From five weak banks to one giant. Can size cure the sickness?
Across the world, bank mergers are not unusual. Sometimes they are undertaken to expand footprints and build global competitiveness; at other times, they serve as rescue missions
Highlight:
- Five troubled Islamic banks to merge into Bangladesh's largest lender
- Merger aims to prevent systemic collapse and depositor panic
- Default loans reach 77% of combined portfolios, showing severe rot
- Taxpayers face Tk20,000 crore bailout burden, raising moral hazard
- Governance, transparency, accountability seen as merger's critical success factors
- Without reforms, merger risks repeating failures on larger scale
If the proposed merger of five troubled Islamic banks goes through, Bangladesh will get its largest lender. As Anis A Khan, former chairman of the Association of Bankers, Bangladesh (ABB), points out, the new entity would hold assets worth nearly Tk2.2 lakh crore, surpassing state-owned Sonali Bank.
On paper, this promises scale and stability, a milestone for the sector.
Keep updated, follow The Business Standard's Google news channel
Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), says the merger's primary objective is simple: to prevent systemic collapse. Closing these banks abruptly could trigger panic among depositors, businesses, and employees – an outcome that regulators cannot risk.
But here lies the harder question: will the mega merger clean up the rot, or simply stitch together five failing banks into one oversized problem?
The central bank must ensure a strong regulatory and supervisory framework to uphold governance and management efficiency in the merged entity. It should explore alternative recapitalisation options before resorting to taxpayers' money.
Common strategy, diverging outcomes
Across the world, bank mergers are not unusual. Sometimes they are undertaken to expand footprints and build global competitiveness; at other times, they serve as rescue missions.
In India, for example, a sweeping wave of consolidation between 2017 and 2020 shrank the number of state-owned banks from 27 to 12. The State Bank of India had already merged five associate banks and Bharatiya Mahila Bank in 2017, catapulting it into the world's top 50 banks. Later, 10 public sector banks were restructured into four larger entities. The aim was clear: to strengthen balance sheets, achieve economies of scale, improve efficiency, tackle bad loans, and prepare for a digital future.
By contrast, the 2008 financial crisis in the United States brought a very different type of merger. When Bear Stearns collapsed, JPMorgan Chase stepped in with government support. Bank of America absorbed Merrill Lynch under similar emergency circumstances. Washington Mutual, the largest bank failure in US history, was taken over by JPMorgan Chase. These were not about growth but about survival – moves designed to prevent the entire financial system from imploding.
Bangladesh too has seen its share of acquisitions. Standard Chartered took over ANZ Grindlays Bank's Bangladesh operations in 2000. Bank Asia has grown by absorbing the Bangladesh operations of Nova Scotia and Pakistan's Muslim Commercial Bank, and this year signed an MoU to acquire Bank Alfalah's operations. These were largely strategic moves, not rescue missions.
The current proposal of merging five Shariah-based banks, however, is different in both scale and motivation.
The banks slated for merger – First Security Islami, Global Islami, Union Bank, Social Islami Bank, and Exim Bank – share a common thread: years of governance failures, insider lending, and political patronage. Four of these five banks were once controlled by the S Alam Group, whose grip over their boards and lending practices had been widely criticised.
The numbers illustrate the rot. Between September 2023 and May 2025, deposits at these banks fell from Tk1.58 lakh crore to Tk1.36 lakh crore. Loans, however, kept growing, reaching Tk1.95 lakh crore. Default loans ballooned to Tk1.47 lakh crore, an extraordinary 77% of their total loan portfolio. Union Bank's non-performing loan ratio stood at 98%, First Security's at 96%, Global Islami's at 95%, Social Islami's at 62%, and Exim's at 48%.
To survive, these banks repeatedly tapped Bangladesh Bank's special liquidity windows, essentially living on regulatory oxygen. The merger is thus not a story of strength but of desperation.
Taxpayers' money will be used to manage the mess created by corrupt and politically linked loan defaults. That's why the government must maintain strict accountability for the performance of these banks.
Price tag of survival
According to Bangladesh Bank's draft outline, the merger will cost Tk35,000 crore. Of this, Tk20,000 crore will come directly from government coffers, meaning taxpayers' money. Another Tk10,000 crore will be drawn from the deposit insurance fund – requiring legal amendments to allow its use as a loan. The remainder, around Tk5,000 crore, is expected from multilateral development partners such as the IMF, World Bank, and ADB, as part of broader financial sector support. These funds too, however, will ultimately be debt repaid by taxpayers.
The government insists that small savers will be protected, with early payouts to safeguard confidence. Institutional deposits, such as those of corporates and agencies, will be converted into shares in the new bank. Jobs will be preserved, except those linked to fraud, with excess staff absorbed through rural branch expansion.
Governance reforms are promised: the existing boards will be dissolved, shares cancelled, a new licence issued, and an experienced managing director appointed under Bangladesh Bank stewardship. The plan envisions running the bank under central bank supervision for three to five years before eventually selling it, possibly to a multinational buyer.
Opportunity cost
But the recapitalisation comes with a heavy fiscal trade-off. As Fahmida Khatun of CPD points out, Bangladesh's tax-to-GDP ratio is only 7.4%, among the lowest in the world. With such limited revenue, every taka counts. Allocating Tk20,000 crore to bail out failed banks inevitably means less money for health, education, social protection, and climate adaptation.
"Of course, there is a moral hazard," Fahmida told TBS. "Taxpayers' money will be used to manage the mess created by corrupt and politically connected loan defaults. That is why the government must maintain strict accountability for the performance of these banks."
Without accountability, she warns, recapitalisation risks rewarding corruption and perpetuating mismanagement.
Public funds, especially in the current fiscal climate, must be deployed with utmost accountability. The injection of Tk20,000 crore in taxpayer money raises legitimate concerns about moral hazard and governance integrity.
Difficult choice
M Masrur Reaz, chairman of Policy Exchange Bangladesh, calls the merger a "difficult choice." On one side is the imperative to protect depositors' funds and avoid a confidence crisis. On the other lies the danger of creating a larger but still fragile institution burdened by weak governance and doubtful commercial viability.
"Bangladesh Bank must ensure a strong regulatory and supervisory framework to uphold governance and management efficiency in the merged entity," he said. "It should also explore alternative recapitalisation options, such as issuing bonds before resorting to taxpayers' money."
For him, the path forward must balance depositor protection with fiscal prudence.
Governance question
For Anis A Khan, former ABB chairman and now managing partner of AAZ & Partners, the merger reflects bold regulatory intervention, but its success will depend on governance and transparency.
"Public funds, especially in the current fiscal climate, must be deployed with utmost accountability," he said. "The injection of Tk20,000 crore in taxpayer money raises legitimate concerns about moral hazard and governance integrity."
Without strong, independent leadership and credible regulatory oversight, Fahmida cautioned, the merger could end up repeating past cycles of recapitalisation without reform.
Why merger became inevitable
Behind the government's urgency lies the stark reality of deposit flight. Public confidence in the five banks has been eroding, with deposits shrinking even as loans mounted. A sudden closure would risk contagion across the banking sector, triggering panic withdrawals and destabilising the financial system.
By merging them into a single entity, regulators hope to ring-fence the problem, reassure depositors, and buy time to restore order. In theory, a larger institution with cleaned-up balance sheets could achieve scale, efficiency, and eventually stability.
But the risks are high. If governance is not fundamentally improved – if boards remain politicised, if regulatory oversight remains compromised – the merged bank could simply be a larger vessel for the same old problems.
Reform or repeat?
At its core, the debate over the merger is not about numbers but about governance. Bangladesh's banking sector has long been plagued by political interference, crony lending, and regulatory capture. Unless these systemic issues are addressed, recapitalisation will only recycle failure at greater cost.
Analysts say the merger offers an opportunity to break the cycle – by enforcing professional management, ensuring genuine board independence, and insulating regulators from political pressure. It could, if managed properly, become the starting point for broader financial sector reform.
But it could also go the other way. By pouring scarce public resources into failed institutions without demanding accountability, the government risks setting a precedent that looters will always be rescued, no matter the cost.
Road ahead
Bangladesh is on the verge of creating its largest bank. Whether this becomes a stabilising anchor for the financial system or a bloated symbol of impunity will depend less on balance sheets and more on governance, transparency, and accountability.
As the merger process unfolds, the critical questions remain: Will depositors truly be protected in the long run? Will taxpayers see value for money in the bailout? Will regulators finally assert independence from political interference? And will the merger pave the way for genuine reform – or simply buy time for the next crisis?
The answers will determine not just the fate of five troubled banks, but the credibility of Bangladesh's entire financial system.
