Towards a strategic central bank

Illustration: TBS

Having worked with the country's financial sector for almost four decades, I have had the privilege of working with some defining central banking 'gurus', who left their mark in transitioning our economy towards being more private sector-led and fit for cross-border trade since the mid-eighties. 

Even today, I work with a few young but talented central bankers with good visibility regarding the future. They want to change and move forward, yet they cannot command the changes well enough.

It is also true that, over the last three decades, Bangladesh Bank (BB) has become an increasingly operational regulator. Even today, it reviews almost every large-ticket transaction on a case-by-case basis. This posture, while cautious, has made it reactive rather than strategic. For a developing economy with ambitions to become a middle-income nation, such micromanagement is no longer tenable.

Globally, modern central banks focus on frameworks, not transactions. The Federal Reserve sets macroprudential tools — capital adequacy norms, systemic liquidity thresholds, and risk-weighted asset requirements — without intervening in individual deals. The European Central Bank supervises systemic institutions but delegates day-to-day approvals to the banking layer. Even the Reserve Bank of India (RBI), long criticised for micromanagement, has shifted towards a supervisory approach that enables self-regulation through compliance-based incentives.

Until recently, BB's role in vetting each USD deposit linked to external commercial borrowing illustrated the core issue. Instead of setting clear rules of eligibility, compliance documentation, and risk-based pricing bands, it approves every inflow manually. This adds friction, causes delays, and promotes opacity. 

According to data from the Bangladesh Investment Development Authority (BIDA), average approval cycles for foreign loans exceed 30–45 days, undermining competitiveness in global capital markets.

A forward-looking central bank must enable rather than control. It must define boundaries, build ecosystems, and allow licensed banks to operate with autonomy within those boundaries.

The same problem is visible in credit access. The strict enforcement of the International Credit Risk Rating (ICRR) has had unintended consequences. While its intent is to protect banks from poor credit exposures, it disproportionately blocks smaller borrowers from accessing credit. Large political borrowers, often backed by implicit guarantees, face no such friction. This skewed outcome has starved innovation and enterprise finance. Simply put, could ICRR prevent the trillions of fraudulent loans in the country? No.

Banks, in this regime, have stopped asking fundamental questions: Why ICRR? How does it tie into forward cash-flow predictability or sector-specific volatility? Instead, a compliance mindset has emerged: "Bangladesh Bank required it." Over time, such an attitude has eroded institutional thinking capacity. Banks have become passive executors rather than strategic financiers. That is perhaps the most damaging long-term cost — when a regulatory environment encourages blind compliance over judgement.

A forward-looking central bank must enable rather than control. It must define boundaries, build ecosystems, and allow licensed banks to operate with autonomy within those boundaries. To do so, three structural shifts are required.

BB should replace transaction-level oversight with sectoral risk frameworks. This includes pre-approved External Commercial Borrowing (ECB) routes for eligible companies with audited financials, risk-weighted credit windows for banks based on their capital base and NPL history, dynamic asset-liability matching rules that incentivise long-term lending, and the launch of multiple sandboxes to test regulations and policies.

Countries like Malaysia have implemented credit guarantee schemes and sandbox-based regulation that allow rapid experimentation under controlled exposure. According to reports from Bank Negara Malaysia, their innovation sandbox approved 38 new financial products in 24 months — with fewer than 1% regulatory breaches.

Rather than waiting for banks to default or misreport, BB must institutionalise a proactive supervision model. This could include building an AI-backed credit risk surveillance tool to flag high-risk portfolios, conducting quarterly asset quality reviews for larger banks, and integrating non-banking datasets such as utility payments and tax records into borrower scoring. At the same time, moving away from an overreliance on collateral-backed lending and recognising other forms of assets would make the system more resilient and inclusive.

India's RBI introduced a Central Repository of Information on Large Credits (CRILC), mandating banks to report exposures above INR50 million. This has significantly improved stress-recognition timelines.

Instead of direct regulation, BB must catalyse markets rather than dominate them. This means licensing independent credit rating agencies and asset reconstruction companies (ARCs), opening up private distressed-asset markets, and facilitating interbank repo and derivative markets to improve price discovery.

Vietnam and Indonesia have liberalised their NPL disposal processes, resulting in a 30–40% recovery improvement within two years of implementation. According to the World Bank, NPL resolution in Indonesia improved from 22% to 63% post-reform between 2016 and 2019.

In order to implement these steps, BB needs to redesign its identity — from an enforcer to an ecosystem architect. It must trust its licensed entities to operate under risk-based guardrails and reserve interventions only for systemic risks.

The banking reforms recently outlined with support from the IMF, ADB, and World Bank offer a unique opportunity. The Distressed Asset Management Act, the Bank Resolution Ordinance, and the proposed deposit-protection enhancements are foundational shifts. However, their success will depend on execution and mindset change.

More critically, BB must invest in building human capital — regulators who understand structured finance, international bond markets, and fintech-led credit models. Without that intellectual depth, BB will continue to regulate today's risks with yesterday's tools, while tomorrow's markets will remain ungoverned.

Mamun Rashid is an economic analyst and Chairman at Financial Excellence Ltd.

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.