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Bangladesh’s banking sector is grappling with a severe liquidity crisis, particularly among weak banks burdened by mounting customer demands and non-performing loans (NPLs). These banks are struggling to meet withdrawal requests, leading to a steady erosion of customer confidence. The situation has deteriorated to the point where some customers, unable to access their funds, reportedly could not purchase sacrificial animals during the last Eid-ul-Adha, highlighting the depth of the crisis. Despite assurances from bank officials that their financial health is improving and transactions are normalizing, the reality paints a grim picture. Analysts suggest that these claims are akin to “covering fish with spinach,” masking the true extent of the banks’ vulnerabilities.
Merger Announcement and Rising Concerns
Recently, Bangladesh Bank Governor Dr. Ahsan H. Mansur announced the merger of five struggling Islamic banks—First Security Islami Bank, Social Islami Bank, EXIM Bank, Global Islami Bank, and Union Bank. This announcement has heightened unrest among customers, who are flocking to branches daily to withdraw their deposits. The governor has repeatedly assured that no depositors will face losses due to the merger, emphasizing that the move is aimed at ensuring the safety of customer funds. However, these assurances have done little to quell public anxiety.
The merger has also sparked fears among bank employees about potential job losses. Governor Mansur has reassured staff that no jobs will be cut due to the merger, but uncertainty persists. The future of these banks remains unclear—whether they will proceed with the inevitable merger or explore alternative solutions.
Root Causes of the Crisis
The banking sector’s woes stem from nearly a decade and a half of unchecked irregularities, corruption, fraud, and money laundering under the previous Awami League government. Islamic banks, in particular, were systematically exploited, with politically connected business groups siphoning off billions of taka through fraudulent loans. These loans were artificially regularized, masking the true scale of NPLs. Following the political upheaval on August 5 last year, the real state of these banks came to light. Proper loan classification revealed an alarming surge in NPLs, with some banks reporting default rates exceeding 90%, and an average of around 80% across weak banks. According to media reports, the banking sector’s total NPLs stand at 4.2 trillion taka, a figure that continues to grow rapidly.
Most of these defaulters, linked to the former regime or its allied business groups, have fled the country, having siphoned off assets abroad. This has left little hope for loan recovery, as their domestic businesses or assets are often untraceable. While the government is taking steps to repatriate laundered funds, the process is complex and time-consuming, offering no immediate relief to the struggling banks.
Government Initiatives to Rescue Weak Banks
To stabilize the banking sector and address the crisis, the government has enacted the Bank Resolution Ordinance 2025. This law empowers Bangladesh Bank to acquire shares of weak banks, transfer assets and liabilities to third parties, and make decisions regarding restructuring, mergers, or liquidation. Banks failing to meet minimum capital or liquidity requirements can be wound up, and those responsible for mismanagement may face legal action.
The government is also seeking financial support from international institutions like the IMF, World Bank, ADB, and IDB to fund the restructuring or resolution of these banks. In January, Bangladesh Bank appointed two international audit firms to assess the asset quality of weak banks, and their reports have already been submitted. Additionally, the central bank has restructured the boards of these banks and placed their managing directors on mandatory leave.
A Bank Resolution Fund has been established to provide financial assistance, drawing from government loans or grants and international funding. These measures aim to restore stability to the financial system and rebuild public trust in the banking sector.
Why Mergers Are Inevitable
According to media reports, the five Islamic banks slated for merger have a combined NPL portfolio of approximately 1.47 trillion taka, accounting for 77% of their total investments. Their provisioning shortfall stands at 74,501 crore taka, making survival without intervention impossible. International standards deem a 4% NPL ratio acceptable, but banks with NPLs exceeding 30% typically face mandatory liquidation. In Bangladesh, however, with NPLs averaging 80%, the government has opted for mergers to protect economic stability and public interest.
The merger aims to create a robust Islamic bank capable of meeting the growing demand for Sharia-compliant banking. The asset quality review of these banks has been completed, paving the way for their consolidation into a single, stronger entity under government oversight.
Potential Outcomes of the Merger
The merger is expected to restore customer confidence through government-backed supervision and a new, reputable brand identity. By transferring bad assets to third-party asset management companies, the new bank will focus on developmental activities. A competent management team, an experienced Sharia board, and a strong governance framework will ensure transparency and accountability.
The consolidated bank will leverage an extensive network, including 759 branches, 698 sub-branches, 509 agent banking centers, and 1,023 ATMs, to serve nearly 9.2 million customers with its 16,000 trained employees. This vast network will enhance financial inclusion and equitable wealth distribution, particularly in underserved areas. Operational costs will decrease, and risk management frameworks will improve, positioning the bank to compete with other major players in the market.
By prioritizing lending to small and medium enterprises, the new bank will foster job creation and balanced economic development. Its strengthened financial capacity and international appeal will attract both domestic and foreign investors, further bolstering the Islamic banking sector.
Conclusion
The merger of weak banks represents a critical step toward resolving the banking sector’s crisis. With government intervention, international support, and robust oversight, the initiative could stabilize the financial system and restore public confidence. However, challenges such as recovering laundered funds and managing NPLs remain significant hurdles. If successful, the merger will create a strong, competitive Islamic bank, contributing to the growth and resilience of Bangladesh’s banking sector.
AI/MR
