Structural flaws to weigh down Bangladesh's banking sector, says S&P Global analyst

Highlights:

• Bangladesh banks face pressure until 2026 due to structural issues
• High credit risks, poor governance weaken sector stability and trust
• Liquidity stress, capital shortfalls threaten Islamic and state-owned banks
• Weak lending standards, foreclosure laws worsen asset quality problems
• Stricter loan norms increase bad loan recognition but boost transparency
• High rates, market-based lending may help bank earnings slightly recover

Bangladesh's banking sector is expected to remain under pressure through 2026 due to deep-rooted structural problems, ongoing asset quality deterioration, and fragile profitability, according to S&P Global Ratings.

"Bangladesh's banking industry continues to grapple with structural problems stemming from weak lending standards and foreclosure laws," said Shinoy Varghese, primary credit analyst at S&P Global Ratings.

According to a report by Asian Banking and Finance, the global ratings agency warned that liquidity stress, especially among certain Islamic lenders, and capital shortfalls across various banks will continue to undermine the industry's stability.

The analysis, published in S&P's 2025 midyear outlook, highlights persistent challenges including high credit risks, fragmented banking operations, and governance issues at several state-owned and Islamic banks.

Varghese said, "State-owned banks still hold substantial amounts of weak assets. Non-renewals of legacy credit lines, coupled with defaults on rescheduled loans, reveal the underlying vulnerability of borrowers' cash flows." 

S&P noted that recent regulatory steps, such as stricter classification norms for overdue loans, tougher renewal criteria, and clearer enforcement of willful defaulter definitions, have led to greater recognition of bad loans.

"This short-term pain will improve transparency in line with international norms, however," Varghese said.

Despite tighter lending conditions and rising defaults, higher interest rates and the transition to a market-based lending rate system could support bank earnings.

"Rates could stay high through 2026 and continue to dampen credit demand. But net interest margins (NIMs) will benefit from this as well as the commencement of the market-based lending rates regime," he said.