Can a bank resolution framework work if discredited owners return?

I worked with senior officials at Bangladesh Bank in developing the framework for the 2025 Bank Resolution Act, which is similar to India’s Insolvency and Bankruptcy Code, 2016, and analogous frameworks in Indonesia and a few other comparable economies. The primary purpose of this arrangement was to protect banks from their old, defaulting owners, who were reluctant to recapitalise their institutions to cover capital shortfalls arising from continuous insider lending and bad loans, which had crippled internal cash generation and stunted future growth.

The people spearheading this process sincerely believed that without increasing the capital base, banks could neither generate fresh loans nor repay small depositors. Although the government itself recapitalised the Sammilito Islami Bank, the destination model of the original merger framework was always predicated on owners or strategic investors coming forward to inject fresh, risk-based capital. This was especially critical given that most of the previous defaulting owners had either fled the country to evade legal action or simply lacked the financial capacity to inject funds into ailing, cash-strapped banks.

The recent amendment to the Bank Resolution Ordinance 2025, now passed as legislation by the BNP government in 2026, has created a mechanism through which previously merged banks can revert to their former owners. Under this provision, former shareholders may reacquire control by paying just 7.5 percent of the total funds disbursed by the government and Bangladesh Bank for operating the merged entities. This is where alarm bells ring loudly.

According to a Samakal report, the central bank had internally opposed this provision. Parliamentary opposition parties also raised objections. Nevertheless, the bill was passed with Section 18(A) intact.

The section states that former shareholders listed under the Bank Resolution Ordinance 2025 or any individual deemed suitable by Bangladesh Bank may apply to the central bank as resolution authority to reacquire the bank’s shares, assets, and liabilities. Applicants must submit undertakings covering: repayment of all government and central bank funds; injection of fresh capital to address existing shortfalls; settlement of all depositor, creditor, and third-party claims; discharge of all tax and regulatory obligations; compensation to parties that incurred losses during resolution; and full compliance with any governance reform conditions stipulated by Bangladesh Bank. On financial terms, applicants must furnish a pay order equivalent to 7.5 percent of total injected funds within three months of final approval, with the remaining 92.5 percent repayable within two years at simple interest of 10 percent per annum.

The concern is unmistakable. In Bangladesh’s institutional context, once ownership reverts (even conditionally), dislodging incumbents again becomes an extraordinary challenge. A 7.5 percent upfront threshold is a nominal commitment against the magnitude of systemic damage already inflicted.

Equally troubling is how Section 18(A) entered the bill in the first place. A 10-member review committee constituted on April 1 and led by an additional secretary of the Financial Institutions Division had recommended reducing the ordinance from 98 to 74 sections after careful deliberation. But this committee, comprising members from the Ministry of Finance, the Legislative and Parliamentary Affairs Division, and Bangladesh Bank, reportedly did not recommend this clause. According to the Samakal report, it was inserted just before the bill was tabled in parliament. Bangladesh Bank apparently only learned of it the following morning and formally requested the Ministry of Finance not to proceed, to no avail.

Regulators rightly argued that any such provision should have explicitly barred those responsible for a bank’s deterioration from reacquiring ownership. Full repayment of depositor and creditor liabilities should have been a precondition, not a forward-looking undertaking. The distinction carries enormous practical weight.

The scale of the damage clarifies why. Under the Bank Resolution Ordinance 2025, five Shariah-compliant banks—EXIM Bank, Social Islami Bank, First Security Islami Bank, Union Bank, and Global Islami Bank—were merged into a consolidated Islamic bank. The entity carries paid-up capital of Tk 35,000 crore, with the government contributing Tk 20,000 crore and the remaining Tk 15,000 crore from the institutional deposits of the banks and the Deposit Insurance Trust Fund.

As of last December, the five merged banks held combined loans of Tk 196,827 crore, of which Tk 165,781 crore, or 84.23 percent, had turned non-performing, against a sector-wide default rate of 30.60 percent. Besides, last December, 22 banks faced a banking capital shortfall totalling Tk 282,603 crore, of which Tk 150,691 crore was the capital shortfall of just these five institutions. EXIM Bank, formerly under Nassa Group’s control, is in relatively better shape with a 62.45 percent default rate and a capital shortfall of Tk 22,625 crore. The remaining four (previously controlled by S. Alam Group) tell a grimmer story: Union Bank has 97.64 percent of its loans classified as defaulted; First Security Islami Bank, 96.43 percent; Global Islami Bank, 96.27 percent; and Social Islami Bank, 75.73 percent, with combined capital deficits running into tens of thousands of crores.

This raises the billion-dollar question: when these banks’ former owners bled the banks dry and literally plundered the institutions’ assets in connivance with their friends and families, as the central bank’s large loans restructuring scrutiny committee revealed, can the banks then ultimately be rescued? Or are we simply opening a new Pandora’s box?

Bangladesh’s banking, hitherto characterised by high non-performing loans, weak risk management, low capital, rampant insider lending, and outright plundering by owners, warrants an overhaul, not any piecemeal solution. We desperately need to come out of political cronyism to bring back confidence into the system. Independence, prevention of conflict of interest, and regulatory compliance should be the way forward, not the distortion of the original purpose to rescue the banking sector.

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

Views expressed in this article are the author's own. 

Follow The Daily Star Opinion on Facebook for the latest opinions, commentaries, and analyses by experts and professionals. To contribute your article or letter to The Daily Star Opinion, see our guidelines for submission.