Bangladesh’s banking sector is undergoing a transformation that is often described as a crisis. Yet the market is increasingly treating it as something else—a sorting mechanism.
For years, weak governance, poor asset quality and aggressive balance-sheet expansion could coexist with deposit growth and market share gains.
That equation is changing. Depositors, borrowers and investors are becoming more selective, and the winners are increasingly the institutions known for strong governance, prudent capital management and low non-performing loan (NPL) ratios.
The consequences are becoming visible across the financial system. Deposit flows are shifting, banking services are concentrating among a smaller group of institutions, lending power is becoming more selective, and investors are rewarding quality with higher valuations and stronger returns.
The flight to quality taking shape in Bangladesh’s banking industry appears less like a cyclical reaction and more like a structural realignment.
The clearest evidence can be found in deposits. Historically, weaker banks often compensated for concerns over asset quality by offering higher deposit rates.
That strategy allowed them to compete for liquidity even when underlying fundamentals were less convincing. Recent liquidity pressures have exposed the limits of that model.
As a result, both retail savers and corporate treasurers are increasingly directing funds towards institutions perceived as safer and better governed.
Several of these banks are reporting deposit growth in the high teens, well ahead of industry averages. The shift is gradual but significant because deposits remain the foundation of a bank’s ability to lend, invest and grow.
What is happening with deposits is also reshaping the competitive landscape for banking services. Liquidity and capital are prerequisites for almost every banking product.
Institutions facing funding constraints inevitably struggle to compete across a broad range of services. Stronger banks, by contrast, are increasingly winning payroll mandates, salary accounts and retail banking relationships that bring stable, low-cost deposits.
The trend extends to consumer lending, cards, cash management, treasury operations, foreign exchange services and remittance products.
Trade finance provides another example. Importers and exporters rely on institutions that enjoy the confidence of correspondent banks abroad, giving stronger banks a clear advantage in attracting and retaining clients.
This creates a reinforcing cycle. Better-governed banks attract more deposits, offer more services, generate higher fee income and invest more heavily in technology and talent. Each advantage strengthens the next.
Credit allocation is beginning to follow the same pattern.
Banks operating below regulatory capital requirements have limited capacity to expand their loan portfolios. As a result, future lending growth is likely to become concentrated among the group of institutions with stronger balance sheets and governance standards.
That concentration may also encourage greater discipline among borrowers, who are likely to face higher expectations around transparency, governance and financial reporting.
Investors appear to have recognised these trends before many others.
Among listed banks, BRAC Bank generated a stock return of about 44.9 per cent in 2025, supported by earnings growth of 47.6 per cent. City Bank returned 22.5 per cent, Prime Bank 25.7 per cent, Eastern Bank PLC returned 15.6 per cent, and Pubali Bank 12.5 per cent.
These institutions differ in size and business models, but they share certain characteristics: relatively low NPL ratios, capital adequacy levels above regulatory requirements and a reputation for stronger governance.
Their performance becomes more striking when compared with alternative investment options. Fixed deposit rates were above 9 per cent during much of 2025, government treasury yields ranged between 10 and 12 per cent, while the DSEX index delivered a negative return of 6.7 per cent.
Investors who allocated capital to quality banking stocks at the beginning of the year were rewarded accordingly. The significance of this shift extends beyond short-term market performance.
As the market share shifts, stronger banks is likely to operate in a less crowded environment. They are attracting deposits, expanding fee-generating services and serving a borrower base that is gradually being pushed towards better compliance and governance practices.
Those conditions create a foundation for sustained earnings growth rather than a temporary boost.
Policy direction appears to be reinforcing the same trend. The FY2026-27 budget allocated Tk36,700 crore for bank restructuring and emphasised a risk-based supervisory framework.
That lesson may ultimately reach beyond banking. Markets tend to reward what they value. If governance is becoming a key differentiator in banking, there is little reason to believe the same principle will not apply to other listed companies as well.
Firms that invest in transparency, accountability and investor relations may increasingly find those qualities reflected in both valuations and access to capital.
Customers, investors, regulators and employees are becoming more discerning.
They are learning to distinguish between institutions that deserve a premium and those that do not.
The banks demonstrated it first. The lesson is exportable.
The author is the Head of Investment Strategy and Organisational Risk Management at BRAC EPL Stock Brokerage Limited.
