The financial sector of Bangladesh, a critical pillar of its economic development, faces significant challenges that need urgent attention for the country to maintain its growth momentum, according to a report by the World Bank.
In the October issue of its South Asia Development Update, the multilateral lender said the ongoing fragility of the financial sector has been exacerbated by both internal and external factors.
The report explained that a significant portion of bank loans are classified as non-performing, thereby limiting the availability of credit.
So, without a robust credit flow, private businesses are struggling to expand or improve their productivity due to financial constraints.
Investments in the manufacturing and service sectors remain particularly sluggish, threatening to slow economic growth.
In a separate report, called Bangladesh Development Update, the World Bank said nearly one in four loans in the country are now defaulted – the highest level in the country’s history.
Non-performing loans (NPLs) jumped to 24.1 percent by March, triple the South Asian average of 7.9 percent, exposing the depth of rot behind weak oversight.
Moreover, the capital-to-risk-weighted assets ratio has collapsed to 6.3 percent, far below the 10 percent regulatory minimum, while that of private Islamic banks and state-owned lenders have plunged to 2.7 percent and 2.9 percent, respectively.
Loan-loss provisioning has also shrunk dangerously, covering just a quarter of bad assets and leaving an estimated $14.2 billion shortfall.
“Recognition of hidden NPLs has wiped out profits, turning many banks technically insolvent,” the World Bank said in its report.
As confidence eroded, depositors pulled money from weaker institutions, forcing Bangladesh Bank to inject an extraordinary Tk 523.7 billion in emergency liquidity and issue Tk 111 billion in credit guarantees to keep interbank funding alive.
Private credit growth plunged to a 22-year low of 6.5 percent, signalling a system choked by fear and bad debt.
Under mounting scrutiny from development partners for these issues, the interim government and central bank, have begun a sweeping overhaul.
Backed by the World Bank, International Monetary Fund, and Asian Development Bank, the reforms include asset quality reviews, dissolution of the boards of 15 troubled banks, and a new Bank Resolution Ordinance, granting the central bank stronger powers to either restructure or shutter failing institutions.
As such, plans are underway to tighten governance at the central bank, strengthen its operational independence, and overhaul the deposit protection and emergency liquidity systems.
The World Bank warned that without swift and transparent implementation, the current crisis could deepen.
“Prevalence of unresolved capital shortfalls and governance failures risk paralyzing credit and investment, threatening Bangladesh’s already fragile recovery,” it said.
Another challenge is that both domestic and foreign investors are being deterred by the high cost of doing business, ongoing political uncertainty and administrative inefficiencies.
Besides, inflation is adding to the financial sector’s troubles as the government’s tight monetary stance is further limiting credit availability.
Against this backdrop, the World Bank said that banks must modernise their operations and adopt more robust risk management practices.
Also, the country’s policymakers must implement reforms that can improve the ease of doing business and attract investment, it added.
The World Bank also advised that fiscal consolidation and work towards improving the health of state-owned banks should be prioritised.
It said strengthening these institutions and implementing reforms to improve governance and reduce corruption are crucial for restoring investor confidence.
The multilateral lender added that the financial sector should look to embrace digitalisation and innovation. Citing progress in improving financial inclusion through mobile banking, the World Bank suggested expanding this digital revolution to other areas.
For example, embracing such initiatives in lending, insurance and payments could help reduce costs and expand access to credit, particularly for small-and-medium sized enterprises (SMEs).
Furthermore, fostering a more competitive financial market will drive innovation, improving services and customer satisfaction.
One of the more immediate opportunities for the country’s financial sector lies in the potential for regional integration and the growing trend of international trade.
As Bangladesh’s export sector continues to perform well, particularly in garments, banks can play a key role in facilitating trade finance, thereby supporting the country’s competitive position in global markets.
The World Bank also said enhanced trade finance capabilities, alongside partnerships with international financial institutions, could help unlock new avenues for financing and economic growth.
