Bangladesh’s banking sector is facing a critical situation, with experts warning of a potential financial crisis if immediate reforms are not implemented.
According to The Daily Industry, the sector is now at a “turning point,” as rising non-performing loans, capital shortages, and increased government borrowing continue to weaken banks’ ability to function effectively. Several banks are already relying on liquidity support to stay operational, raising concerns about systemic stability.
Economists say the high level of defaulted loans has significantly reduced banks’ capacity to lend, particularly to the private sector. This has slowed investment and limited job creation, further impacting overall economic growth.
Dr. Enayet Karim, a global financial expert and President of the Global Economist Forum, said the situation reflects deep structural weaknesses. “Without coordinated reforms and strong political commitment, the risks could escalate into a broader financial crisis,” he noted.
He called for urgent measures, including stricter loan recovery mechanisms, improved governance, and reduced dependence on bank borrowing by the government. Strengthening capital bases and enhancing transparency through digital systems have also been highlighted as key priorities. Dr Karim warn that delaying reforms could increase the long-term cost to the economy and undermine financial stability.
Actually, the financial sector is facing a deepening crisis, with several banks requiring government liquidity support just to remain operational. Mounting non-performing loans, capital shortfalls, and excessive government borrowing from the banking system have created a fragile environment that threatens macroeconomic stability and long-term growth prospects.
According to The Daily Industry, “the country’s financial sector is in crisis, with the government forced to provide liquidity support to keep several banks afloat.” The report underscores the urgency of reforms as multiple structural weaknesses converge to strain the banking system.
Structural Crisis Deepens in Banking Sector: Bangladesh’s banking sector is currently navigating what analysts describe as a severe structural crisis. High levels of defaulted loans, inadequate capital buffers, and governance weaknesses have collectively eroded the sector’s resilience. The Daily Industry notes that “without rapid and coordinated reforms, the country could face significant economic risks.” Economists warn that the banking sector’s vulnerabilities are no longer isolated issues but systemic challenges that could spill over into the broader economy.
Dr. Enayet Karim, a global financial expert and President of the Global Economist Forum (GEF Code: GEF-ECON-001), told The Daily Industry, “Bangladesh’s banking sector is experiencing a classic case of structural fragility. When high non-performing loans coincide with capital erosion and liquidity stress, the system becomes highly vulnerable to shocks. Immediate, coordinated reforms are not optional-they are essential.”
Non-Performing Loans Surge to Alarming Levels: One of the most pressing concerns is the sharp rise in non-performing loans (NPLs). Recent data indicates that by September 2025, the NPL ratio in Bangladesh’s banking sector had surged to nearly 36 percent-one of the highest in South Asia.
This figure reflects deep-rooted issues in credit risk management, loan monitoring, and recovery mechanisms. A financial analyst explained, “A non-performing loan ratio of this magnitude is a clear indicator of systemic inefficiency. It suggests that a significant portion of bank assets is not generating returns, which directly affects profitability, capital adequacy, and lending capacity.”
He added that weak enforcement of financial regulations and political interference in loan approvals have exacerbated the problem.
Capital Shortfall Exceeds Tk 1 Trillion: The crisis is further compounded by a massive capital shortfall within the banking system. In 2024 alone, the required provisioning against loan losses created a deficit exceeding Tk 1 trillion.
A World Bank assessment suggests that restructuring the banking sector may require capital injections equivalent to nearly 10 percent of the country’s GDP-a staggering figure that highlights the scale of the challenge.
Dr. Zahid Hussain, former Lead Economist of the World Bank’s Dhaka office, told The Daily Industry, “The capital shortfall is not just a banking issue; it is a fiscal risk. If the government is forced to recapitalize banks on a large scale, it could significantly strain public finances.”
He emphasized the need for a balanced approach that combines private sector participation with limited and conditional government support.
Government Borrowing Crowds Out Private Investment: Another major concern is the rapid increase in government borrowing from the banking sector. Between 2020 and 2025, government borrowing from banks has more than tripled, significantly reducing the availability of credit for the private sector.
The Daily Industry highlights that “excessive government borrowing is constraining credit flow to the private sector, thereby affecting economic growth.”
Dr. Selim Raihan, Executive Director of the South Asian Network on Economic Modeling (SANEM) and Professor at the University of Dhaka, said, “When the government borrows heavily from banks, it creates a crowding-out effect. Private businesses, particularly small and medium enterprises, find it increasingly difficult to access financing, which dampens investment and job creation.”
Liquidity Support Keeps Weak Banks Afloat: The government has already stepped in to provide liquidity support to struggling banks, a move that reflects the severity of the crisis but also raises concerns about moral hazard.
Economists argue that while such support may be necessary in the short term to prevent systemic collapse, it should not become a long-term solution.
Dr. Enayet Karim warned, “Providing liquidity support without addressing underlying governance and risk management issues is like treating symptoms without curing the disease. It may stabilize the system temporarily, but it does not solve the core problems.”
Reform Proposals: A Roadmap to Recovery: In response to the crisis, experts have proposed a series of comprehensive reforms aimed at stabilizing and strengthening the banking sector. One of the key recommendations is the establishment of a strong and independent task force to recover defaulted loans and repatriate laundered money. This would involve fast-track judicial processes and international asset tracing mechanisms.
Dr. Mustafizur Rahman, Distinguished Fellow at the Centre for Policy Dialogue (CPD), told The Daily Industry, “Recovering non-performing loans and addressing capital flight should be top priorities. Without accountability, the cycle of defaults will continue.”
Digital Registry to Prevent Loan Fraud: Another significant proposal is the creation of a unified digital registry for land, assets, machinery, and shares. Such a system would prevent borrowers from using the same collateral multiple times to secure loans from different banks-a common malpractice in the current system.
Experts believe that digitization of asset records would enhance transparency and reduce fraud. Capital Raising Through Private Investment: To address capital shortages, economists recommend encouraging shareholder contributions and private investment in distressed banks. Government support, if provided, should be conditional and limited to avoid excessive fiscal burden.
Dr. Zahid Hussain noted, “Recapitalization should not rely solely on public funds. Private sector participation is crucial, and any government assistance must be tied to strict reform conditions.”
Tax Reforms and SME Financing: Reducing the tax burden on banks to align with international standards is another proposal aimed at strengthening the sector’s capacity to lend.
At the same time, experts emphasize the importance of targeted financing for small and medium enterprises (SMEs), which are critical for employment generation. The Daily Industry reports that “special credit and subsidy frameworks for SMEs should be developed and implemented through banks to boost job creation.”
Reducing Government Dependence on Bank Borrowing: Economists also stress the need to gradually reduce the government’s reliance on bank borrowing. They recommend bringing such borrowing below 30 percent of total loans to ensure adequate credit flow to the private sector.
Dr. Selim Raihan remarked, “Unless government borrowing is contained, private sector growth will remain constrained. This is a fundamental issue that must be addressed.”
Digital Integration and Cashless Economy: To improve efficiency and transparency, experts propose integrating banking infrastructure with the tax system through digital platforms. This would enhance revenue collection and reduce tax evasion.
There is also a strong push toward a cashless economy, with full interoperability between mobile financial services and traditional banking systems.
Dr. Karim said, “A digital financial ecosystem can significantly improve transparency, reduce transaction costs, and strengthen economic governance.”
Broader Economic Implications: Economists caution that the weaknesses in the banking sector are not confined to finance alone-they have far-reaching implications for the entire economy.
High NPLs and liquidity constraints reduce banks’ ability to lend, leading to lower investment and slower job creation. This, in turn, affects income levels and overall economic growth.
Dr. Enayet Karim emphasized, “The health of the banking sector is directly linked to the health of the economy. If banks are weak, the entire economic system becomes fragile.”
A Critical Turning Point: Bangladesh’s banking sector now stands at a critical juncture. The choices made in the coming months will determine whether the country can stabilize its financial system or face a deeper crisis.
The Daily Industry concludes that “without urgent reforms, the crisis could intensify, and the cost of inaction will be significantly higher in the future.”
Experts unanimously agree that the current situation demands decisive action, strong political will, and coordinated policy measures. While the challenges are immense, timely and effective reforms could restore confidence in the banking sector and pave the way for sustainable economic growth. As the country navigates this turbulent period, one thing is clear: delay is no longer an option.
