Rebuilding trust in the financial sector

The new government has inherited a financial system burdened by three interrelated weaknesses: poor governance, fragile balance sheets and erosion of public trust in policy decisions and credibility. These weaknesses are structural and, unless addressed in sequence and with discipline, they will continue to undermine economic recovery and stability.

The first issue is asset quality and governance. Non-performing loans have reached alarming levels, unofficially approaching nearly 35 percent of total outstanding credit if restructured and evergreened exposures are included. Repeated loan fraud, insider and related party lending, and weak enforcement have deeply eroded confidence in banking and non-banking financial institutions. The insurance sector has seen some consolidation, and the microfinance sector remains resilient, but the core stress lies in banks and NBFIs.

My experience during loan restructuring exercises revealed inefficiency among borrowing entities, weak risk appraisal standards within banks and NBFIs, and excessive interference, particularly in state-owned banks. Regulatory forbearance went too far. Governance failure has not been confined to one layer.

The question is how to break this cycle.

To begin with, we need a realistic and enforceable fit and proper regime for bank directors and chief executives. Governance reform must precede capital injection. There must be full transparency about beneficial ownership and who ultimately benefits from loans. Even the definition of family requires tightening to prevent circumvention of rules.

The Bank Company Act must be aligned with Basel core principles, particularly the emphasis on risk-based supervision grounded in real economic conditions. Our legislative tendency has been reactive, enacting punitive rules after scandals. Such reactionary policymaking rarely distinguishes between systemic weakness and isolated malpractice. The second major challenge is capital adequacy and bank resolution. The capital base of the financial system has weakened in recent years, exposing concealed insolvency risks. Repeated recapitalisation without structural reform only postpones resolution.

The central bank has initiated an Asset Quality Review in eleven banks. Once we determine the depth of the problem, a time-bound recapitalisation roadmap must follow. Recapitalisation should not be unconditional. It must be tied to measurable restructuring commitments, including loan write-offs, governance reform and bad loan recovery targets. Banks should prepare action plans, but implementation must remain under close central bank oversight. For institutions unwilling or unable to comply, resolution tools must be activated, including bridge banks, purchase and assumption mechanisms, management replacement or structured consolidation. Reform of state-owned banks is the critical pillar. Fiscal drain through repeated capital injections cannot continue indefinitely. Consolidation is long overdue. However, a merger without governance reform simply aggregates weakness. Consolidation must be accompanied by professional boards, operational autonomy with accountability and a firm stance on loan recovery.

Equally important is restoring coherence between monetary policy and financial stability. Inflation, combined with inconsistent policy signalling, weakens credibility. Policy contradiction is more damaging than a tight policy. This brings us to the autonomy of the Bangladesh Bank. Autonomy must be accompanied by institutional capacity building. Bangladesh remains one of the more over-regulated economies, where excessive directives substitute for supervisory depth. If deposit rates decline because of macroeconomic adjustment, lending rates must follow through market transmission.

Finally, governance reform without legal enforcement remains incomplete. Faster adjudication of loan recovery cases, a strengthened credit bureau mechanism, stricter enforcement of anti-money laundering provisions and transparent disclosure of bank health indicators are necessary to restore credit discipline. A sound financial system reduces uncertainty. Investors do not respond to slogans or presentations. They respond to predictability. Policy clarity, knowledge of peer country reform experience and political commitment at the highest level to allow institutions to function without distortion are essential. Confidence cannot be legislated. It must be rebuilt through consistent action.

The writer is a banker and an economic analyst