Going through exceptional stress, Bangladesh’s banking sector is entering 2026 with early signs of stabilisation, even though risks remain elevated, said Midland Bank PLC Managing Director and CEO Md Ahsan-uz Zaman.
Tighter regulatory enforcement exposed long-hidden weaknesses, and a sharp deterioration in asset quality was the most significant challenges faced by the banking sector, he told TIMES of Bangladesh in an interview.
“Rising non-performing loans reflects years of weak credit discipline, governance shortcomings and relaxed loan classification that delayed proper recognition of risk,” he said.
While state-owned banks were most severely affected, “private banks were also required to increase provisioning, strengthen recovery efforts and reassess portfolio risks.”
Liquidity pressure was another major concern in 2025, with shortages of foreign currency disrupting trade financing and affecting overall market confidence.
The pressures were further aggravated by governance unfolding lapses and several high-profile loan irregularities, which weakened public trust in the banking system.
Although inflation began to moderate, its cumulative impact continued to strain borrowers’ repayment capacity, especially in interest-sensitive sectors.
Delays in external financing support and gaps in timely regulatory intervention also slowed the pace of sectoral recovery, leaving lending capacity constrained and profitability under sustained pressure.
Early signs of stabilisation
Regulatory reforms such as asset quality reviews, bank consolidation initiatives and the introduction of a bank resolution framework are helping contain further deterioration, Zaman said.
Macroeconomic conditions are showing gradual improvement, supported by easing inflation, steady remittance inflows and resilient export performance.
At the same time, Bangladesh Bank’s reform roadmap, with its focus on stronger supervision, recapitalisation and non-performing loan reduction, has begun to restore confidence.
As the banking sector moves toward 2026, “the operating environment will continue to be shaped by legacy balance-sheet pressures alongside evolving regulatory and technological expectations.”
Risks remain elevated
Among the most critical risks facing banks remains asset quality, with elevated non-performing loans, prolonged rescheduling practices and sectoral concentration constraining profitability and capital formation.
Addressing this challenge requires a “disciplined shift toward stronger credit governance, realistic risk pricing and proactive recovery strategies, with lending decisions anchored in credit quality and long-term viability.”
Capital adequacy and liquidity resilience will remain equally important under a more stringent supervisory regime and volatile funding conditions.
Banks must focus on strengthening internal capital generation, diversifying funding sources and maintaining adequate liquidity buffers to withstand stress scenarios.
At Midland Bank, balance-sheet resilience and prudent growth continue to guide its strategic priorities, said the banker with long experience in the US market.
He also said regulatory transformations will further define the sector’s trajectory.
“Bangladesh Bank’s move toward risk-based supervision signals a decisive shift toward governance quality, risk culture and forward-looking oversight.”
This will require banks to embed risk management across business lines and strengthen board oversight, internal controls and accountability.
Digitalisation presents both opportunity and risk, he said, adding that while technology enhances efficiency and customer experience, it also heightens exposure to cyberthreats and operational disruptions.
“Cybersecurity, data protection and operational resilience must therefore be treated as strategic imperatives.”
In parallel, macroeconomic uncertainty, external sector pressures and climate-related risks will influence credit performance and portfolio sustainability significantly.
Rates and credit outlook
On interest rates, Zaman expects the environment in 2026 to remain relatively stable, though at a moderately elevated level compared to the pre-2022 period.
“After a prolonged phase of inflationary pressure and tight monetary conditions, recent policy actions suggest a gradual move toward balance rather than aggressive tightening.”
Inflation has started to ease and liquidity conditions are slowly improving, but Bangladesh Bank is “likely to maintain a cautious stance to protect financial stability and contain renewed price pressures.”
Lending rates are therefore expected to remain range-bound, with limited scope for sharp reductions.
Interest rates will continue to reflect funding costs, credit risk and regulatory requirements rather than competition alone.
In Islamic banking and Shariah-based products, profit rates are expected to remain aligned with market realities, offering structured flexibility within approved ranges to balance depositor returns, borrower affordability and overall asset quality.
His outlook for private-sector credit growth in 2026 is cautiously optimistic.
After a subdued period, credit demand is expected to recover gradually, led by export-oriented industries, small and medium enterprises, agriculture and selective consumer segments.
However, banks are likely to remain risk-conscious, and credit expansion is expected to be more selective and quality-driven rather than broad-based.
“Overall, 2026 is unlikely to be a year of rapid credit acceleration or sharp rate cuts. Instead, it is expected to be a year of consolidation.”
Reforms and weak banks
On reforms, Zaman said the recent course of banking and economic reforms reflects meaningful progress, yet deeper structural issues persist.
The introduction of risk-based supervision, reforms to loan classification and provisioning standards, the transition to expected credit loss methodologies by 2027, tighter governance guidelines restricting related-party lending, the Bank Resolution Ordinance, amendments to key financial statutes and expanded deposit insurance mechanisms together provide tools to address long-standing weaknesses.
However, entrenched governance weaknesses, chronic capital shortfalls and elevated non-performing loans continue to undermine confidence and constrain credit intermediation.
The central bank itself has acknowledged that actual non-performing loan ratios remain high and that full transparency reveals the magnitude of unresolved credit stress.
Addressing weak banks burdened with very high non-performing loans remains one of the most consequential priorities for financial stability.
Persistently elevated non-performing loans are symptomatic not merely of cyclical stress, but of underlying governance weaknesses, deficient risk culture and historical credit misallocation.
Resolution strategies must therefore prioritise transparent asset quality assessment, decisive loss recognition and robust governance overhaul.
“Banks that are fundamentally solvent but saddled with problem assets should be supported to restructure under stringent conditions, while those with deeply impaired capital and chronic governance failures may require resolution mechanisms.”
An important example is the consolidation of five troubled Shariah-based banks into a single merged entity, now emerging as Sammilito Islami Bank.
The merger offers opportunities to achieve scale, improve efficiency and strengthen Islamic finance offerings, but significant risks remain.
“The legacy of toxic assets creates immediate capital adequacy challenges,” he said.
“In my assessment, the merger’s outlook is cautiously constructive—a necessary stabilisation step but not an end in itself,” Zaman said.
Continuous central bank oversight, transparent asset resolution plans and strict enforcement of accountability will be vital to ensure that the merged institution contributes to confidence in the banking system rather than perpetuating unresolved risks.
