Written by Mrinal Haque
The Banking Post | June 6, 2025
DHAKA – Bangladesh’s banking sector, once a pillar of the nation’s economic ascent, now faces an existential reckoning. Crushed by soaring bad loans, governance failures, and technological stagnation, the industry must embrace radical reforms or risk derailing the country’s growth ambitions. Recent data from the Bangladesh Bank, World Bank, and IMF reveal a system in distress – yet also outline a viable path to recovery.
The Crisis in Numbers
- NPL Tsunami: Non-performing loans (NPLs) surged to 20.2% of total loans by end-2024 – four times the IMF’s safe threshold – and may hit 30% by mid-2025 . State-owned banks, holding under 30% of assets, bear 45% of bad loans, with their capital adequacy ratios turning negative in 2024 .
- Economic Drag: Banking instability contributed to GDP growth plummeting to 4.2% in FY24, with FY25 projections dipping to 3.3% . The volume of defaulted loans (BDT 3.46 trillion) now exceeds annual health and education budgets .
- Access Chasm: Only 25% of adults access formal credit, while 24 crore mobile financial accounts operate outside traditional banks .
Table: Key Banking Indicators (2024–2025)
| Indicator | Current Status | Projection | Global Benchmark |
|---|---|---|---|
| NPL Ratio | 20.2% (2024) | 30% (mid-2025) | ≤5% (IMF) |
| State Bank Capital Adequacy | Negative (2024) | Improving (if reforms) | 10–12% |
| SME Finance Gap | $2.8 billion (2023) | Widening (without tech) | N/A |
| Digital Accounts | 24 crore (MFS, 2024) | Doubling by 2027 | N/A |
Drivers of Distress
- Governance Collapse: Political interference in board appointments, dual regulation by the Finance Ministry and Bangladesh Bank, and chronic regulatory forbearance have enabled reckless lending. “Wilful defaulters operate with impunity,” notes the Centre for Policy Dialogue (CPD), while legal loopholes delay loan recovery .
- Structural Obsolescence: Banks cling to branch-centric models despite Bangladesh’s 63% smartphone penetration (GSMA, 2025). This excludes SMEs, which face a $2.8 billion credit gap .
- Macroeconomic Pressures: Inflation hit 9.94% in FY25 – a 12-year high – squeezing borrowers and eroding bank margins. Money supply expansion (Tk 700bn printed in FY23) fuels inflation, validating the Quantity Theory of Money .
The Path to Revival: Innovation Meets Reform
1. Digital Disruption as Lifeline
Bangladesh’s 24 crore mobile financial accounts signal a digital pivot. Examples point the way:
- Kenya’s M-PESA boosted SME lending by 24% via mobile microloans .
- Embedded Finance: Supply-chain solutions could unlock liquidity for RMG and agriculture exporters. IFC advocates using alternative data for credit scoring to serve the “unbanked” .
- Open Banking: A proposed 24-month rollout could democratize data, spurring fintech innovation .
2. Green Finance Imperative
With global brands demanding sustainable supply chains, green finance offers competitive advantage:
- RMG Sector Shift: Bangladesh’s $42 billion garment industry must adopt renewable energy and man-made fibers (MMF) to retain market share. IFC identifies solar investments and duty rationalization as keys .
- Climate Alignment: Banks lag in financing renewables despite rising ESG capital flows. Products like green bonds could attract foreign investment .
3. Governance Overhaul
The World Bank prescribes urgent surgery:
- Asset Management Companies (AMCs): To quarantine NPLs, mirroring Vietnam’s success in halving bad debts within five years .
- Depoliticized Boards: Appointing technocrats instead of political loyalists.
- Enhanced Supervision: Stricter single-borrower limits, real-time stress testing, and faster bankruptcy resolutions .
Forecast: Two Scenarios for 2030
Downside Risks (Status Quo)
Without reform, NPLs could breach 35%, triggering bank failures. GDP growth could stagnate below 4%, jeopardizing Bangladesh’s quest for upper-middle-income status. Public trust – already frayed – would evaporate .
Upside Potential (Reform-Driven)
- Digital Leap: Mobile banking could cover 70% of adults, unlocking $5 billion in SME credit.
- NPL Resolution: AMCs and governance reforms could cut NPLs to 8% by 2030.
- Green Leadership: Bangladesh could capture 15% of the global ethical apparel market via green RMG financing .
The Verdict
As Gayle Martin of the World Bank stresses, “Bold and urgent reforms” are non-negotiable . The technology exists; the blueprint from Vietnam and Kenya is proven. What’s needed is political will to depoliticize banks, embrace digital disruption, and align lending with climate resilience.
Bangladesh’s banking sector stands at a crossroads: one path leads to irrelevance, the other to becoming the engine of a $1 trillion economy. The race against time has begun.
— Reported with data analysis from Bangladesh Bank, World Bank, and CPD publications.
