Unequal treatment in the financial sector: A tale of two standards
Bangladesh Bank’s contrasting approach to troubled banks and non-bank financial institutions has left depositors of the latter exposed, raising urgent questions about fairness, regulatory oversight, and the future of financial trust in the country
The Bangladesh Bank's recent initiative to merge five distressed Islamic banks into a single entity has been widely welcomed as a prudent step to protect depositors, particularly small savers, and to stabilise the financial system.
However, the central bank's contrasting decision to liquidate nine Non-Bank Financial Institutions (NBFIs) raises serious questions about fairness, consistency, and regulatory priorities.
The forgotten deposit holders
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Like banks, NBFIs hold deposits from thousands of small savers who were drawn by slightly higher interest rates. These depositors now face the grim prospect of losing their hard-earned money, while depositors of the troubled banks are being shielded through a state-led merger.
This disparity is striking. Both the distressed banks and the NBFIs suffered from similar governance failures—reckless lending, political influence, and weak oversight. Yet one group is being rescued, while the other is being left to sink.
It is worth emphasising that both banks and NBFIs are Financial Institutions (FIs) under the jurisdiction of Bangladesh Bank, governed by comparable prudential regulations. Moreover, the NBFIs in question are publicly listed companies, meaning that the Bangladesh Securities and Exchange Commission (BSEC) also exercises regulatory oversight alongside Bangladesh Bank.
All these institutions have been regularly audited and given clean bills of financial health, and at no point were depositors warned of any potential risk or irregularity. The absence of such cautionary signals from either regulator has left depositors blindsided and betrayed.
From MSME champions to corporate casualties
It wasn't always this way. When NBFIs were first established, they played a critical developmental role by lending to Micro, Small, and Medium Enterprises (MSMEs), a sector long neglected by traditional banks due to high administrative costs and collateral constraints. For years, these institutions helped small businesses thrive, fuelling employment and innovation.
Their troubles began when success bred complacency. Many NBFIs shifted away from MSMEs and began courting large corporate clients without proper due diligence. As a result, they fell into the same trap as the banks—rising non-performing loans and liquidity crises.
Crony capitalism and regulatory neglect
A few powerful business groups took advantage of this regulatory vacuum. The S Alam Group, already linked to the troubled Islamic banks, allegedly extended its influence over some NBFIs as well. Others fell prey to the notorious P K Haldar, whose financial manipulations devastated depositor confidence and damaged the credibility of the entire non-bank financial system.
One cannot help but ask: What were the regulators doing?
The Bangladesh Bank's supervisory units seemed either asleep at the wheel or compromised by unethical practices. Years of negligence, regulatory capture, and political interference allowed mismanagement to spiral out of control. Today, depositors are paying the price for that ineptness.
The cost of selective compassion
Rescuing banks is undeniably expensive. Yet, bailing out a few NBFIs, through restructuring, new governance, and targeted liquidity support, would have cost the public purse only a fraction of that amount.
Instead, the liquidation of NBFIs not only hurts depositors but also undermines public trust in non-bank financial channels that play a vital role in financing smaller enterprises.
The message this sends is troubling: some institutions, and some depositors, are deemed more deserving of protection than others. It evokes George Orwell's Animal Farm, where "all animals are equal, but some are more equal than others."
The way forward
To restore confidence and fairness in the financial system, Bangladesh needs a consistent, transparent, and accountable approach to financial distress management. This should include:
Uniform resolution framework: Establish a single, comprehensive resolution system for all financial institutions to ensure equal protection for depositors, regardless of the type of institution.
Depositor protection for NBFIs: Introduce protection mechanisms for non-bank financial institutions similar to those available for banks, up to a reasonable and clearly defined threshold.
Regulatory accountability: Enforce strong oversight reforms and accountability measures to prevent future instances of regulatory capture, negligence, or conflict of interest.
Restructuring over liquidation: Prioritise rehabilitation and management reform for viable NBFIs rather than outright liquidation, enabling recovery and continuity of service.
Renewed MSME focus: Reorient NBFIs towards their original developmental role of financing micro, small, and medium enterprises (MSMEs).
Transparent coordination: Ensure proactive and transparent coordination between Bangladesh Bank and the Bangladesh Securities and Exchange Commission (BSEC) to safeguard both investor and depositor interests.
Bangladesh's financial system stands at a crossroads. Restoring fairness and integrity in the treatment of distressed institutions is not just about saving depositors—it is about upholding public trust in the rule of law, good governance, and the fundamental principle that all institutions are equal before the regulator.
Masud Khan is Chairman of Unilever Consumer Care and Independent Director of BAT Bangladesh and Singer 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.
