Financial-sector reform in 2025: Cleanup, guardrails and the old temptations
The deeper story of 2025 is not technocratic triumph or failure, but managed transition
Bangladesh's financial system entered 2025 with fewer places left to hide. Years of weak loan discipline, repeated rescheduling, and regulatory forbearance had accumulated into visible stress across banks, especially those with governance and connected-lending problems. What followed was not a dramatic break, but a coordinated attempt to clean up balance sheets, install guardrails, and manage adjustment without panic.
The reform story of 2025 is therefore not about a single law or intervention. It is about sequencing: diagnose first, build tools for failure, protect depositors, tighten prudential rules – and only then confront the harder political questions about discretion, accountability, and central-bank power.
Uncovering the reality
Keep updated, follow The Business Standard's Google news channel
Bangladesh Bank announced in 2024-25 that it would conduct independent Asset Quality Reviews of 17 banks – prioritising weak and Islamic banks – to establish a credible baseline of losses, capitalisation needs, and governance failures. AQRs would be conducted using best practice methodologies and external expertise.
A first group of six private banks AQRs was completed by mid-2025, with the remainder scheduled by year-end. The AQR results were shared with bank boards, confirming substantial under-recognition of non-performing assets and capital shortfalls. A second phase covering three additional banks was initiated, but the broader program stalled – effectively leaving the system with partial diagnosis and no system-wide reckoning.
AQRs are resource-intensive for both supervisors and banks. Conducting AQRs for all 17 banks in parallel would have strained BB's supervisory capacity and the availability of qualified external audit firms. The AQR program has crossed a point of no return – but not a point of no delay. Bangladesh has demonstrated that it can run credible diagnostics and act on some of them. Whether it completes the journey depends less on technical capacity than on political willingness to absorb the consequences of what the remaining AQRs are likely to show.
Resolving zombies and maintaining confidence
Bangladesh had long avoided: what happens when banks are not viable?
The Bank Resolution Ordinance filled a long-standing legal gap. It provided formal tools to intervene in failing banks through bridge institutions, purchase-and-assumption transactions, asset separation, bail-ins, bail-outs and – if necessary – temporary public ownership. A dedicated restructuring and resolution unit was set up to operationalise these powers.
This was about ending the default option of indefinite support. For the first time, the system was being designed to absorb bank failure without improvisation.
Resolution tools are politically fragile without depositor confidence. That constraint was addressed through the Deposit Protection Ordinance.
The reform doubled deposit coverage to Tk2,00,000 per depositor and cut payout timelines from months to just over two weeks. Separate protection funds were established for banks and finance companies, with clearer premium rules and membership obligations.
First results on the ground
The most visible application of this new framework was the consolidation of five troubled Islamic banks into a single institution under closer supervision. Rather than allowing multiple weak entities to drift independently – or triggering abrupt closures – authorities opted for aggregation. It is not a textbook resolution, but it marked a break from open-ended forbearance and signaled that Islamic banks would not be exempt from prudential discipline.
The consolidation was operationalised through a BB circular issued on December 30, which set out the legal and supervisory basis for transferring the operations of the five banks into the newly created Sommilito Islami Bank. The circular clarified the continuity of deposits and contracts, placed the new institution under enhanced regulatory oversight, and provided for liquidity support to ensure uninterrupted banking services.
From January 1, small individual depositors were able to access their funds through the new entity. Early results suggest the immediate objective was achieved: depositor panic was contained, payment services continued, and the authorities have gained time to address governance and capital issues within a single supervised platform.
Regulatory progress and regress
Alongside legal reform came quieter changes that matter just as much. Updated definitions of non-performing loans and forbearance reduced the scope for repeated cosmetic rescheduling. Cure-period requirements were tightened, and the transition path toward IFRS 9 – expected-credit-loss provisioning by 2027 – was reaffirmed. Once losses must be recognised earlier and provisioning becomes unavoidable, banks are forced toward recapitalisation, restructuring, or exit.
Rescheduling policy, however, moved in the opposite direction. While tighter classification rules constrained cosmetic rollovers, BB simultaneously revised rescheduling frameworks – especially for large loans. The rescheduling framework itself offered structured relief rather than blanket forbearance. It allows extended repayment tenors, grace periods on principal, and phased instalment schedules for stressed but operating borrowers, subject to documentation of cash flows and viability.
In effect, the framework created a formal channel to stretch repayment timelines while keeping loans within the banking system, delaying classification or resolution but avoiding abrupt defaults. Routing large loan rescheduling through a BB constituted committee reduced unilateral evergreening by weak banks, but it also created focal points for lobbying and rent-seeking. Credit outcomes shifted from bank–customer relationships to regulatory mediation, weakening the link between lending decisions and consequences. Discipline advanced – but cautiously, and unevenly.
The unfinished agenda
Reform intensity outside banking was more measured. The Bangladesh Securities and Exchange Commission focused on surveillance, disclosure, and market infrastructure rather than sweeping legislative change. Insurance reform under the Insurance Development and Regulatory Authority continued incrementally. Bankrupt non-bank financial institutions were dealt with through tighter supervision and restrictions on activity, aimed at containing risk rather than rapid turnaround.
Proposals to amend the Bangladesh Bank Order – aimed at strengthening independence, clarifying accountability, and aligning governance with international norms – remain unresolved. The bureaucracy has effectively played a kick-the-can game by protracting hard decisions about BB autonomy and oversight. At the same time, BB has continued to roll out risk-based supervision frameworks, sharpening off-site monitoring and prioritising supervisory attention toward weaker institutions, even as the legal foundations for its independence remain unsettled.
The uneven pace of reform reflects political triage: banking, as the core source of systemic risk and fiscal exposure, drew the heaviest attention. The deeper story of 2025 is not technocratic triumph or failure, but managed transition. Losses were surfaced, tools were built, and authority was reorganised – while discretion was carefully preserved. Whether this moment becomes a bridge to durable discipline, or hardens into a new equilibrium of managed delay, will turn on one unresolved question: whether reform of BB itself is finally confronted, rather than endlessly postponed.
Zahid Hussain is former lead economist at World Bank Dhaka office
