The banking sector in Bangladesh continues to face significant challenges rooted in longstanding governance issues and questionable policy decisions. The sector’s distress, which has been developing over many years, was exacerbated during the Awami League’s 15-year tenure, marked by widespread loan defaults and mismanagement within several banks. This led to the merger of five struggling banks into Sammilito Islami Bank, a rescue measure that has so far failed to restore financial stability. Meanwhile, nearly half of the country’s remaining 56 banks remain burdened by heavy losses and capital shortfalls.
The current government is considering amendments to the Bank Company Act that critics say risk perpetuating some of the banking sector’s core problems. Proposed changes reportedly include relaxing restrictions on family control of banks and extending the allowed tenure of bank directors. Provisions holding directors accountable for loans to companies linked to them may also be weakened. These decisions have prompted concerns that authorities have not fully learned from the sector’s past difficulties.
A central issue has been the concentration of control over bank boards in the hands of powerful business families. Banks, which hold public deposits, depend on directors’ fiduciary responsibility to manage funds prudently. However, when boards are dominated by a small number of families or close associates, lending decisions have often favored their interests rather than the banks’ long-term stability. During the previous regime, prominent groups such as S Alam, Beximco, Premier, and Sikder reportedly secured influence over banks by placing relatives and associates on boards, often circumventing rules designed to limit such concentration.
During 2018 and 2023, the government amended regulations to lengthen directors’ allowable continuous service from nine to 12 years. These measures were widely seen as accommodating the demands of influential business groups rather than aiming to improve governance. The result was an environment where insiders extended loans to affiliated firms on favorable terms, leading to a surge in non-performing loans and significant financial losses that contributed to ongoing sector instability.
In response, an interim government proposed reforms aimed at improving oversight and reducing nepotism. These included capping the number of directors from a single family at two, shortening continuous tenure to six years, expanding the legal definition of family to prevent circumvention, mandating that independent directors constitute half of each board, and introducing accountability for directors when linked companies default on loans. These proposals were designed to strengthen governance and restore regulatory discipline.
The current administration, however, appears to be reconsidering these safeguards. Supporters of the proposed easing argue that longer director tenures ensure experience and that reducing family representation could disrupt operations. Critics contend these arguments overlook the risks of nepotism and conflict of interest, warning that increased family influence may reopen channels for irregularities and weaken independent oversight.
The sector’s difficulties have broader economic implications. Bangladesh now ranks among countries with the highest ratios of non-performing loans globally. The ongoing challenges have contributed to an economic slowdown, with the International Monetary Fund projecting growth to dip below 4% this year. Additionally, Bangladesh is scheduled for a fourth round of evaluation by the Financial Action Task Force in 2027-28, focusing on anti-money laundering and financial crime controls. Weakening governance safeguards in the banking sector could raise doubts about the effectiveness of financial oversight, increasing the risk of grey listing—a designation that could impose economic costs beyond the banking industry.
As the government weighs these policy changes, experts caution that failing to address the governance issues at the core of the banking crisis may undermine efforts to restore financial stability and economic growth.