On April 10th of this year, the parliament passed a new law amending the Bank Resolution Act, 2026, potentially undoing previous banking reforms and adjustments. The revised act allows former owners of struggling banks, even those responsible for mismanaging their institutions to insolvency, to repurchase these banks at a fraction of the cost previously provided by the government and central bank. This amounts to less than 7.5% upfront, with the remaining 92.5% to be paid over two years at a 10% simple interest rate. This law signifies a step back rather than progress in banking reform.
Drawing on my extensive 35-year experience in the Bangladeshi financial sector, I am deeply concerned about this law, which contradicts established practices for resolving failed banks. It jeopardizes the stability of Bangladesh’s financial sector, which was salvaged from collapse through significant government and central bank interventions.
Among the five banks merging to form Sammilito Islami Bank, namely First Security Islami Bank, Social Islami Bank, Union Bank, Global Islami Bank, and Exim Bank, controlled by S Alam Group and Nassa Group, investigations by Bangladesh Bank revealed widespread irregularities and fund misappropriation leading to substantial financial losses. The government and central bank injected around Tk 35,000 crore to stabilize these banks. The decision to consolidate these banks aligns with international norms, holding owners accountable for their banks’ failures.
However, the new law allows former owners and directors of troubled banks to reacquire their institutions by submitting applications to Bangladesh Bank. While the law sets conditions like repaying government funds, additional capital infusion, depositor protection, and scrutiny, the terms are favorable, offering a discounted repurchase price for the banks. This could lead to a scenario where those responsible for the banks’ downfall finance their repurchase using borrowed funds from the banking sector.
My research, published in The Journal of Developing Areas in 2024, illustrates the link between uncertainty and non-performing loans in Bangladesh. It shows that weakening regulatory principles can exacerbate asset quality deterioration, creating more uncertainty in the financial system. The new law, signaling leniency towards financial wrongdoings, will only heighten uncertainty, not alleviate it.
Studies reveal that governance structures directly impact the risk and performance of banks. Weak governance, as seen in cases where controlling shareholders exploit banks for personal gain, increases risk and hampers performance. Reinstating owners linked to governance failures undermines the stability of financial institutions.
To address these challenges, Bangladesh must uphold the reforms initiated by Bangladesh Bank and supported by the IMF. Distressed banks should remain merged and protected, ensuring that former owners face penalties before reclaiming their institutions. Empowering an independent Bangladesh Bank and implementing a comprehensive framework for distressed assets recovery are crucial. Prioritizing depositor protection and ensuring full accountability for fraud and embezzlement are essential steps towards a robust banking system that serves the public interest.
The citizens of Bangladesh deserve a transparent and accountable banking system free from undue influence. The parliament must reconsider the implications of the amended Bank Resolution Act to secure true reform opportunities before they vanish.
