Banking sector needs structural reforms: KHI

The banking sector needs comprehensive structural reforms to fix deep-rooted weaknesses, as liquidity support and regulatory tweaks alone cannot restore financial stability, according to a review by the Knowledge Hub Institute (KHI).
The review identifies mounting non-performing loans (NPLs), severe capital and provisioning shortfalls, sluggish credit growth and governance weaknesses as major challenges.
The findings were released at KHI’s first press briefing in Dhaka on Saturday, attended by its president, Dr Khondaker Golam Moazzem.
The Banking Sector Assessment and Policy Review (January-September 2026) found that the sector remained under severe financial stress despite regulatory initiatives by Bangladesh Bank and the government.
At the end of 2025, the banking sector’s aggregate capital adequacy ratio stood at minus 2.64%, while the Tier-1 leverage ratio was minus 3.10%.
Classified loans accounted for 32.78% of total loans in June 2026, up 0.52 percentage points from March.
The situation was particularly severe in full-fledged Islamic banks, where classified loans reached 58.9%, followed by state-owned commercial banks at 43.2%, private commercial banks at 31.6% and foreign banks at 6.5%.
The review also highlighted weakening credit intermediation, with private-sector credit growth slowing to 4.09% in September 2026, raising concerns about banks’ ability to support business financing, private investment, job creation and economic recovery.

The findings were presented by Prof Shah Md Ahsan Habib, KHI component lead and professor at the Bangladesh Institute of Bank Management (BIBM), and Noor Yana Jannat, research associate at KHI.
The assessment found that Bangladesh Bank and the government issued 266 policy and regulatory instruments between January and September 2026 to address financial sector weaknesses.
Key measures included enacting the Bank Resolution Act 2026, placing four vulnerable financial companies under resolution, raising deposit insurance coverage to Tk2 lakh per eligible depositor and introducing Risk-Based Supervision (RBS).
KHI outlines six-month reform priorities
KHI proposed priority reforms for October 2026 to March 2027 to strengthen financial stability and restore confidence in the banking system.
The recommendations include independent asset quality audits of high-risk banks, strict legal and social accountability for wilful loan defaulters, and funded capital restoration or resolution plans for financially distressed institutions.
The institute also called for assessing deposit payout mechanisms to ensure prompt access to funds when financial institutions enter resolution.
It further recommended redirecting bank financing towards productive economic activities rather than increasing dependence on government securities.