When Bangladesh’s interim government under economist Muhammad Yunus took office after the collapse of Sheikh Hasina’s long-entrenched regime, it inherited a banking sector on the verge of systemic failure.
By mid-2024, officially reported non-performing loans had exceeded 1.7 trillion taka, roughly $15.5 billion, equivalent to nearly 11 percent of total outstanding credit of about $140 billion, with analysts estimating the true figure to be far higher once the rescheduled and evergreened loans were included.
Years of politically driven lending, forced capture of bank boards, regulatory forbearance and opaque governance had hollowed out large parts of the financial system.
The measures that followed under the Yunus administration amounted to the most consequential attempt at banking reform since liberalization in the 1990s and the clearest break yet from the authoritarian economic management that preceded it.
The scale of the damage was severe. A growing number of banks were effectively insolvent, surviving through repeated liquidity injections from Bangladesh Bank that cumulatively ran into several billion dollars, alongside regulatory indulgence and the quiet erosion of depositor confidence.
Capital adequacy ratios in multiple institutions fell below Basel III minimums, while governance failures became systemic rather than exceptional.
Several banks, particularly in the Islamic banking segment, functioned less as financial intermediaries than as conduits for connected lending. By 2024, five Islamic banks alone controlled deposits worth more than $10 billion, yet carried some of the highest stress ratios in the system, with paid-up capital in several cases fully eroded.
Under Hasina’s rule, banking licences had been granted on political grounds, while influential sponsors enjoyed near-total immunity from regulatory action.
Yunus’s interim government moved quickly to arrest the slide. The central bank was given political backing to reassert supervisory authority, boards of troubled banks were reconstituted, and long-deferred decisions were finally taken.
Unlike earlier reform attempts that relied on cosmetic changes or short-term liquidity support, the current approach acknowledged an uncomfortable reality that some banks were beyond repair in their existing form.
The most consequential step was the decision to merge five crisis-ridden Islamic banks into a single consolidated institution holding deposits of more than Tk 1.1 trillion, or about $10 billion, with combined assets exceeding $13 billion.
It was a move that previous governments had avoided, wary of political backlash and legal entanglements. Under the interim administration, Bangladesh Bank invoked new resolution frameworks that prioritized systemic stability over shareholder sensitivities.
In several of the merged banks, shareholders’ equity had already been wiped out, leaving little justification for preserving corporate independence.
The mergers were neither symbolic nor voluntary. Shareholders absorbed losses and balance sheets were restructured under central bank oversight. The state committed significant fiscal and liquidity backstopping – estimated at $1.8 to $2.2 billion – to protect depositors.
The reopening of withdrawals after months of restrictions marked a crucial psychological turning point, stabilizing deposits and containing the risk of broader financial contagion.
The logic behind consolidation was straightforward. Bangladesh’s banking system, with more than 60 commercial banks serving a $460 billion economy, had become overcrowded and politicised.
These factors also made them weakly governed. Mergers offered economies of scale, simplified supervision and reduced regulatory arbitrage. More importantly, they signaled a philosophical shift that failure would be managed, not indefinitely postponed.
These steps were complemented by tighter oversight of related-party lending, stricter enforcement of loan classification rules and a gradual move away from interest-rate caps that had long distorted risk pricing.
The interim government also backed a bank resolution framework aligned with international norms, giving regulators early-intervention powers long absent from Bangladesh’s financial architecture.
Critically, the reforms unfolded in a changed political context. The fall of Hasina’s government removed the protective shield that had insulated from scrutiny influential borrowers responsible for billions of dollars in bad loans. Under authoritarian rule, the boundary between political power and financial privilege had blurred to the point of invisibility.
Yunus’s administration, lacking an electoral mandate but benefiting from post-uprising legitimacy, has been able to act where elected governments hesitated.
This does not mean the reforms are without risk. Bank mergers are complex operations, particularly in systems where asset quality data remain contested and recovery values are uncertain.
Analysts estimate that cleaning up legacy bad loans across the sector could take five to seven years and cost an additional several billion dollars in capital support. Reform durability will depend on whether the next elected government resists pressure to revert to politically expedient banking practices.
Yet the direction of travel is unmistakable. For the first time in over a decade, banking reform in Bangladesh is being driven by economic necessity rather than political convenience.
The interim government has resisted calls to simply recapitalize failed banks without structural change – a strategy that would have socialized losses while preserving the behaviours that caused them.
The contrast with the previous regime is stark. Under Hasina, financial stability was often confused with the absence of a visible crisis, achieved through regulatory suppression rather than reform.
The cost was borne quietly by depositors, smaller borrowers and the credibility of a financial system whose total assets exceed $200 billion. Yunus’s approach has been more transparent and, in the short term, more disruptive – but also more credible.
The implications extend beyond banking. A functioning financial system is essential for investment, trade and growth, particularly as Bangladesh navigates external pressures from global monetary tightening, export uncertainty and foreign-exchange volatility in an economy that relies on more than $55 billion a year in exports and $20 billion in remittances.
None of this guarantees success. Entrenched interests remain, and reform fatigue is a real danger as elections approach. But the banking sector is no longer being managed as a political instrument. It is being treated, at long last, as a system that must either function properly or be restructured.
For an interim government with limited time and no electoral base, that is no small achievement. If the reforms endure, they may stand as one of the most consequential legacies of Bangladesh’s post-uprising transition – proof that even amid political uncertainty, structural change is possible when denial gives way to decision.
Faisal Mahmud is the minister (press) of the Bangladesh High Commission in New Delhi.