Bangladesh cannot afford to wait: Financial reform must outpace emerging risks

Bangladesh stands at a crossroads. After three decades of impressive growth, the country's economic model – long celebrated for its dynamism and resilience – now faces a much more volatile global environment. 

Slowing world growth, shifting capital flows, and a surge in "fat-tail" risks – rare but high-impact events such as pandemics, geopolitical fragmentation, supply-chain disruptions, and climate shocks – have exposed growing strains in the financial architecture that served Bangladesh for years. 

The question is no longer whether risks will materialise, but whether the financial system is prepared to absorb them.

In a fat-tail world, resilience cannot rest on isolated reforms. It requires an integrated framework that links capital strength, governance discipline, data transparency, forward-looking supervision, and institutional capability. 

The prospect of compound shocks placing simultaneous pressure on banks, markets, and fiscal space can no longer be treated as business as usual. 

Strengthening the financial architecture now – and building durable capacity at home – is essential if Bangladesh aims to safeguard stability while deepening its integration into the global financial system.

Governance: Foundation of credibility

At the core of financial resilience lies governance. Bangladesh's banking system – particularly state-owned and weakly governed institutions – continues to grapple with chronic capital shortfalls, politically influenced lending, and weak oversight. 

These are not abstract technical problems; they strike at the credibility of the entire system.

Better-governed institutions within Bangladesh already demonstrate stronger capital, lower NPLs, and more stable depositor confidence.

Stronger governance begins with capital that truly absorbs loss. To that end, strengthening Tier 1 capital buffers is essential—not merely to hit regulatory thresholds but to withstand plausible but severe stress scenarios. 

However, public capital must be paired with accountability. Conditional recapitalisation tied to governance and performance metrics ensures that public funds do not merely sustain old practices but also help embed disciplined decision-making and risk awareness.

Equally fundamental is the quality of leadership within banks. Fit and proper criteria for directors and senior management, rigorously enforced, raise the bar for ethical oversight. 

Where lending decisions have historically been influenced by connections rather than creditworthiness, they undermine both balance-sheet health and market trust. 

To counter this, leading regulators increasingly deploy AI-driven supervisory tools to enhance early risk detection.

Risks discipline: Anticipate, do not just respond

Bangladesh's past trajectory illustrates the value of early structural reform; its future success will likely depend to a great extent on building institutions that internalise risk rather than merely react to it.

For too long, stress testing in Bangladesh has been a compliance check rather than a forward-looking policy tool. Modern economies face compound shocks-- where currency depreciation, export contraction, liquidity shortages, and interest rate spikes occur simultaneously.

Bangladesh's financial system must be tested against such realities. Stress testing that captures joint shocks to foreign exchange markets, export income, liquidity conditions, and asset prices should be central to supervisory practice. 

Even more importantly, stress test results must drive supervisory responses, not just feature in annual reports. If severe stress scenarios expose capital or liquidity vulnerabilities, regulators and banks must have both the authority and the appetite to prepare credible mitigation plans.

Asset quality is central to risk discipline. Persistent non-performing loans cloud the transparency of bank balance sheets and weaken confidence in reported indicators. 

When losses are not promptly recognised and adequately provisioned, capital ratios may appear sufficient on paper, yet markets remain cautious – a credibility gap that can suppress lending, raise funding costs, and delay recovery.

Data, transparency, and early-warning architecture

The Basel Committee on Banking Supervision has consistently underscored that robust risk measurement and data aggregation are essential to effective supervision and crisis prevention. 

A unified regulatory data warehouse – integrating bank reporting, off-balance sheet exposures, and cross-institution linkages – would allow authorities to see emerging risks before they cascade.

Coupled with bank-by-bank disclosures that align financial reporting with international norms, this level of transparency boosts market confidence and gives regulators room to act pre-emptively.

With nearly 80 percent of export earnings concentrated in ready-made garments, Bangladesh remains vulnerable to shifts in global demand. 

Diversification into other sectors such as pharmaceuticals, light engineering, IT and business process services, and agro-processing, or newly emerging export frontiers, is not just an economic strategy; it is a financial stability strategy. 

Complementary reforms – including modernisation of the foreign exchange regime and development of standardised hedging instruments –  reduce volatility and give firms tools to manage risk rather than absorb it.

Talent and capacity: The human backbone of reform

Even the strongest frameworks falter without competent execution. Bangladesh cannot build a resilient financial system without investing in people – regulators, risk managers, analysts, and technologists – who understand both global norms and local contexts.

Recruiting talent with expertise in quantitative risk modelling, data science, cybersecurity, and technology-enabled financial services should be a national priority. These skills underpin modern risk management systems and are particularly relevant as digital finance expands.

Inside institutions, a culture of continuous development – focused on risk culture, governance ethics, supervisory judgement, and crisis management capabilities – ensures that reforms are lived, not just written. 

Regulatory bodies, too, must compete for talent with competitive compensation, specialised career tracks, international training partnerships, and governance protections that preserve independence and integrity.

Digital financial services and climate integration: Frontiers of resilience

Digital financial services offer enormous promise for inclusion and efficiency. 

Yet this promise carries risk if not accompanied by robust controls. Strengthening AML/KYC automation, fraud detection systems, and data governance frameworks will safeguard the digital ecosystem while extending its benefits.

Climate change – perhaps the most existential risk for Bangladesh – must also be integrated into financial governance. 

Climate stress testing, climate-risk adjusted capital incentives, and a national green finance taxonomy would align credit flows with sustainable development, encourage private investment in adaptation, and help financial institutions price climate risk appropriately.

A call to act before it is too late

Bangladesh has succeeded when it has acted early and boldly. From export-led growth to remarkable poverty reduction, the country's economic story is one of ambition and adaptation. 

The sustainability of the next phase of growth will depend not only on its pace but increasingly on how effectively the country manages financial and macroeconomic risks – particularly in a more volatile global environment.

Reform delayed is vulnerability multiplied. The window for decisive action – across governance, risk discipline, systemic transparency, human capital, and strategic diversification – remains open, offering the opportunity to build a more resilient foundation for the future. 

The current reform momentum provides an opportunity, though international experience suggests that delaying structural adjustments can raise the eventual economic cost.

Bangladesh can still choose resilience. Yet that choice requires more than sound technical prescriptions – many of which have already gained widespread recognition. 

It demands credible implementation, institutional coherence, and forward-looking governance. While consensus on the need for reform is broad, the real test is whether the sense of urgency is strong enough to translate agreement into action before the next shock arrives.

Shahed Shafi is Global Head of Counterparty Risk Management at US Bank and a former senior risk leader at Citigroup.

Abdullah Al Masud is a consultant business economist with experience in economic research, policy analysis, and higher education management in the US and Bangladesh.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.