Who pays the price? Bangladesh's banking sector at a crossroads in 2026

As Bangladesh steps into 2026, its banking sector finds itself at a critical inflection point. With loan defaults reportedly nearing 35% as of September 2025, concerns over financial stability are intensifying. The ripple effects are being felt across the economy—constraining credit, dampening investor sentiment, and slowing growth.

Mounting Pressure on the Financial System

The surge in non-performing loans (NPLs) has weakened bank balance sheets. The liquidity situation, already fragile, would have been more acute had there been stronger credit demand. This environment has discouraged private investment—long considered a key engine of employment and economic momentum. Governance shortcomings and lapses in risk management have further compounded the sector's vulnerabilities.

Fiscal Strains and the Risk of Crowding Out

To meet its fiscal obligations, including a rising debt servicing load, the government has leaned heavily on domestic borrowing. While this has helped plug budgetary gaps, it raises the risk of crowding out private sector credit, especially in a liquidity-constrained environment. Should private investment rebound in 2026, as many hope, competition for funds could intensify—unless public borrowing is carefully calibrated.

Fiscal space remains tight. Official figures indicate that around 20.5% of the national budget is allocated to debt servicing, though some analysts suggest the true burden may be higher when off-budget liabilities are considered. With a tax-to-GDP ratio of just 7%, one of the lowest in the region, boosting revenue mobilization is an urgent priority.

Reform Through Consolidation—But at What Cost?

In response to mounting stress, the central bank has initiated mergers among struggling banks, particularly within the Shariah-compliant segment. While consolidation can enhance operational efficiency and resilience, its success hinges on transparency, due diligence, and accountability. Without these, structural weaknesses may simply be repackaged rather than resolved.

Public perception will be pivotal. If these mergers are viewed as bailouts for the well-connected rather than genuine reform, trust in the banking system could erode further. Clear communication and demonstrable improvements in governance will be essential to restore confidence.

Accountability and the Path Forward

A lingering concern is the lack of visible accountability for past mismanagement. While some leadership changes have taken place, meaningful reform requires more than reshuffling personnel. Strengthening regulatory oversight, enforcing prudent lending standards, and ensuring consequences for negligence or misconduct are vital to restoring institutional integrity.

Looking Ahead

With national elections scheduled for February 2026, Bangladesh stands at a pivotal juncture. The outcome will shape not only the political landscape but also the direction of economic reform. While elections often bring a sense of renewal, investor confidence will depend on the post-election policy environment. Ensuring energy reliability, legal predictability, and a stable financial system will be critical to unlocking private investment and sustaining growth. The months ahead offer an opportunity to reset priorities and rebuild trust—but only if bold, transparent, and inclusive reforms follow the ballot.

Syed Mahbubur Rahman is the Managing Director & CEO of Mutual Trust Bank.