What Is Wrong with Our Banking?

There is no doubt that the banking sector plays a central role in the financial system of any economy by mobilising savings, allocating capital and supporting investment, trade and economic growth. In developing countries like Bangladesh, banks serve as the primary source of formal financing for businesses, industries and individuals. History tells us that extended bank loans or debt have even helped entrepreneurs form their initial business equity.
Hence, the stability and efficiency of the banking sector are essential for ensuring sustainable economic development. However, in recent years, Bangladesh’s banking sector has experienced a series of structural and institutional challenges that have weakened its financial performance, decreased public confidence, and increased systemic risks. These problems are interconnected and cannot be addressed through isolated policy measures alone.
The banking crisis is not merely the result of financial difficulties; rather, it is primarily a crisis of governance, accountability and institutional discipline. Many of the sector’s current problems have accumulated over a long period due to weak regulatory enforcement, ineffective corporate governance, political interference, non-action or no action at the regulatory bodies and the gradual erosion of professional banking practices. Without addressing these underlying governance failures, financial reforms alone are unlikely to produce sustainable improvements.
One of the most significant concerns is the rapid growth of non-performing loans (NPLs). The increasing volume of defaulted loans is one of the greatest threats to Bangladesh’s financial stability. High levels of NPLs reduce bank profitability, weaken liquidity, limit new lending and ultimately slow economic growth. Many defaulted loans result from poor credit appraisal, inadequate due diligence, insufficient post-disbursement monitoring and, in some cases, lending decisions influenced by non-commercial considerations. Repeated rescheduling of defaulted loans without effective recovery measures weakens credit discipline and encourages a culture of intentional loan default.

Weak corporate governance is one of the root causes of the banking sector’s problems. Effective governance requires transparency, accountability, independent oversight and professional management. However, when boards of directors fail to exercise independent judgement or when institutional decisions are influenced by vested interests, banks become vulnerable to poor lending practices and financial mismanagement. Governance failures not only reduce operational efficiency but also damage investor confidence and the credibility of the entire financial system. So is the case of large loans being concentrated amongst a few names only, resulting in even the large businesses' houses being highly leveraged.
Another issue is the weakness of risk management. Banks should evaluate borrowers based on financial strength, repayment capacity, business feasibility and market conditions before approving loans. However, weak internal controls, inadequate monitoring and the absence of a strong risk management culture often expose banks to excessive credit and operational hazards. Modern banking requires advanced risk assessment systems, qualified professionals and strict compliance with internal policies to ensure financial resilience.
Regulatory institutions also have a critical responsibility in maintaining the health of the banking sector. An effective and independent central bank should supervise financial institutions impartially, enforce prudential regulations and take timely corrective actions against irregularities. Regulatory decisions should be based on professional judgement rather than external influence. Strengthening institutional independence and regulatory capacity is therefore essential for restoring discipline within the financial system.
Another major concern is the gradual decline of public trust in the banking sector. Banking fundamentally depends on confidence. Depositors, investors and businesses expect banks to operate with integrity, transparency and professionalism. When governance failures, financial scandals and rising loan defaults become frequent, public confidence declines significantly. Restoring trust requires visible accountability, stronger governance, transparent financial reporting and consistent enforcement of banking regulations.
To overcome these challenges, we need a comprehensive structural reform rather than temporary policy responses. Those reforms include strengthening corporate governance, improving loan recovery mechanisms, ensuring professional and independent bank management, enhancing regulatory supervision, promoting a strong risk management culture and taking firm legal action against wilful defaulters. Since strong business houses are thought to be ‘belly up’, it is about time for the central bank to consider capping the huge loans with some connection to their equity bases. Sustainable banking reform depends on rebuilding institutional integrity, enforcing accountability at every level and creating a banking environment where financial decisions are made based on merit rather than influence.
In conclusion, the banking sector crisis should not be viewed solely as a financial issue but as the outcome of long-standing governance failures and institutional weaknesses. Rising non-performing loans, weak corporate governance, ineffective risk management, regulatory shortcomings and political interference have collectively undermined the stability of Bangladesh’s banking system. Addressing these challenges requires coordinated reforms, stronger institutions and a renewed commitment to transparency, professionalism and accountability. Only through these measures can the banking sector regain public confidence and effectively contribute to the country’s long-term economic growth and financial stability.

The writer is Chairman at Financial Excellence Ltd and Founding Managing Partner of PwC Bangladesh