Bank Company Act: BB moves to cap family directors at 2, cut directors' tenure to 6 years

Infographics: TBS

The Bangladesh Bank is proposing a comprehensive overhaul of the country's banking laws, targeting long-standing governance failures caused by family dominance, political influence, and lax loan regulations. 

The proposed changes, part of a final draft amendment to the Bank Company Act, aim to strengthen corporate governance and restore stability to a sector crippled by rampant loan scams and rising non-performing loans over the past two decades.

The central bank's most significant proposals focus on limiting the power of influential individuals and families. 

The Bangladesh Bank (BB) proposes limiting the number of directors from a single family and their affiliates on bank boards from five to two, and cutting a director's continuous term from 12 years to six, in a move to curb family influence in bank management.

Such dominance by certain board members has crippled the country's banking sector over the past 15–20 years, particularly during the Sheikh Hasina regime, leading to rampant loan scams, rising non-performing loans, and loss of public funds and trust. 

Conglomerates such as S Alam gained control of multiple banks and withdrew thousands of crores of taka, much of which was, ultimately, allegedly laundered out of the country.

The central bank, in the final draft amendment of the Bank Company Act, also proposes to bar political figures from boards, ease foreign investors' shareholding limits, restrict one person from holding large stakes in multiple banks, and treat general and wilful defaulters equally.

With these changes, the central bank aims to strengthen corporate governance, enhance transparency and accountability in board appointments and shareholding, and safeguard the stability of the banking sector.

TBS spoke with several bankers and economists, who all agreed on the necessity of these changes, particularly those limiting family and political influence in banks.

Rumee Ali, former deputy governor of BB, said while these are certainly welcome changes, the regulator will need to be more diligent in ensuring effective implementation.

Zahid Hussain, former lead economist at the World Bank's Dhaka office, said, "Dynastic control of bank boards has been a key factor in the bankruptcy of many banks. Reducing directors from 5 to 2 should help contain owner dominance in board decisions."

The Bank Company Act was last amended in 2023, allowing up to three members from the same family and two from their affiliates to serve on a bank's board.

During Sheikh Hasina's 16-year tenure, her government amended the Bank Company Act three times, each amendment further weakening the banking sector.

Originally, the 2003 amendment removed the six-year cap on directors' tenure. In 2013, following an IMF recommendation, the cap was reinstated, allowing incumbent directors to stay for another six years. In 2018, the tenure was extended to nine years, and in 2023, it was further stretched to 12 years.

Each amendment also reset the tenure count from the date of its implementation, enabling some directors to remain on boards for up to 30 years by taking advantage of these resets.

Political figures barred from bank boards

The proposed draft amendment prohibits political figures—particularly government ministers, members of parliament, and mayors of city corporations—from serving as bank directors.

It also reduces the maximum number of directors in a bank company from 20 to 15 and requires that at least 50% of board members be independent directors, appointed from a panel prepared by the Bangladesh Bank.

Additionally, the draft limits shareholder voting power: any individual or entity holding more than 5% of a bank company's shares — directly or indirectly — cannot exercise voting rights exceeding 5% of the total votes.

Max shareholding cap to be relaxed for foreign investors

The draft proposes easing the maximum shareholding limit in banks to attract strategic foreign investors.

Currently, an individual can hold up to 5% of a bank's shares, or up to 10% when combined with family members. The Bangladesh Bank has been seeking strategic foreign investors for several banks. For example, it plans to merge five Islamic banks and sell stakes to foreign investors.

Speaking to TBS, the Bangladesh Bank governor said foreign investors could acquire up to 100% ownership of a bank if they wish.

Reforming shareholding and ownership

To close loopholes that have allowed business conglomerates to control multiple banks, shareholding rules have been proposed to be tightened.

The new draft amendment seeks to restrict the same person from holding significant shares in multiple banks.

Under the existing Bank Company Act (Section 23), no person serving as a director of one banking company may simultaneously be a director of another bank, financial institution, insurance company, or their subsidiaries. It also prohibits any individual from serving as a representative director on a bank board on behalf of another shareholder.

However, influential business groups have bypassed this law by using company names to hold directorships in multiple private banks. For example, the S Alam Group effectively controlled eight banks through direct and indirect ownership, leading to large-scale corruption and the collapse of those banks. The country's largest private commercial bank, Islami Bank, also fell under S Alam Group's indirect control and later became a troubled bank due to corruption.

Following the regime change on 5 August last year, the Bangladesh Bank seized all direct and indirect shares held by S Alam Group in banks and non-bank financial institutions. The central bank is now working to prove in court that the group is the ultimate beneficiary of those indirect holdings.

To enhance oversight and transparency, the central bank issued the "Identification of Ultimate Beneficial Owners (UBOs) and Disclosure of Ownership Structure of Banks" circular on 1 December 2024. However, implementation has stalled, and some businesspeople continue to hold directorships in multiple banks via their companies.

The new draft amendment reiterates the need to close this loophole and end the practice of a single person controlling significant stakes in multiple banks.

Wilful defaulter provision to be scrapped

The draft proposes removing the distinction between general and wilful defaulters, ensuring both are treated equally. It also cancels the special privilege that allowed general defaulters to access group loans.

In the 2023 amendment, under then–finance minister AHM Mustafa Kamal, the term "wilful defaulter" was introduced, allowing borrowers deemed not to have defaulted wilfully to receive further loan facilities — sparking widespread criticism in the banking sector.

According to the 2023 definition, a borrower is considered a wilful defaulter if, despite having the financial ability, they fail to repay a loan; if they obtain loans by providing false information about themselves or their family members; or if they misuse loan funds for purposes other than those stated in the application.

Previously, under Section 27 of the Bank Company Act 1991, if a group company defaulted due to reasonable causes, other companies in the group were not classified as defaulters and could receive new loans with Bangladesh Bank approval. 

The 2023 amendment went further, allowing any sister concern, individual, or company within a group to avoid wilful defaulter status if the central bank authenticated their claims of having valid reasons for default. These entities could then access fresh loans, subject to Bangladesh Bank's instructions.

Following the passage of the 2023 amendment, the Bangladesh Bank issued a 2024 circular permitting banks to extend loans to companies within defaulting groups until they were officially classified as wilful defaulters.

The new draft amendment seeks to remove this provision entirely.

Zahid Hussain said removing the distinction between wilful and non-wilful defaulters will reduce arbitrariness in NPL recognition and improve banks' balance sheet accuracy, leaving banks to decide how to handle wilful versus non-wilful cases.

Rumee Ali said, "I also agree with the move of abolishing the delineation of 'wilful' and 'non-wilful' defaulters into categories. The subjective elements made this practice a fertile ground for abuse."

BB to appoint directors in state-owned banks

Under the draft amendment, state-owned banks will follow the same rules on capital requirements and director appointments as private sector banks, aiming to improve governance in state-owned and specialised banks.

Currently, directors in state banks are appointed by the government, often including bureaucrats and political figures — contributing to poor bank health. 

All state-owned banks are facing capital shortfalls due to high default loans linked to corruption, losses ultimately covered by taxpayers' money. Government interference has also limited the Bangladesh Bank's ability to ensure proper governance at the board level.

Experts take on the proposed changes

Rumee Ali said, "These amendments are better suited to the state of governance in our institutional architecture, which is far from aligning with international standards."

Mamun Rashid, chairman of Financial Excellence Ltd and former country head, PwC and CEO of Citibank NA Bangladesh, said across the world, including our South Asia neighbours India and Sri Lanka, banks are predominantly managed by a management committee and strategic directions come from independent directors. Board Audit Committee, NRC and Risk Committees are, in fact, headed by independent directors. Promoter directors should focus more on dividends and the goodwill of the bank.

"Therefore, I support capping the tenure and number of promoter directors and inviting more subject-matter expert independent directors," he added.

Mohammed Nurul Amin, chairman of Global Islamic Bank, said, "Good initiative, but BB should consult all genuine stakeholders before finalising everything so that a good gesture doesn't face challenges or need amendments soon after."

Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD), said, "I see these measures as necessary to restore good governance in the banking sector."

He said previously, long-tenured family dominance often led to board capture, unethical influence, looting of depositors' money, and high loan defaults. This is a positive first step.

However, these changes will yield results only if Bangladesh Bank also ensures its independence and enforces accountability, transparency, and good governance throughout the banking sector, free from political and bureaucratic interference, Mustafizur added.

Sharif Zahir, chairman of United Commercial Bank, said capping directors from a single family at two is the right move to reduce concentration risks and curb family dominance on boards. 

He, however, prefers keeping overall tenure up to 12 years with staggered terms and performance reviews, rather than cutting it to six, as longer tenures help execute multi-year recovery and governance programmes.

Regarding defaulters, he supports strong measures against those who loot depositors' money but warns that removing the "wilful" distinction entirely could penalise viable borrowers.

"There's no single 'right' number. What matters is intention, execution, and enforcement. Keep the family cap at two; keep total tenure at up to 12 years with rigorous evaluations; strengthen fit-and-proper and risk governance; and impose uncompromising penalties on perpetrators who embezzle depositors' funds — while maintaining a fair, rules-based path for restructuring viable businesses. That is how boards can both protect depositors and maximise long-term shareholder value under sustainable, transparent practices," Sharif Zahir added.

Mehmood Husain, chairman of IFIC Bank, said, "I think the proposed amendments were much needed for establishing good governance, bringing in credit discipline, and enhancing safe custody of depositors' money."

Also, it is a good move to remove the provision for a wilful defaulter. Because a defaulter is a defaulter," Mehmood added.