A national strategy for banking sector reform and stabilisation: Protecting national deposits, restoring confidence, and safeguarding the economy

The stability of a nation's banking system is inseparable from the stability of its economy. Banks are the primary custodians of national savings, intermediating public deposits into productive investment. When banks fail, it is not only institutions that suffer—it is national trust, economic momentum, and public wealth that are put at risk.

Bangladesh is currently facing a systemic banking sector distress. Several banks—both private and government-owned—are operating under prolonged capital shortages, CRR–SLR non-compliance, high non-performing loans (NPLs), weak income generation, and declining depositor confidence. This condition has reached a point where delay itself has become a national economic risk.

This document presents a nationally aligned strategy to repair ailing banks without using fiscal budgetary funds, through deposit-to-equity conversion, governance reform, and strong regulatory oversight. It also argues that banking sector reform must be elevated to a core political manifesto issue, given its direct impact on national savings, economic development, and social stability.

1. Banking Distress as a National Emergency

The current banking crisis is not accidental nor isolated. It is the cumulative result of:

•      Unprofessional and politically influenced credit decisions
•      Lending to unviable projects with inflated costs
•      Weak project monitoring and control
•      Siphoning of funds from banks to projects and beyond
•      Ineffective accountability of sponsors, boards, and management
•      Delayed and insufficient corrective supervision etc.

As a result, public deposits—national resources entrusted to banks—have been placed at risk. The continued fragility of the banking system threatens:

•     Household savings
•     SME and industrial financing
•     Employment and investment
•     National economic credibility

Banking sector repair is therefore an immediate national necessity, not an optional reform.

2. Why Conventional Solutions Are No Longer Viable

2.1 Fiscal Recapitalisation Is Unsustainable

Injecting public money to recapitalise distressed banks:

•     Strains the national budget
•     Transfers private failure to taxpayers
•     Repeats a model that has failed to deliver governance reform
•     Creates moral hazard

Government-managed banks themselves continue to struggle with NPLs and inefficiency. Using public funds to absorb private banking losses is neither fair nor effective.

2.2 Nationalisation or Government Takeover Is Not a Solution

Converting private banks into government-owned institutions:

•    Does not guarantee better governance
•    Weakens sponsor accountability
•    Adds operational burden to the state

Experience shows that ownership change without structural reform does not protect depositors.

2.3 External Strategic Partners Are Uncertain

While desirable, strategic investors:

•      Are difficult to attract during deep distress
•     Require time, discounts, and control
•     Cannot provide immediate system-wide relief

3. Core Principle: Capital Must Be Repaired by Fixing the Balance Sheet, Not by Adding Cost

Ailing banks do not fail simply because capital is low; they fail because:

•   Deposit liabilities remain high
•   Interest costs and cash outflows continue
•   Earnings capacity is structurally weak

Replacing capital while keeping the same deposit base which is Lost or become Bad debt and interest burden intact only postpones distress.

The more effective solution is to repair capital by reducing deposit liabilities.

Banks should take all effective measures, under an appropriate government legal framework, to recover loans disbursed.

4. Deposit-to-Equity Conversion: A Transformational National Model

4.1 The Concept

Under a regulated framework:

•     A portion of long-term or large deposits is voluntarily converted into equity
•     Deposit liabilities are reduced
•     Capital is strengthened immediately
•     Interest expense and cash outflow decline

This is not depositor loss—it is depositor participation in recovery.

4.2 Why This Model Works

Deposit-to-equity conversion:

•     Improves capital adequacy instantly
•     Reduces funding cost structurally
•     Restores net interest margin
•     Eases CRR–SLR pressure
•     Stabilises liquidity
•      Avoids fiscal burden

Most importantly, it aligns risk, reward, and responsibility.

5. Governance and Oversight: The Non-Negotiable Condition

Capital repair without governance reform merely delays failure. Therefore:

•     Depositor-shareholders must have board representation
•     Existing control must be diluted where capital has failed
•     Regulators must enforce:
•     Real-time monitoring
•     Timely corrective action
•     Accountability of boards and management

Banks must be supervised as public trust institutions, not private entitlement platforms.

6. Role of the Regulator and Policymakers

The regulator must:

•     Define eligibility and safeguards for deposit conversion
•     Ensure voluntariness and transparency
•     Approve governance structures
•     Enforce enhanced supervision

Policymakers must:

•     Support reform-oriented regulation
•     Resist ad-hoc bailouts
•     Protect national deposits as a strategic resource

7. Banking Reform as a Political Manifesto Imperative

A sound banking system:

•     Protects public savings
•     Funds national development
•     Supports SMEs and employment
•     Preserves economic sovereignty

Therefore, banking sector reform must be a core agenda of political parties, not a technical footnote. Citizens' savings are national assets, and safeguarding them is a fundamental responsibility of any government seeking public mandate.

8. National Benefit of a Strong Banking System

A reformed banking system:

•     Acts as a guardian of national deposits
•     Channels savings into productive national priorities
•     Reduces fiscal risk
•     Restores public confidence
•     Strengthens domestic and international credibility

Banks must serve the greater national interest, not narrow private or political agendas.

9. Conclusion: A Necessary National Reset

Bangladesh's banking sector stands at a crossroads. Continuing with incremental fixes will deepen the crisis. Structural reform is unavoidable.

A regulated deposit-to-equity conversion framework, combined with strong governance and regulatory oversight:

•     Repairs capital
•     Reduces risk
•     Protects public savings
•     Avoids fiscal burden
•     Restores trust

This approach represents a responsible, nationally beneficial, and economically sound path forward.

Final Policy Position

•     Banking reform must be treated as a national priority
•     Public money should not be the default solution for private failure
•     Deposit-to-equity conversion offers an immediate, effective repair mechanism
•     Governance and accountability must be enforced without compromise
•     Protecting national deposits must remain the first principle of banking.

National deposits should be utilized first and foremost in the national interest, in line with a clearly defined national priority lending agenda.