Over the 36 days that it spanned, the July Uprising that uprooted the authoritarian regime of the Awami League last year didn't quite have the fate of the country's banking sector very high on its agenda for reforming the country. But as is well-known, the exit of the then-prime minister prompted a systemic collapse across the entire structure that sustained Sheikh Hasina's rule, from corrupt government officials who hollowed out the country's institutions to the politicians who were in her favour to the oligarchs who looted the nation's wealth at a scale perhaps unmatched anywhere in the world.

"This is the biggest, highest robbing of banks by any international standards. It didn't happen on that scale anywhere, and it was state-sponsored." That was how Bangladesh Bank Governor Ahsan Mansur, the man who was largely tasked with turning things around in the banking sector, described it in an interview with the Financial Times, shortly after assuming the responsibility last year.

He went on to say an estimated Tk2tn ($16.7bn) had been spirited out of Bangladesh after the bank takeovers, using methods such as loans made to their new shareholders and inflated import invoices.

Under Dr Mansur, Bangladesh Bank engaged accountancy firms EY, Deloitte, and KPMG to conduct an "asset quality review" of the banks that, according to the governor, lost $17 billion due to transactions involving businesspeople close to the regime of Hasina.

The Bangladesh Financial Intelligence Unit also established 11 joint investigation teams tasked with tracking and reclaiming assets believed to have been purchased with funds siphoned from the banks, as well as prosecuting those responsible. Mansur was appointed central bank governor by interim national leader Muhammad Yunus following Hasina's departure to India in August 2024.

Return to conventions

Just over a year later, the banking sector can indeed be said to have pulled back from the brink, Governor Mansur said at a seminar organised by the Centre for Policy Dialogue (CPD) last month, crediting a series of measures taken since he assumed office.

The governor said the sector was "right at the edge of the cliff" when the interim government took office in August last year. "Our two main challenges were to stabilise the macroeconomy and reform the financial sector. Reforms cannot be done in a year, but we have started them in every area," Mansur said.

Upon taking charge, he held meetings with international financial institutions to maintain lines of credit. "We assured them that we would repay every penny we owed, and we did. Our situation did not turn out like Sri Lanka or Pakistan," he said.

According to him, the biggest support in debt repayment came from remittance inflows alongside export earnings over the past year. On inflation, the governor said controlling it was a major challenge.

Since August 14 last year, Bangladesh Bank has not sold a single dollar from reserves, instead buying dollars at Tk122 despite pressures to adjust the rate. Inflation has fallen below 10%, and Mansur expects it to drop below 5% in the future.

While the balance of payments is now in surplus, the economy is still lagging in attracting investments, he noted.

"Before elections, big investors will not come, but we have already prepared the ground to encourage investment after the polls," he added.

On why no banking commission was formed, Mansur said it would have delayed urgent decisions, taking six to nine months to produce a report. Instead, three separate task forces have been formed to reform the banking sector, central bank operations, and recover laundered money.

Recovering funds siphoned abroad is proving the most challenging, he said, as it required coordination with 8-10 ministries.

Major legal reforms are also underway, including extensive amendments to the Bank Companies Act, fundamental changes to the Money Laundering Act - adding asset recovery provisions - and broad revisions to the Bangladesh Bank Order to enhance the central bank's accountability and autonomy.

Amendments will also be made to the Deposit Insurance Act and the Money Loan Court Act to resolve long-pending loan default cases.

The central bank also plans to amend the Bangladesh Bank Resolution Ordinance to allow it to acquire any bank facing liquidity crises due to irregularities. "No more leniency. If a bank cannot operate properly, Bangladesh Bank will take it over," Mansur warned.

He added that a single body will be created for "360-degree monitoring" of all banks to tackle irregularities in a coordinated manner. The governor further stressed initiatives to make Bangladesh a cashless economy, including the promotion of QR codes, wider credit card usage, expansion of nano-loans, banking education for school students, housing reforms, revenue department restructuring, and lowering smartphone prices to expand digital banking coverage.

A room full of economists seemed to by-and-large agree with the governor.

Despite all the work that still continues, Mansur has expressed grave concerns about the financial sector's recovery under the current legal provisions in the country's laws, as he disclosed plans to revise the Artha Rin Adalat Ain (Money Loan Courts Act) soon.

The governor gave a series of interviews with local news outlets in recent weeks, where he has been very focused on criticizing the legal system's impact on financial stability.

"If the judiciary continues on its current path, the financial sector will never be able to rebound," Dr Mansur asserted, according to our sister newsagency UNB.

"Bangladesh Bank, the government, and the judiciary must work in harmony. To reach international standards, we must operate with similar capacity and accountability," he added.

Addressing the persistent issue of non-performing loans (NPLs), Dr Mansur emphasized a zero-tolerance approach. "A defaulter should be called a defaulter," he stated unequivocally.

He added that even if a borrower obtains a stay order from the High Court, Bangladesh Bank should still classify them as a defaulter. "Because the way a bank knows a customer, it is not possible for the court to understand that."

Mansur cited a recent incident involving Agrani Bank, where a borrower was declared a defaulter despite having a stay order, leading to the issuance of a warrant against them. According to the governor, such decisions are "policy-wise correct."

Responding to questions about the progress made in restructuring the banking sector over the past year, Dr Mansur highlighted the deep-rooted nature of the problem.

"We have seen that this is not a one-day affair. Banks and financial institutions have been systematically seized for about eight to nine years," he said.

NPLs: 'The worst in Asia'

Bangladesh now has the highest non-performing loan (NPL) ratio in Asia, with defaults surging to 20.2 percent of total loans in 2024, according to a new Asian Development Bank report. In contrast, other South Asian countries -- India, Pakistan, and Sri Lanka -- reduced their NPL ratios last year, while Nepal recorded only a marginal increase of 0.9 percentage points. India, the region's largest economy, cut its NPL ratio to 2.5 percent from 3.4 percent, helped by sweeping banking reforms.cording to the central bank's internal report though, the NPL situation is even worse. It is important to note that several banks are facing a significant liquidity crisis, worsened by rising NPLs, slow deposit growth, and weak loan recovery. To help stabilize their liquidity situations, BB is allowing struggling banks to borrow from the inter-bank market under central bank guarantees. However, the increasing demand for funds has led BB to provide some of these banks with temporary liquidity support, while measures have been taken to absorb excess liquidity from the banking system by using BB bills to avoid long-term financial imbalances.

The surge in NPLs will likely exceed 30 percent of total outstanding loans, raising serious concerns for the banking industry, according to the BB's Monetary Policy Statement. Contributing factors include systemic weaknesses, regulatory gaps, and exploitative practices such as money laundering and illicit capital flight.

In response, BB has introduced comprehensive guidelines aligned with international best practices for loan classification, provisioning, and recovery. BB is committed to enforcing strict regulations consistent with international best practices to improve governance.

Strengthening regulatory oversight and effectively implementing these reforms will be crucial for restoring stability, resilience, and public trust in the country's banking sector. The management and recovery of NPLs are paramount priorities for BB in its efforts to ensure the financial stability and resilience of the banking sector. The BB has emphasized the necessity for solid credit risk management policies and tools that comply with Basel III requirements.

Accordingly, the Expected Credit Loss (ECL) methodology-based provisioning system is scheduled for implementation in 2027, in alignment with the International Financial Reporting Standard (IFRS 9). This ECL model incorporates historical data, current economic conditions, and future forecasts, thus enabling banks to engage in proactive credit risk management and mitigate the accumulation of NPLs.

In the context of recovering defaulted loans, particularly those in legal proceedings within the Artha Rin Adalat and higher courts, BB has issued a policy directive highlighting the essential role of commercial banks' legal departments. This directive underscores the need for these departments to expedite the resolution of such cases to enhance overall banking efficiency and effectiveness in managing credit risk.

Task forces at work

Bangladesh Bank has established three specialized task forces to further address the structural problems within the banking sector and undertaken necessary structural reforms. The first task force is dedicated to implementing comprehensive banking sector reforms, strongly emphasizing improving governance and risk management practices. The second task force aims to strengthen BB's capacity and restructure its operations with a view to enforcing the banking regulations and improving compliance. The third task force is focused on recovering stolen assets and managing the non-performing assets of banks by establishing an asset management company.

The first taskforce, called the Banking Sector Reform Taskforce (BSRTF), aims to assess banks' financial health, mitigate risks, and recommend reforms to strengthen governance and resilience within the sector. A central component of this reform initiative is the systematic implementation of Asset Quality Reviews (AQR) across the banking landscape. To facilitate this process, special regulations have been enacted permitting the engagement of foreign consulting firms.

BB has advocated introducing two pivotal laws in the legislative arena: the Bank Resolution Act and the Deposit Insurance Act (Amendment). These pieces of legislation are designed to establish a robust framework for resolving, restructuring, or liquidating the underperforming banks, directly informed by the outcomes of the AQRs. Concurrently, BB is drafting guidelines and circulars intended to delineate the procedures for deploying various bank resolution mechanisms. Additionally, the amendment of Bangladesh Bank Order 1972 and the formulation of the Distressed Asset Management Act are underway.

A pivotal initiative aims to combat money laundering and curb illicit capital flight by demonstrating our unwavering commitment to financial integrity. An inter-agency task force, spearheaded by the Governor of Bangladesh Bank, has been established to reclaim and manage laundered assets with precision and resolve. This task force works diligently alongside key authorities to identify and investigate assets unlawfully removed from the country, expertly navigate the legal complexities, and initiate proactive repatriation efforts.

To date, a number of specialized Joint Investigation Teams-comprising dedicated members from the Anti-Corruption Commission (ACC), the Criminal Investigation Department (CID) of the Bangladesh Police, the National Board of Revenue (NBR) on tax related fraud, and Bangladesh Financial Intelligence Unit -have strategically prioritized cases involving distinct groups and individuals.

BFIU plays a crucial role in coordinating these investigations, while the Attorney General's Office provides the much-needed legal support to strengthen our joint efforts.

In addition, the task force is actively collaborating with esteemed international organizations, including the World Bank's StAR Initiative, the U.S. Department of Justice (USDoJ), the International AntiCorruption Coordination Centre (IACCC) of the UK government, and the International Centre for Asset Recovery (ICAR).

A noteworthy advancement in BB's supervisory approach is the implementation of a Risk-Based Supervision (RBS) framework. Following the successful completion of a pilot program with three banks in April 2024, the initiative progressed to a second phase that involved 20 banks undergoing preliminary risk assessments.

To further bolster the banking sector's resilience, BB concentrates on recovery planning for certain struggling banks, including establishing frameworks tailored for recovery and resolution. BB has also released updated stress testing guidelines to enhance risk management practices across the sector. These guidelines encompass conventional risk categories-such as credit, market, operational, and liquidity risks-and have also integrated climate risk stress testing to address potential vulnerabilities arising from natural disasters.

5 to 1: United Islami Bank

All these measures have played their bit in stabilising the sector at a time of crisis, preparing the ground for what is likely to be the boldest measure yet: merging five of the banks that were run into the ground by the oligarchs who ruled the roost under AL. Having always maintained that they would clean up the sector without letting any banks go under or close, the execution of the upcoming merger is crucial to Dr Mansur's vision for the sector.

Last week, it was announced that Bangladesh Bank has decided to appoint administrators to oversee the merger of these five struggling Shariah-based private banks, into a single state-owned Islamic bank.

The decision was taken at a special board meeting chaired by the Bangladesh Bank Governor at the central bank headquarters, with other board members present.

A senior central bank official told UNB that office orders will soon be issued to appoint the administrators and dissolve the existing boards of the affected banks. He said amendments to the Bank Resolution Ordinance and other supporting laws will be introduced as needed to facilitate the process.

Each bank will be assigned an administrator supported by a team of four officers. The initiative aims to safeguard depositors' funds and restore public confidence in the banking sector.

According to the government's plan, First Security Islami Bank, Social Islami Bank, Global Islami Bank, Union Bank, and Exim Bank will be consolidated into a new state-owned entity, provisionally named the United Islami Bank.

The central bank is expected to issue a licence for the new bank soon. Bangladesh Bank officials believe the merger will help end long-standing irregularities and corruption in the Islamic banking sector, while restructuring is expected to rebuild customer trust.

Following the merger, the existing boards of directors and managing directors will be dissolved, and the shares of the merged banks declared void. All assets and liabilities will be transferred to the new entity, which will begin operations as United Islami Bank.

To recover government investment, shares of the new bank will eventually be sold to the private sector. Large depositors may be given the option to convert part of their deposits into shares, while small depositors will face no restrictions on withdrawals.

A forensic audit revealed defaulted loans at the five banks ranging from 48 to 98 percent of their total loan portfolios. The central bank estimates Tk 35,200 crore will be required for the merger, with Tk 20,200 crore to be provided by the government.

Four of the banks -- First Security, Union, Global, and Social Islami -- have long been under the control of the S. Alam Group, while Exim Bank was owned by Nazrul Islam Majumder, Chairman of the Nassa Group.

To expedite the process, Bangladesh Bank has formed a working committee led by Deputy Governor Kabir Ahmed. The panel will oversee the entire merger process, with its top priority being the protection of depositors' funds.

Officials acknowledged that one of the biggest challenges could come from potential lawsuits by opponents of the merger. The central bank is, however, confident the process will not be derailed.

"The governor has made it clear that if any case is filed, it will be handled through the Attorney General's office. Bangladesh Bank is ready for all kinds of legal battles," said an official.

No final decision has yet been made about the fate of employees at the five banks or whether their scattered branch networks will be rationalised. But all five banks' boards of directors will be dissolved immediately after the merger, with Bangladesh Bank forming a new board and initially taking charge of operations until a final governance structure is decided.

Over the past 15 years, S Alam Group and its affiliates allegedly borrowed thousands of crores of taka under various names from the banks under its control, leading to massive loan defaults.

According to Bangladesh Bank data, the combined default loans of the five banks stand at around Tk 1.47 lakh crore - about 77% of their total outstanding loans. Among them, Union Bank is in the worst condition with 98% of its loans defaulted, followed by First Security Islami Bank at 96%, Global Islami Bank's 95%, Social Islami Bank at 62% and Exim Bank at 48%.