Reforming Bangladesh’s banking sector – piecemeal or holistic approach?

Introduction to Banking Reforms in Bangladesh

The Bangladesh Bank, under the current interim government, has taken significant steps towards reforming the banking sector. These reforms are long overdue and essential for streamlining the country’s banking system. The central bank’s efforts are commendable, but planned and cohesive initiatives are necessary for effective and sustainable reforms. This article will focus on the nature and structure of these reform initiatives and their alignment with the development of a good banking governance model.

Overview of Reform Initiatives

The reform initiatives undertaken by the Bangladesh Bank are diverse and widespread. Some of the key initiatives include:

• The formation of three task forces: the Banking Sector Reforms Task Force (BSR-TF), a task force for strengthening Bangladesh Bank’s institutional capacity, and a task force for identifying, investigating, and repatriating assets siphoned off from Bangladesh.
• The introduction of the Asset Quality Review (AQR) framework and the signing of a Memorandum of Understanding (MoU) with the UK’s Foreign, Commonwealth & Development Office (FCDO) to receive technical assistance from Deloitte LLP.
• The establishment of the Bank Resolution Department and the finalization of the Bank Resolution Ordinance (BRO) 2025.
• The drafting of the Bangladesh Bank Order 2025, which is currently under review.
• The dissolution and reconstruction of 15 Boards of Directors to restore effective governance and ensure sound bank management.
• The issuance of a circular titled "Transactions with Bank-Related Persons or Institutions" to impose stricter limits and provisions on extending credit facilities to bank-related persons or institutions.

Detailed Reform Initiatives

Other significant reform initiatives include:

1. Restructuring the Inter-Agency Task Force on Stolen Asset Recovery and Management: The Ministry of Finance issued two circulars on June 15, 2025, to restructure the task force, which is chaired by the Governor of the Bank and coordinated by the Head of the BFIU.
2. Revision of Core Risk Guidelines: Bangladesh Bank revised the Core Risk Guidelines, including the Guidelines on Credit Risk Management (CRM) for banks, and introduced Risk-Based Supervision (RBS) in banking from January 2026.
3. Asset Quality Review (AQR): A total of 17 banks were selected for AQR in three phases, with the first phase covering six banks already completed.
4. Amendments to Banking Laws: Amendments were made to the Bank Companies Act, Money Laundering Act, and Deposit Insurance Act to improve accountability and loan recovery.
5. Implementation of Expected Credit Loss (ECL) Methodology: Bangladesh Bank decided to implement an ECL methodology by 2027, with scheduled banks submitting Time-Bound Action Plans to transition from the existing rule-based model to the ECL model.
6. Prompt Corrective Action (PCA) Framework: The PCA framework was put into effect on March 31, 2025, providing early-warning tools for the regulator’s intervention to address financially weak banks.

Observations and Analysis

While the reform efforts are underway, they seem to lack a master plan. The initiatives appear to be problem-centric, addressing issues as they arise rather than following a comprehensive strategy. The absence of an integrated framework for developing a sustainable, effective, efficient, transparent, accountable, and dynamic governance model in the banking industry is noticeable. The reform steps, although individually appropriate and essential, collectively lack strategic cohesiveness.

The Need for Fundamental Reforms

The banking sector faces new challenges, risks, and situations due to rapidly flourishing technology and an increasingly competitive environment. Renovating the existing governance system in banking is crucial. The need for fundamental reforms is evident, as partial reforms would be akin to patchwork. The newly constituted task forces are expected to present a good governance model for the banking sector, and successful implementation will depend on the commitment of the political government.

Conclusion

In conclusion, the Bangladesh Bank’s reform initiatives are a step in the right direction, but a more comprehensive and integrated approach is necessary for effective and sustainable reforms. The development of a good banking governance model requires a holistic approach, considering short and long-run perspectives. The commitment of the political government will be crucial in implementing these reforms and ensuring the success of the banking sector in Bangladesh.