, positioning Bangladesh among the highest default-rate jurisdictions globally. Financial analysts note that while previous years masked true asset quality through aggressive loan rescheduling and accounting leniency, rigorous asset quality reviews and domestic audits following recent political shifts have unmasked the true magnitude of anonymous lending, systemic irregularities, and governance failures.
From Default to Daylight Robbery
Reflecting on past reform efforts, Dr. Mahmud noted that restoring discipline in earlier decades required rigorous, painstaking regulatory frameworks that successfully elevated several private banks to international benchmarks. However, the post-2010 era swept away all regulatory pretenses. Bypassing statutory safeguards, vested interests engaged in systemic looting, effectively siphoning funds directly out of financial institutions unchecked.
The roots of this vulnerability stretch back to the initial, unvetted authorization of private commercial banks without adequate regulatory frameworks. Historically, this allowed entrepreneur-directors to absorb nearly one-third—approximately 35 percent—of total deposits as insider loans. The absence of robust "anti-trust" or anti-monopoly laws meant single families or interest groups could effortlessly cement control over multiple banking institutions, turning public depositories into private fiefdoms.
The consequences of this deregulation have not remained confined to corporate balance sheets; they have inflicted profound human suffering. Dr. Mahmud drew poignant attention to the tragedy of bankrupt financial institutions that had accepted public sector and institutional deposits—including teachers' salaries, welfare reserves, and pension funds.
The total collapse of these institutions left millions of takas belonging to impoverished, MPO-registered educators permanently trapped. It is a scathing indictment of a system where the life savings of grassroots nation-builders were gambled away through reckless, unscrutinized licensing and political patronage.
No analysis of Bangladesh's banking crisis is complete without examining the role of political influence. Dr. Mahmud launched a sharp critique against the use of state-owned banks as distribution hubs for political favors.
"If political administrations wish to dispense political favors, they should choose sectors that do not inflict major damage on the national economy," Dr. Mahmud asserted, emphasizing that utilizing the financial sector for political patronage is entirely inappropriate.
For decades, state-owned lenders and vulnerable specialized and Islamic institutions have shouldered the burden of non-performing assets generated by politically connected borrowers. As speakers at the BIBM conference—including Bangladesh Bank Deputy Governor Dr. Md. Kabir Ahmed, BAB Chairman Abdul Hai Sarker, World Bank Country Director Abdoulaye Seck, and ABB Chairman Mashrur Areffin—pointed out alongside keynote presenter PRI Chairman Dr. Zaidi Sattar, insulated central bank autonomy and deep governance reforms are non-negotiable if the country wishes to break this cycle.
As the economy navigates a period of liquidity stress, soaring default ratios, and slowing growth, current policymakers face a delicate tightrope walk. Calls have grown to relax certain rules to rescue distressed lenders.
However, Dr. Mahmud offered a vital caveat: while extraordinary times may demand temporary regulatory breathing room, policymakers must ensure that relaxing rules does not inadvertently reopen Pandora's box for fresh plunder.
To move forward, the financial system must implement rigorous vetting mechanisms to ensure capital reaches honest, genuine entrepreneurs rather than speculative syndicates. Blindly mimicking international prescription models without grounding reforms in local realities will yield little success. Ultimately, as Dr. Mahmud aptly noted, laws and regulations alone cannot enforce integrity; corporate, banking, and political leadership must cultivate a foundational ethical compass.
Without genuine political will to insulate the financial sector from partisan capture and address the staggering Tk 6.07 trillion default mountain, Bangladesh risks falling right back into the old, familiar traps.
Source: UNB