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[🇧🇩] Banking System in Bangladesh

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[🇧🇩] Banking System in Bangladesh
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Why central bank independence matters

Atiqul Kabir Tuhin
Published :
Jul 16, 2025 22:47
Updated :
Jul 16, 2025 22:47

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In a landmark step toward central bank independence, the interim government has reportedly drafted the 'Bangladesh Bank Order, 2025', aiming to elevate the central bank to the status of a constitutional body. Currently, the central bank operates as a 'body corporate' under the Bangladesh Bank Order, 1972, and is meant to be autonomous. But political interference, as was evident during the Awami League regime, seriously undermined its autonomy, leading to a cascading effect on the broader economy, from hyperinflation to the near collapse of the banking sector. As a result, there have been discussions and recommendations, including from the International Monetary Fund (IMF), to amend the Bangladesh Bank order to grant the central bank more autonomy, particularly concerning monetary policy and governance of the financial sector.

The crucial role of an independent central bank in achieving price stability is widely acknowledged. As economist John Maynard Keynes famously remarked, price stability should be the foremost goal of monetary policy, a goal unattainable without central bank independence. Keynes believed that a central bank, free from political influence, is better positioned to focus on maintaining stable prices, which is fundamental for a healthy economy. Empirical studies support this view, showing that countries with more autonomous central banks tend to manage inflation more successfully. Citing the experiences of several emerging markets in recent decades, experts argue that central bank independence is the most effective monetary policy governance model to date.

Under such a framework, price stability is achieved by separating monetary policy decisions from the grip of political influence. The separation helps counteract political business cycles. These cycles occur when governments pursue populist and expansionary policies in a bid to ensure their re-elections. While such policies, like increased public spending or easy credit, might initially boost economic activity and garner popular support, it invariably leads to inflationary pressures in the long run. An independent central bank can act as a bulwark against such short-sighted political maneuvering, focusing instead on long-term economic stability.

In the context of Bangladesh, it is not difficult to see the benefits of adopting independent central bank model. In fact, the lack of price stability and the soaring of inflation into the double digits domain under the previous Hasina government serve as a stark example of the cost of printing money to manage outsize fiscal spending. Instead of challenging the regime's pernicious policies, the then subservient BB governors did everything to pander to the whims of the government. From artificially managing the exchange rate and enforcing 'nine-six' caps on bank lending rates, to turning a blind eye-if not actively colluding-to the plundering of state-owned and several private commercial banks, and increasing money supply by printing new money, the policy failures of the central bank during the AL regime were beyond acceptable limits. Had the central bank been truly autonomous, much of the inflationary pressure and the banking sector's distress from rising non-performing loans (NPLs) could be avoided.

Against this backdrop, the proposal to grant Bangladesh Bank constitutional status is both timely and essential. However, simply recognising the BB as a constitutional body won't suffice as numerous existing constitutional bodies - such as the Public Service Commission, Election Commission, and even the judiciary - have not been immune to brazen political interference.

The draft BB order proposes, among other provisions, the formation of a search committee tasked with preparing a shortlist of candidates for the positions of governor and deputy governors. Based on the committee's recommendations, the Prime Minister would nominate candidates. But the appointment as well as removal of the Governor and Deputy Governors will require parliamentary approval. And the governor will be accountable to parliament.

However, in Bangladesh's political culture, monetary policy issues are rarely debated in Parliament. Even under the existing BB order, the Governor is technically accountable to the parliamentary standing committee. Yet, over the past decades, not a single Governor was seen being questioned by Parliament, not even following the unprecedented cyber heist when hackers stole close to 100 million dollars from the reserves. So, legislation alone is not enough, what matters is strong political will for its genuine enforcement.

To shield Bangladesh Bank from political interference, experts underscore the importance of establishing clear and stringent criteria for the appointment of the Governor and Deputy Governors. They argue that the Prime Minister should not have unchecked authority to appoint candidates at will. Instead, the formation of a search committee should be clearly defined and it should be empowered to recommend individuals who are not only technically competent and experienced but also independent-minded and capable of resisting political pressure. Legal provisions are essential, but their effectiveness ultimately depends on the mindset and integrity of those in power. Even if the law guarantees central bank autonomy, no institution can operate independently unless its leadership genuinely upholds that spirit.

 

10 banks rated sustainable in BB’s 2024 evaluation
Bangladesh Bank first introduced the sustainability rating system in 2020

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Ten private commercial banks and two financial institutions have been rated as sustainable financial institutions in the Bangladesh Bank's Sustainability Finance Report 2024.

The top-rated banks this year are BRAC Bank, City Bank, Dutch-Bangla Bank, Eastern Bank, Jamuna Bank, Mutual Trust Bank, NCC Bank, Prime Bank, Pubali Bank, and Shahjalal Islami Bank.

Among them, BRAC Bank, City Bank, Eastern Bank, Jamuna Bank, Mutual Trust Bank, and Prime Bank also featured in the 2023 rankings.

In contrast, Exim Bank, Trust Bank, United Commercial Bank, and Uttara Bank—previously ranked in 2023—have dropped off the list in 2024.

Among financial institutions, IDLC Finance and IPDC Finance retained their places in the sustainability rankings for the second consecutive year.

The central bank evaluates banks and financial institutions based on five key indicators: the Sustainable Finance Index, CSR activities, green project financing, the Core Banking Sustainability Index, and Banking Services Coverage.

Core Banking Sustainability and Banking Services Coverage jointly account for around 60 percent of the total score.

Banks with strong risk management, healthy capital adequacy, and low non-performing loans receive higher scores under these metrics.

Specifically, the Core Banking Sustainability score considers the net NPL ratio, Tier-1 capital to risk-weighted assets, provision maintenance, CMSME loan share, and large-loan portfolio exposure.

The Services Coverage component, weighted at about 10 percent, evaluates reach through branch networks, number of deposit and loan accounts, and agent banking outlets.

Bangladesh Bank first introduced the sustainability rating system in 2020 to encourage financial institutions to integrate environmental, social, and governance (ESG) considerations into their operations.​
 

Currency paradox: Why is BB buying dollars?

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After years of depreciation that saw the taka lose nearly 30 percent of its value against the US dollar since the Covid-19 pandemic, the local currency is finally showing signs of strength.

However, in a surprising turn of events, the Bangladesh Bank has swiftly intervened to halt the US dollar's decline, raising questions about its exchange rate management.

The relentless rise of the US dollar for years has been a primary driver of economic strain in Bangladesh.

It has been a key factor behind soaring inflation, which has remained stubbornly above 9 percent since March 2023, causing hardship for consumers and importers.

While inflation saw a slight dip to 8.48 percent in June, the pressure on household budgets remains immense.

For months, economists and policymakers have pointed to the high exchange rate as a major culprit for the persistent inflation.

Businesses, especially those reliant on imports, have borne the brunt of the powerful US dollar, while exporters and remitters have benefited.

Now, with the taka finally gaining ground to some extent, the central bank has stepped in.

In just two days, Bangladesh Bank purchased $484 million from commercial banks as the exchange rate fell by more than Tk 2 in five days, dropping to Tk 120 against each US dollar.

Following this intervention, the interbank selling rate climbed back to Tk 121.20 on Wednesday.

This prompts a crucial question—why is the central bank seemingly preventing the taka from gaining strength?

One explanation lies in the central bank-managed exchange rate system.

Despite adopting a more flexible regime in May as part of a $5.5 billion loan agreement with the International Monetary Fund, the system is not entirely market-driven.

Bangladesh Bank maintains an exchange rate band and intervenes when the currency moves outside its desired range.

An exchange rate band is a system where a country's central bank sets a target value for its currency against a foreign currency (or a basket of currencies) and allows the exchange rate to fluctuate within a specific range, or "band," around that target.

This approach falls between a completely fixed exchange rate, where the currency's value is pegged and does not fluctuate, and a purely floating exchange rate, where market forces of supply and demand determine the rate without any central bank intervention.

Areif Hussain Khan, executive director and spokesperson for the central bank, defended the intervention, saying the regulator's goal was to prevent excessive volatility.

"We want to keep the forex market stable because neither a big rise nor a steep fall is a good indicator. If the dollar weakens too much, exporters and remitters feel discouraged and suffer losses," he said.

Zahid Hussain, former lead economist at the World Bank's Dhaka office, criticised the central bank's intervention in the foreign exchange market.

He argued that allowing the US dollar rate to decline further could help ease inflationary pressure.

"Over the past three years, various analyses have explained why inflation has increased in Bangladesh. While opinions vary, one consensus has emerged—the rise in the US dollar's value," he said.

He added that reducing the exchange rate from Tk 120 to around Tk 110 could have had a remarkable impact in curbing inflation.

"So, the question is, why is this opportunity to curb inflation being missed?" asked Hussain.​
 

Banks to remain closed on August 5

BSS
Published :
Jul 17, 2025 19:37
Updated :
Jul 17, 2025 19:37

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All scheduled banks across the country will remain closed on August 5, 2025, marking the observance of the government-declared holiday marking “July Uprising Day.”

To this end, the central bank on Thursday issued a circular through its Department of Off-site Supervision, instructing all scheduled banks to suspend operations on that day in compliance with the holiday announced by the government.​
 

Banks borrow record Tk 1.45t in a month as liquidity dries

JUBAIR HASAN
Published :
Jul 19, 2025 00:10
Updated :
Jul 19, 2025 00:10

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Fund funnelling from the central bank into commercial banks in Bangladesh through repo instrument hits a record high of over Tk 1.45 trillion in June, indicating their severe liquidity crunch.

Deposit growth remains slow amid higher non-performing loan (NPL) regime following past misrule in the banking sector while government bank borrowing also ballooned to make up for revenue deficit, bankers and money-market analysts say about the banks' desperate need for liquidity feeding.

They say the volume of commercial lenders' borrowing through repo window of the Bangladesh Bank (BB) continues ballooning to meet their local-currency obligations.

According to the latest data available with the BB, the country's scheduled banks altogether borrowed Tk 1.45 trillion from the banking regulator under the repo facility in June 2025.

Off the amount, around 75 per cent was taken using 14 days' maturity while remaining Tk 275 billion and Tk 91.05 billion came from 7-day maturity and overnight facility.

Under the repo-backed liquidity facility from the central bank, the figures of borrowed funds were Tk 1.33 tillion, Tk 940 billion and Tk 838 billion in May, April and March last, the data showed.

The commercial lenders needing short-term liquidity are largely bent on 14-day-tenure repurchase instrument of the BB and keep banking on it as much as possible. As a matter of fact, the volume of credits handed out through the liquidity-availing window continues surging.

But there are allegations by a number of bankers and BB officials that some of the commercial lenders frequently use such instruments to avail short-term funds but invest those in long-term government securities to gain more under the persisting economic sluggishness, which plays a significant role in the squeezing of yields on treasury bills and bonds.

Seeking anonymity, a BB official says the rising use of the repo-backed funds indicates that majority of the commercial banks have been facing serious liquidity crunch in recent times.

The central banker says the deposit growth remains low in recent times because of trust deficit in the banking system after massive-scale loan-related irregularities got exposed following the July-August mass-uprising that toppled Sheikh Hasina's governing regime.

On the other hand, the BB official says, the volume of NPLs in banks keeps mounting to reach Tk 4.20 trillion, almost one-fourth of the entire loans worth Tk 17.13 trillion disbursed by the banks until March last.

"So, the banks have no other option but to rely heavily on central bank repo instrument to overcome the formal credit mismatch," the central banker adds.

He mentions that the government roughly borrowed some Tk 1.24 trillion from the banking system in the last fiscal year (FY'25). Of the borrowed funds, the government paid back over Tk 300 billion to the central bank in the form of meeting its previous liabilities.

According to the BB data, the deposit growth stood at 8.21 per cent by April last. It was more than 12 per cent even three years ago.

On condition of anonymity, the treasury head of a commercial bank said commercial banks normally use the short-term liquidity instrument of the BB to meet CRR (cash reserve ratio) requirement.

But the reality is different. The commercial lenders frequently use such instruments to avail short-term funds but invest those in long-term government securities to gain more under the persisting economic sluggishness, he told the FE.

Sharing statistics, the seasoned banker says the banks need to keep 4.0 per cent as CRR with the central bank, which is around Tk 750 billion. But the banks borrowed Tk 1.45 trillion in June last.

"It indicates how serious the liquidity crunch in banks is. If the BB stops giving repo facility for a couple of weeks, majority of the banks will collapse," he said

Under such circumstances, the treasury head said the banking regulator keeps squeezing repo facility following the lending condition set by the IMF (the International Monetary Fund), which is "unfortunate".

The regulator has already curtailed repo facility once a week from daily handouts. It also discarded 28-day repo and is about to scrap 14-day window from October next.​
 

How challenging transition to cashless transaction is

FE
Published :
Jul 22, 2025 00:05
Updated :
Jul 22, 2025 00:05

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Banking has been undergoing transformation at a phenomenal rate. The latest trend apparently runs counter to the very concept of bank serving as a depository of cash or currency. Maintenance of cash -- enormous sums to be precise, is costly. How costly it can be is revealed by Bangladesh Governor Dr Ahsan H Mansur. According to him, Bangladesh has to spend a fabulous sum of Tk 200 billion on management of cash each year. Along with the central bank which alone prints bank notes, 61 commercial banks have to bear the costs of maintenance of idle money, transportation, security, insurance, storage, teller services, and sorting instruments. Printing of each currency note has a cost. If 1,000-taka note costs around Tk5.0-6.0, printing costs of notes of smaller denomination and coins in particular may exceed the value of those notes and coins. In a country where currency notes are subjected to all kinds of abuse, it is not surprising that an additional cost is involved annually with reprinting of 13 per cent banknotes rendered damaged.

Clearly, cashless transaction and transfer of large amounts of money digitally for payment and other purposes can drastically bring down the expenditure on cash management. The country also stands to benefit immensely if its informal sector governed mostly by black money or unaccounted-for economy, thought to be bigger than the formal one, can thus be curbed. So the positives are many if the country can plan for a systemic transition to a cashless society. That calls for payment of small amounts of daily transaction through QR codes to online transfer of big amounts in financial deals by using financial services like PayiO or wire transfer via banks. Cost-cutting and avoidance of physical contact and hassles in such transactions are highly desirable.

Yet things are not very simple and straightforward as one would like them to be. Unless cent per cent cybersecurity and digital protection can be ensured, clients are unlikely to be convinced of such transactions. The notorious digital heist at the Bangladesh Bank has not helped the cause. Breaching of cybersecurity cannot be ruled out unless the cyber unit of each bank or financial institution is manned by highly efficient and knowledgeable staff. Then there is the issue of digital and financial literacy, without a reasonable level of which confidential financial transactions can expose such operations to cybercriminals always on the lookout for banking heists.

Last but not least, the deplorable law and order situation in the country certainly points to make digital transaction safe and secure but the investments made in infrastructure like ATM booths -- so long considered convenient -- are likely to prove to be a waste of money with the booths falling in disuse. Anti-social elements, particularly those looking for innocent victims to commit financial crimes have their own novel way of breaching security codes. In the latest such incident, a 28-year-old young man from Shripur was lured into a private car before taking him hostage and snatching away his debit and credit cards for swindling about Tk600,000 from his accounts in four banks on Saturday last. His flight abroad was scheduled the same night. So without improving the law and order, embarking on a course of cashless transactions may be fraught with danger.​
 

ONE YEAR OF JULY UPRISING
Challenges still remain in banking sector in Bangladesh

Mostafizur R0ahman 23 July, 2025, 23:27

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Bangladesh’s banking sector has seen some tangible reforms over the past one year under the interim government, but a sustainable recovery of the sector damaged badly during the past government is constrained by some knotty challenges such as rising non-performing loans, outdated regulations and weak institutional capacity, economists said.

The interim government led by Professor Muhammad Yunus assumed office on August 8, 2024, three days after the ouster of the Awami League-led authoritarian regime in a student-led mass uprising.

The Bangladesh Bank under Ahsan H Mansur, who became the central bank governor after the 2024 political changeover, has gone for reforms to address deep-rooted maladies such as loan irregularities, political interference and financial malpractice in the country’s banking sector.

M Masrur Reaz, chairman and chief executive office of the Policy Exchange Bangladesh, an independent advocacy firm, told New Age that among all sectors, the banking sector had witnessed the most visible and impactful reforms over the past one year under the interim government.New age products

He said that a huge amount of funds had been looted and laundered from banks by oligarchs who exploited their political connections with the ousted regime.

The powerful business tycoons reportedly siphoned off $17 billion from the banking sector of the country during the 15-year rule of the ousted prime minister Sheikh Hasina.

That cycle of corruption and abuse of power has been stopped due to the BB steps, Masrur Reaz said describing it as a major achievement.

Reaz said that the central bank took decisive steps by reconstituting boards of several banks, thereby removing the influence of politically connected business groups.

This move, he said, has significantly improved governance and helped restore regulatory compliance in those banks.

The BB has restructured boards of 14 banks, removing controversial and politically connected business groups like the S Alam Group.

The S Alam Group had controlled eight private commercial banks directly or indirectly and allegedly withdrew about Tk 2.25 lakh crore from 10 banks in names and anonymously.

The central bank initiated asset quality reviews at banks known to have faced serious corruption and malpractice, aiming to identify the true extent of damage within those banks.

The reporting of non-performing loans and other data had previously been compromised through data manipulation, but the central bank has now brought those reporting practices under stricter oversight and closer to international standards.

Reaz, however, said that the central bank should have established an asset management company to deal with defaulted loans and facilitate recovery of such loans.

He also stressed the need to revisit the country’s legal framework. He said that many existing laws and regulations posed obstacles to effective banking reforms and those should be amended to support the ongoing restructuring efforts.

The sector’s most pressing challenge remains the ballooning non-performing loans.

By March 2025, NPLs reached Tk 4.2 lakh crore — nearly double the figure from a year earlier, representing about 24 per cent of all outstanding loans and are projected to climb further.

The bad loans had long been understated through rescheduling, restructuring, or even data manipulation during the deposed Awami League-led government, which have now been exposed.

The central bank’s move in April to tighten NPL classification by cutting the overdue period from six to three months as per international standard has exposed more hidden bad loans.

The BB has also frozen a massive amount of liquid assets and tangible assets of defaulters and alleged money launderers over the past one year to recover bad loans.

Mustafizur Rahman, executive director of the Centre for Policy Dialogue, a local think tank, said that the banking sector experienced the highest concentration of reforms over the past one year.

He said that the real picture of the sector — long sugar-coated and obscured — had finally been revealed.

He noted that the Bangladesh Bank formed dedicated task forces and engaged international audit firms to conduct asset quality reviews at struggling banks that uncovered deep-rooted irregularities and malpractices.

Mustafizur added that the central bank had been working with weak banks either to restore their financial health or to facilitate their liquidation through mergers.

‘The Bangladesh Bank has plans to establish an asset management company to recover bad loans and has also initiated processes to bring back laundered funds from abroad, although this will take time due to complex legal and diplomatic procedures,’ he said.

Bankers said that due to the mounting NPL, many banks were now facing acute capital shortfalls and provisioning gaps.

Some 19 banks have been barred from declaring dividends for taking deferral facilities against their high provision shortfalls.

While corruption and loan scams have been somewhat curbed, the overall financial condition of these banks has not improved much, the bankers said.

In desperation, the central bank injected about Tk 37,000 crore into nine struggling banks through printing money to meet depositors’ demands, yet the cash crisis persists, with depositors still struggling to withdraw their funds, BB officials said.

Legal obstacles, including court-ordered stays on loan recoveries and delays in enacting new legislation, continue to shield defaulters, they said.

The BB plans to merge a number of private commercial banks through an ordinance, but the process has yet to begin. Similarly, proposals to establish asset management companies and independent recovery units remain in limbo.

Proper rules for bank directors have been announced but not enforced. A significant amount of defaulted loans is linked to bank directors who have granted themselves loans across different banks, exploiting loopholes in regulations.

The central bank continues to uphold lenient loan rescheduling rules, allowing defaulters with the down payment as low as 2.5 per cent and the repayment period of up to 29 years.

Banks have identified over a thousand of wilful defaulters, but the central bank has failed to take decisive measures, despite having the authority to impose travel bans and other restrictions.

Furthermore, no steps have been taken to hold central bank and commercial bank employees accountable for their roles in corruption and loan scams.

The central bank has recently launched a special rescheduling facility for businesses who defaulted on their loans for reasons beyond their control. Under the facility, only a handful of large borrowers have been benefited, but small borrowers are yet to get any support.

Despite these, Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, said that the banking sector witnessed the most comprehensive reforms in the past one year.

He cited the formation of task forces, audits by renowned chartered accounting firms, board reconstitutions, and regulatory reviews as positive developments that could help stabilise the sector.

He also noted improvements in the macroeconomic context, pointing out that the balance of payments strengthened, remittance inflows and exports rose sharply, and foreign exchange reserves improved. The exchange rate, too, has returned to a relatively stable position, he said.

Bangladesh’s gross foreign exchange reserve, calculated under the International Monetary Fund guidelines, soared to $24.98 billion on July 17 from $20.47 billion in August 2024.

He, however, said that the central bank should now shift focus towards stimulating private sector credit growth and improving the investment climate.

Without such measures, he warned, the country’s overall economic growth could face significant headwinds despite improvements in banking oversight.

BB executive director Areif Hussain Khan, also the spokesperson for the central bank, said that they were working to restore the people’s confidence in the banking sector and therefore initiated many reform initiatives.

‘Some initiatives have already been implemented, others are awaiting to be executed,’ he said.​
 

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