Chapter 1

The Banking Landscape

Bangladesh's banking sector comprises 61 scheduled banks across four ownership categories: 6 state-owned commercial banks (SOBs), 3 specialized development banks, 43 private commercial banks, and 9 foreign banks. This structure, a legacy of post-independence nationalization and successive private licensing waves in the 1980s and 1990s, creates an oversaturated market where too many banks compete for a limited pool of bankable assets. The resulting fragmentation depresses profitability, encourages connected lending, and complicates regulatory oversight. The Sammilito Islami Bank merger in late 2025, which absorbed five failed banks, reduced the effective count by four and set a precedent for state-led resolution.

The officially reported non-performing loan ratio rose from 1.9% in 2011 to 9.6% in 2023 under the pre-Basel III classification regime. This trajectory already reflected deep governance failures: directed lending by SOBs to politically connected borrowers, weak credit appraisal at private banks, and Bangladesh Bank's historically constrained enforcement capacity. The Basel III adoption in late 2024 corrected years of forbearance-masked reporting: the ratio jumped to 20.20% by December 2024, 24.1% by March 2025, and a record 35.73% by late 2025. Nothing in the underlying portfolio changed; the classification finally caught up with it.

Lending rates moderated from over 12% in the early 2000s to around 9.9% by 2024, partly shaped by Bangladesh Bank's 9% lending rate cap (imposed 2020, replaced by SMART rate 2023). Compressed margins undermine banks' ability to absorb credit losses and build capital buffers, a cost that compounds as NPLs accumulate. The trade-off between cheap credit access and sector solvency is now the central pricing question for the new central bank leadership.

The Sammilito merger changes the structure in one direction only: it removes failed private banks from the count and places their liabilities on the state balance sheet. Whether it improves system solvency depends on the quality of the asset-management and recovery process that follows. The architecture of resolution now exists; the enforcement discretion has changed hands.

Chapter 2

Credit, Money, and Interest Rates

Private sector credit as a share of GDP expanded from about 22% in 2000 to 35.8% by 2024, reflecting the economy's deepening financial intermediation. Yet this ratio sits well below peer economies such as Vietnam (147%) or Thailand (148%), indicating that Bangladesh's formal banking sector still plays a limited role in channeling savings to productive investment. A large share of economic activity in agriculture, micro-enterprises, and the informal sector remains outside the formal credit system, and the NPL-driven credit contraction of 2024-2025 is widening that gap further.

Broad money (M2) as a share of GDP has grown from under 14% in 1974 to 48.8% in 2024. M2 growth has moderated sharply in recent years (6.1% in 2024) as Bangladesh Bank tightened monetary policy to combat double-digit inflation and as credit demand contracted under the weight of NPL uncertainty. The central bank's shift to interest-rate-based monetary policy in mid-2023 represents a structural change in framework, though transmission remains constrained by administered rates and weak monetary pass-through in a sector dominated by connected lending.

Interest Rate Dynamics

The lending-deposit spread has narrowed from over 4 percentage points in 2000 to 1.3 pp in 2024. A narrower spread benefits borrowers on paper but compresses bank margins at a time when provisioning demands for rising NPLs require greater earnings capacity. The new BB Governor has signaled a preference for lower policy rates to revive private credit growth; that choice interacts directly with the sector's ability to self-provision against the 35.73% NPL stock.

The real lending rate has turned negative during high-inflation episodes, meaning depositors effectively subsidize borrowers. This distortion discourages financial savings, accelerates capital flight, and diverts household resources toward real assets, all outcomes that weaken the deposit base the banking cleanup depends on.

Chapter 3

Regional Benchmarking

Comparing Bangladesh against regional peers reveals a sector that lags on nearly every dimension of financial health. On the pre-Basel III reported figure, Bangladesh's NPL ratio of 9.6% already leads the comparison group: Pakistan 6.6%, Thailand 2.8%, Vietnam 2.3%, Indonesia 2.0%, India 1.7%. On the Basel III-honest late-2025 figure of 35.73%, Bangladesh is operating at more than thirteen times India's NPL ratio. India itself improved dramatically through the Insolvency and Bankruptcy Code; Bangladesh has the legal precedent but not yet the institutional follow-through.

Financial depth tells the same story. Bangladesh's credit-to-GDP ratio of 35.8% is one of the lowest in the comparison set. Thailand leads at 148%, underscoring the gap between Bangladesh's banking sector and what is achievable at similar or higher income levels. The M2-to-GDP ratio of 48.8% is respectable in isolation but masks the fact that much of the monetary expansion has been absorbed by government borrowing rather than channeled to private productive investment.

The five-dimension radar synthesizes NPL quality, credit depth, lending rate, M2/GDP, and branch density. Bangladesh trails the peer average on all but M2/GDP, and the gap on NPL quality widened materially once Basel III reclassification replaced the reported series with the honest one.

The peer comparison does one thing the domestic data cannot: it provides a credible floor for what reform could deliver. India cut its NPL ratio from over 11% in 2018 to 1.7% in 2023 through statutory resolution. Thailand and Vietnam maintain ratios below 3% while supporting faster credit growth than Bangladesh. The gap is not structural; it is institutional.

Chapter 4

Stress and Vulnerability

Foreign exchange reserves fell to $21.39 billion by late 2024, providing approximately 3.9 months of import cover. The reserve position has since recovered substantially: gross reserves stood at $34.14 billion on May 10, 2026 (BSS), and the BPM6-standard measure at $29.47 billion, held up by sustained remittances (record USD 27.5 billion in 2024) and import compression. The BDT/USD rate settled around 122 after the managed depreciation of 2022-2023, a correction that was overdue but imposed significant costs on importers and dollar-denominated borrowers.

The most acute fiscal risk lies in the state-owned banks. Conservative estimates place the total recapitalization need for SOBs at approximately 555 BDT billion (roughly $4.5 billion at current exchange rates). Sonali Bank alone requires an estimated 150 BDT billion, Janata Bank 130 BDT billion, and Agrani Bank 90 BDT billion. Without recapitalization, SOBs cannot meet Basel III minimum capital adequacy ratios, constraining their lending capacity and eroding depositor confidence. The government faces a choice between absorbing the fiscal cost and allowing zombie banks to continue operating with negative net worth.

The banking-sector capital hole is connected to the energy-sector capital hole: IPP capacity charges flow through state-owned bank loan portfolios, and unpaid liabilities (including the approximately USD 850 million owed to Adani Power) sit on BPDB's balance sheet which the state stands behind. None of these can be resolved in isolation. The fiscal envelope set by the next Tarique Rahman government budget constrains all three simultaneously.

Chapter 5

Reform Scenarios and Outlook

Three scenarios frame the divergent paths Bangladesh's banking sector could take through 2030. The status quo baseline starts not from the pre-Basel III 9.6% but from the honest 35.73% record. Under no meaningful change to regulatory enforcement or SOB governance, that ratio stagnates: new NPLs are generated at roughly the same rate as old ones are written off or rescheduled, producing no net improvement in asset quality. The Sammilito merger is already complete; whether it becomes a one-off or a template depends on political will under the new BB leadership.

A moderate reform path, one that includes strengthened loan classification standards, independent SOB boards, and a functional asset management company, could bring the NPL ratio toward 6.0% by 2030. This requires sustained commitment and an annual fiscal cost of roughly 0.3% of GDP for SOB recapitalization. The aggressive reform scenario, modeled on India's IBC experience, envisions full Basel III compliance, time-bound NPL resolution, privatization of at least two SOBs, and credible license revocation for persistently undercapitalized banks. This path could reduce NPLs to 3.0% by 2030, at an upfront fiscal cost of approximately 3.0% of GDP.

The reform sequencing is critical. BB governance reform, board restructuring, and operational autonomy codified in statute (not personal undertakings) must come first. An asset management company, strengthened insolvency legislation, and forensic audit publication for every bank above 20% NPL form the core 2025-2026 reform package. SOB restructuring and MFS regulation extend the horizon into 2027 and beyond. Governor Mostaqur Rahman's eleven-point reform agenda and his public commitment not to bow to political pressure are the entry conditions; the institutional lock-in that survives his successor is what matters.

The Tarique Rahman government has spoken about asset recovery in general terms. It has not yet named the first beneficiary against whom a recovery case will be filed. The window in which prosecution is politically possible is narrowing as new business relationships form. Without asset recovery, the precedent is set that capture has no cost beyond the loss of operational control of the franchise.

Policy Implications

Toward a Resilient Banking Sector

The analysis across five chapters points to a sector that is functional but fragile, capable of supporting Bangladesh's current growth trajectory but ill-equipped for the demands of an upper-middle-income economy. The policy agenda falls into three tiers: immediate stabilization, medium-term institutional reform, and long-term structural transformation.

1. Complete the Sammilito resolution. The merger of the five failed banks into Sammilito Islami Bank PLC is complete; the depositor absorption (Tk 35,000 crore paid-up capital, roughly 0.7% of GDP) is the largest single banking intervention in Bangladesh's history. The outstanding task is converting the depositor liability into a sustainable balance sheet through an asset-management vehicle and a credible recovery timeline.
2. Resolve the SOB capital shortfall. Recapitalize or restructure state-owned banks with time-bound performance contracts. The estimated 555 BDT billion shortfall is large but manageable if phased over five years at roughly 0.3% of GDP annually. Continued forbearance only compounds the eventual fiscal cost.
3. Legislate Bangladesh Bank independence. Governor Mostaqur Rahman's verbal commitment not to bow to political pressure is welcome; the institutional protection that survives his successor is what matters. Amend the Bangladesh Bank Order to make the operational independence of the rule-enforcement function irreversible, not contingent on the governor of the day.
4. Establish a national asset management company. A centralized AMC, modeled on Korea's KAMCO or Malaysia's Danaharta, could purchase and resolve distressed assets at scale, freeing bank balance sheets for new lending. This requires enabling legislation and initial government capitalization. The Sammilito resolution provides the institutional learning for design.
5. Publish forensic audit findings. The Sammilito merger was preceded by bank-level forensic audits at the five failed banks. The same exercise is necessary at every commercial bank with an NPL ratio above 20% on Basel III classification. Without the underlying numbers in the public domain, the recapitalization discussion at the next budget is uninformed and political-economy pressure to soften the terms is unconstrained.
6. Name the asset-recovery cases. The precedent is set that capture has no cost beyond the loss of operational control of the franchise if no recovery cases are filed. The S Alam Group is the obvious starting point. The 180-day window of maximum political feasibility is half-gone.

Methodology and Sources

Data and Attribution

All quantitative results in this report are drawn from pre-computed data in data/banking_flagship_results.json (BDPolicyLab internal), which aggregates Bangladesh Bank annual reports and Financial Stability Reports, World Bank World Development Indicators, IMF Financial Soundness Indicators, and Bangladesh Bureau of Statistics. Exchange rate data from Bangladesh Bank interbank market. Post-Basel III NPL figures (Dec 2024, Mar 2025, late 2025) are independently sourced from BBF Digital and confirmed by Bangladesh Bank; they are not in the pre-computed results JSON, which ends at Dec 2023.

• Sammilito Islami Bank final licence (The Daily Star): thedailystar.net/business/news/sammilito-islami-bank-gets-final-licence-4047446
• Five merging banks Bangladesh Bank preliminary licence (TBS News): tbsnews.net/economy/banking/sammilito-islami-bank-gets-preliminary-license-bangladesh-bank-1281276
• Bangladesh NPL record 35.73% (late 2025) (BBF Digital): bbf.digital/why-2025-marked-a-turning-point-for-bangladeshs-banks
• Ahsan H Mansur ouster, February 2026 (The Daily Star): thedailystar.net/news/bangladesh/news/shock-ouster-bb-governor-4115256
• Mostaqur Rahman appointment (TBS News): tbsnews.net/bangladesh/process-underway-appoint-new-bb-governor-replacing-ahsan-h-mansur-sources-1370886
• New BB Governor reform pledge (Dhaka Tribune): dhakatribune.com/business/banks/404486
• Forex reserves USD 34.14 bn, May 10 2026 (BSS): bssnews.net/news-flash/380959
• Internal data (BDPolicyLab): data/banking_flagship_results.json