Bangladesh is trying to clean up its banks just as those banks are becoming less able and less willing to finance long-term growth. That makes a deeper capital market not a parallel reform, but the second engine the financial system now needs.
The logic is simple. Banks burdened by bad loans and capital shortfalls must repair their balance sheets and lend more cautiously. But if bond and equity markets cannot take over part of that financing role, bank reform could leave productive businesses starved of long-term capital.
The success of financial reform therefore depends on more than fixing banks. Bangladesh must simultaneously build credible market-based channels that can move savings into investment as bank lending retreats.
Bangladesh Bank has revised loan-classification rules, making the scale of distressed assets more visible. Non-performing loans are estimated at 35 to 36 per cent of total loans, exceeding Tk6.44 lakh crore and possibly reaching Tk6.5 lakh crore.
The central bank says restoring stability could take five to 10 years. Its initial target is to bring the bad-loan ratio down to 25 per cent by March-April 2027.
That clean-up has already moved beyond recognising losses. Five financially distressed banks are to be merged into a new bank with Tk35,000 crore in paid-up capital, including Tk20,000 crore in government recapitalisation support. Proceedings have also begun to wind down or liquidate nine non-bank financial institutions.
Monetary policy is tightening at the same time. Bangladesh Bank has stopped financing the government through newly printed money, while inflation has fallen from 12.5 per cent to between 8.2 and 8.7 per cent.
The exchange-rate regime has also become more market-oriented, with the taka trading around Tk121.50-Tk124.50 per US dollar and gross reserves remaining above $20 billion.
Alongside that stabilisation drive, digital banking is being used to widen access and lower distribution costs. Minimum paid-up capital has been raised to Tk300 crore from Tk125 crore, sponsor requirements have been tightened and five proposed digital banks have received preliminary approval.
The new framework has also drawn foreign capital. VEON is putting $250 million into Nova Digital Bank, while the broader target is to attract $1 billion into digital infrastructure and financial technology.
The bigger structural shift, however, is in the capital market.
The Bangladesh Securities and Exchange Commission has removed the floor-price mechanism, restored normal circuit breakers and stepped up enforcement. Across the 2025 and 2026 financial years, it took 227 enforcement actions and imposed Tk419.23 crore in fines.
Regulatory reform is also moving towards technology and access. The commission is expanding surveillance, digital initial public offering processes and channels for foreign investors. Foreign transactions have since risen by 152 per cent on the Chittagong Stock Exchange and 25.73 per cent on the Dhaka Stock Exchange.
The bond market is meant to carry part of the same burden. The securities regulator has set a target for a Tk50,000 crore green-bond market by 2030 and is finalising a framework covering Sukuk, blue bonds, orange bonds and exchange-traded funds.
That matters because Bangladesh’s companies have long relied heavily on banks for large, long-term loans. The result was a mismatch between the maturity of bank funding and the duration of industrial and infrastructure lending, adding to balance-sheet stress.
Now, under conditions attached to the International Monetary Fund’s $4.5 billion loan programme, banks must repair their balance sheets and meet tougher capital requirements. They are becoming more cautious about large corporate lending.
As bank credit tightens, businesses are being pushed towards capital markets, green bonds and Sukuk.
That shift could become the second engine of financial reform. If those markets deepen, Bangladesh can reduce pressure on banks and give companies a stronger source of long-term finance. If they do not, tighter lending will simply widen the financing gap at a time when investment is already weak.
The policy implications are straightforward.
Bangladesh Bank needs political and administrative independence. Weak-bank mergers and the winding down of failed institutions must be completed while protecting depositors.
At the same time, the capital market must grow beyond share trading, with greater participation from pension funds, mutual funds and insurers and deeper bond and Sukuk markets.
Digital banks add a third layer to the transition, but only if innovation is matched by strong cybersecurity and responsible algorithm-based lending.
The reform challenge, then, is not simply to fix banks. It is to ensure that as banks retreat from risky long-term lending, stronger market-based finance is ready to take its place.
That will depend on execution, institutional accountability and public confidence.
The writer is a capital market investor and vice president at the Bangladesh-American Chamber of Commerce USA Inc.
Views expressed are solely those of the author.
