The resolution scheme prepared by Bangladesh Bank after the collapse of normal operations in five Islamic banks has reopened a deeper debate about the structure of the banking system itself. The merger of EXIM Bank, First Security Islami Bank, Global Islami Bank, Social Islami Bank and Union Bank into Sammilito Islami Bank is being presented as a stability measure under the Bank Resolution Ordinance, 2025. For depositors, however, the scheme offers little reassurance. Access to funds will be phased over months and years, fixed deposits are locked through forced renewals and institutional depositors are required to accept equity in place of liquidity.
This outcome raises a fundamental question. If depositors ultimately bear the cost of systemic failure, what was the role of regulators, and how should banking be restructured to avoid repeating this experience?
The contradiction at the core of banking has once again been exposed. Banks accept deposits under an implicit promise of safety backed by regulation. Depositors have no visibility into governance failures, related-party lending or concealed default risks. They rely on regulators to enforce discipline and intervene early. When banks collapse after years of “long-standing irregularities”, it reflects not only institutional weakness but regulatory failure, including delayed intervention, failure to protect depositors and absence of accountability despite visible warning signs.
Bangladesh’s legal framework does not provide an unconditional sovereign guarantee beyond the deposit insurance limit. This is fiscally understandable. For depositors, however, the distinction between explicit and implicit guarantees is irrelevant. When deposits are frozen, rationed or converted into shares, confidence collapses. Once confidence erodes, the problem becomes systemic rather than confined to a few institutions.
Against this backdrop, the question is no longer whether the system can be patched again, but whether its basic assumptions need rethinking.
One option is the gradual migration of household savings away from banks into secured instruments. Greater use of government securities such as treasury bills, bonds and savings certificates, along with diversified capital market instruments, would reduce direct household exposure to bank failure. Banks would shift from being custodians of public savings to intermediaries managing credit and liquidity using funds raised through explicit channels.
Such a transition could improve transparency. Government instruments carry sovereign risk that is openly acknowledged and priced. Capital market instruments carry market risk that investors consciously accept. Bank deposits, by contrast, are treated as risk-free even when they are not. Reducing this mismatch between perception and reality could create a more resilient system.
The costs, however, are significant. A decline in bank deposits would raise lending costs. Attractive risk-free government returns could crowd out private credit unless carefully managed. Financial inclusion concerns also arise, as many depositors lack the literacy or access required to navigate capital markets. A poorly sequenced shift could destabilise banks and borrowers alike.
A second approach would involve banks relying more directly on borrowing from the Government for lending. In this model, banks would operate less as deposit-takers and more as credit agents, channelling Government or central bank funds into the economy. Liquidity risk would be socialised, while credit risk management would remain within banks.
There is historical precedent for such arrangements, particularly in post-crisis or state-led development contexts. If designed transparently, this model could ensure continued lending to priority sectors during periods of low public confidence. It would also make the fiscal cost of banking support explicit rather than embedding it in forced deposit rollovers or equity conversions.
Yet the governance risks are serious. Guaranteed public funding weakens incentives for prudent risk management. Political influence over credit allocation could intensify, leading to misallocation and moral hazard. Without strong institutional safeguards, this model risks replacing private misgovernance with public inefficiency.
The most transformative proposal is the introduction of a central bank digital currency as the foundation of a safer financial system. Under this framework, individuals and businesses could hold digital deposits directly with the central bank, eliminating credit risk on transaction balances. Banks would then focus on lending, investment and financial services rather than safekeeping deposits.
This separation addresses the core contradiction revealed by the current resolution. Deposits are treated as money but are legally unsecured claims on fragile institutions. A CBDC would allow risk-free digital money holdings, while banks would raise funds through clearly defined investment products rather than demand deposits.
For Bangladesh, a carefully designed CBDC could improve transparency, reduce cash reliance, enhance payment efficiency and strengthen monetary policy transmission. It could also give regulators real-time visibility into liquidity conditions, reducing the likelihood of sudden failures.
The transition risks are substantial. Large-scale movement of deposits to the central bank could create funding shocks unless alternative mechanisms are in place. Design choices, including whether the CBDC is interest-bearing, capped or unlimited, would be critical. Operational resilience, cyber security and data privacy risks also require serious consideration.
These alternatives point to a common conclusion. The traditional banking model, where deposits are treated as sacrosanct while governance failures accumulate until collapse, has reached its limits. The Sammilito Islami Bank resolution shows that delayed intervention shifts the cost of failure onto depositors even without formal haircuts.
Reform does not mean eliminating banks but redefining their role. Deposit-taking cannot remain an unconditional privilege. Either deposits must be genuinely protected through strong supervision, early resolution and credible insurance, or their role in household savings must be reduced in favour of safer and more transparent instruments.
Regulators must also reassess their mandate. Resolution schemes are emergency tools, not substitutes for supervision. When banks accumulate unsustainable defaults over years, the issue is not only how to resolve them, but why corrective action was delayed. Accountability must be integral to reform.
Public confidence remains the financial system’s most valuable asset. Once lost, it cannot be restored through circulars or phased withdrawals. Whether through safer savings instruments, redesigned funding models or a CBDC, reform must uphold one principle: depositors should never again depend on regulatory improvisation to access their own money.
The current crisis should be seen not merely as a banking failure but as an opportunity to rethink fundamentals. Preserving the status quo may ultimately prove far more costly than pursuing bold and carefully planned reform.
The writer works at a trade finance company.
