Banking Sector: A Decade of Decay With Loans, Loots and Lawlessness

The banking sector is the heart of the economy. It serves as the primary source of capital for businesses and industries, as well as for the working capital and financing of small, medium, and cottage industries (CMSME). This is why the banking system is one of the key driving forces behind a country’s economic growth. When the banking system operates smoothly, the economy remains stable, but if disorder arises in this sector, the overall economy slows down and weakens.

There are numerous examples worldwide where crises in the banking sector have led to economic disasters.  For instance, in the first decade of this century, Greece faced near bankruptcy when its government took excessive loans from banks but failed to repay them. Similarly, Iceland's three major banks collapsed due to excessive lending, pushing the country’s economy to the brink of destruction and forcing the government to seek international loans. In these cases, mismanagement and poor decision-making were primarily responsible. But, in Bangladesh, the level of looting in the banking sector over the past one and a half decades by political influence, nepotism, and vested interest groups is unprecedented.

From approving new banks based on political considerations to formulating policies favoring party loyalists and groups, the entire system was shaped to serve particular interests. Moreover, these groups were regularly granted exemptions from bank interest and charges. Opportunities were created to classify loans as regular without requiring any down-payment during rescheduling and restructuring processes. The most astonishing aspect was the introduction of a system that allowed non-performing loans to be shown as regular by paying only 20% of the defaulted amount. As a result, despite thousands of crores of taka in defaulted loans remaining in banks, a clean balance sheet could be presented at the end of each year. At various times, the definition of non-performing loans (NPLs) was changed to exclude actual defaulters from official records. The introduction of new definitions and relaxed repayment terms began under the pretext of mitigating post-COVID economic losses. In 2019, citing the need to help businesses recover from COVID-related financial setbacks, loan repayment policies were relaxed for three consecutive years—an initiative that primarily benefited a specific group.

During that time, financial analysts and bankers associated with the banking sector feared that after the COVID excuse, new justifications would be sought to continue granting concessions to loan defaulters. However, there was no need to look for excuses—the Russia-Ukraine war provided a fresh opportunity. In 2022, Russia attacked Ukraine. Even before the statistics on Ukraine's losses were released, major business owners in our country started claiming that they had suffered even greater losses. The government also did not remain idle, ensuring that business owners were appeased by providing them with special privileges. In the final quarter of 2022, an opportunity was granted to avoid being listed as a defaulter by repaying only 50% of the due installments or loans.

At the same time, bank owners were kept satisfied by offering various privileges. In 2022, banks were permitted to record unpaid interest as revenue, concealing the sector’s actual financial status. This state-backed manipulation turned the banking industry into an illusionary success. Due to repeated and unexpected benefits from the government, even genuine businesses and borrowers lost the motivation to repay loans. As a result, bankers became less proactive in debt recovery, while borrowers became increasingly reluctant to repay their dues. Despite a continuous rise in non-performing loans, a "red carpet" approach was used to mask the crisis.

Amendments were made to the Bank Companies Act to centralize control over the banking sector, Changes to the 1991 Act allowed up to four directors from the same family, instead of the previous limit of two. Additionally, the tenure of directors was extended from a maximum of six years (two consecutive terms) to nine years (three consecutive terms). These amendments facilitated the concentration of banking sector control within a few influential families. Political influence was leveraged to appoint chairman and board members, while their devoted Managing Directors were handpicked to serve vested interests. The laws were passed unilaterally in the National Parliament to grant such privileges to select individuals and groups,After Fazle Kabir assumed the role of governor in 2017, under his mediation, Islami Bank and several other banks were handed over to financial exploiters. From making decisions on lowering the CRR (Cash Reserve Ratio) in hotel meetings to setting a 6% interest cap on deposits and a 9% cap on loans, various measures were taken to provide special benefits to business owners. However, despite the 9% loan interest cap, no business owners reduced the prices of their products. It became a common occurrence to make controversial decisions through Bangladesh Bank, including irregularly channeling large sums from banks' CSR (Corporate Social Responsibility) funds into the Prime Minister’s relief fund. Using state mechanisms for looting banks has been a long-standing tradition of the Awami League.

If we analyze the history of banking in the country, we see that the Awami League has always paid special attention to this sector. Before 1996, in the 25 years since independence, there were 17 private banks and 32 insurance companies (both general and life insurance combined) in the country. However, between 1996 and 2000, the then-Awami League government issued licenses for 13 new banks and 28 insurance companies (19 generals and 9 life insurance). In contrast, from 2001 to 2006, during the five-year tenure of the four-party coalition government, and the subsequent two-year caretaker government, no new banking licenses were issued in the span of eight years. However, within four years of forming the government in 2008, the Awami League, driven by political considerations, approved licenses for five new banks.International donor agencies like the IMF, former bankers, economists, and even Bangladesh Bank itself objected to the issuance of new banking licenses.

 The central bank had stated that, considering the economic landscape at the time, the excessive number of banks, financial institutions, and insurance companies was a burden on the economy. Consequently, in 2001, Bangladesh Bank made a policy decision not to issue any new banking licenses. However, political pressures led to a conflict between the government and the central bank regarding new banking licenses. Finance Minister Abul Maal Abdul Muhith publicly announced in Parliament that new banks would be approved based on political considerations. He later told journalists that granting licenses was a political decision. Bangladesh Bank, however, expressed its inability to implement this directive, arguing that there was no economic necessity for additional banks. The central bank even submitted a report to the Ministry of Finance highlighting this issue.

Despite this, the government remained steadfast in its decision, ultimately pressuring Bangladesh Bank to comply. On September 16, 2012, the central bank’s board finally approved a policy to grant new banking licenses. From 2009 onward, a total of 14 new banks were approved. The primary sponsors of these banks were influential Awami League leaders and individuals close to the government, ensuring the party’s dominance over the banking sector. The approval of so many banks on political grounds was an unprecedented event.

 The intention behind granting these politically motivated banking licenses was ultimately fulfilled, as massive irregularities and corruption siphoned off thousands of crores of taka. The case of Farmers Bank stands as a glaring example. Despite persistent financial irregularities, the bank survived under political protection. When public confidence hit rock bottom, its name was changed to Padma Bank to give it a fresh start. However, even this rebranding failed to save it, as 62% of its total loans became non-performing, and many depositors have still not received their money back.

The decline of the banking sector began in 2009. According to the latest Global Competitiveness Report by the World Economic Forum, Bangladesh ranked 130th out of 141 countries in banking system soundness—the lowest among South Asian nations. Another global economic study ranked Bangladesh’s banking sector 85th out of 136 countries, a 22-position decline compared to 2009. Within SAARC countries, Bangladesh now ranks fifth, whereas under the last BNP-led government, it was in second place.

Following the August 5 revolution, the long-concealed iceberg of non-performing loans has started to surface. By the end of December 2024, total non-performing loans had surged to Taka 345,000 crore, compared to only Taka 22,000 crore 2009. Currently, more than 20% of total distributed loans are classified as defaulted. As non-performing loans continue to rise, dark clouds loom over the country’s economy.


Amir Mohammed Khosru is a
banker and a columnist.