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Bangladesh Bank has initiated a plan to merge five struggling banks into a single entity in a bid to restore discipline in the financial sector. The proposed new bank will require around Tk 35,000 crore in fresh capital to operate.

The central bank governor recently sought approval for the merger, which Finance Adviser Salehuddin Ahmed cleared before leaving for an overseas trip.

According to the proposal, the new institution will initially run under Bangladesh Bank’s close supervision. Once stabilised, it will be gradually handed over to private and foreign strategic investors, ensuring the government’s investment is eventually recovered with returns.

Troubled assets and mounting losses

The move follows a year-long review of six banks—First Security Islami Bank, Global Islami Bank, Union Bank, Exim Bank, Social Islami Bank, and ICB Islami Bank. Asset quality reviews conducted by KPMG and EY, alongside BB’s own inspections, revealed alarming capital shortfalls and rising non-performing loans despite restructured boards.

As of September 30, 2024, the five banks together carried capital shortfalls running into tens of thousands of crores. Their classified loans ranged from nearly 50% to over 99% of total lending, while liquidity support extended by the central bank failed to yield improvements.

The ICB Islami Bank has been excluded from the resolution process for now due to ongoing legal disputes over its ownership.

How the merger will work

Under the government’s newly enacted Bank Resolution Ordinance 2025, the five banks will be treated as “transferring banks,” while a new institution will serve as the “receiving bank.”

To meet the Tk 35,000 crore capital requirement, authorities plan to convert Tk 15,000 crore of institutional deposits into equity through a bail-in process. The remaining Tk 20,000 crore will be provided by the government as temporary financial support.

The central bank has suggested that the government extend tax exemptions for at least five years to help the merged bank stabilise. It also requested that profits after provisioning be exempted from tax, in line with international best practices.

A senior BB official said, “These banks have become non-viable. Merging them into a new entity is essential to restore public confidence and ensure sustainable credit flows for the economy.”