The year 2025 will be remembered as the moment Bangladesh’s banking sector finally confronted decades of accumulated dysfunction. Non-performing loans surged to Tk 6.44 lakh crore—nearly 36% of total outstanding credit—by September, more than double the ratio from a year earlier and the highest level since 2000. System-wide bank capital ratios plunged to 4.5% by June, less than half the 10% regulatory minimum. Yet from this crisis emerged the most ambitious restructuring in the nation’s financial history: the forced merger of five Islamic banks, the enactment of landmark resolution legislation, and a comprehensive three-year reform roadmap backed by the IMF, World Bank, and ADB.
The transformation was precipitated by political upheaval. When the interim government assumed power in August 2024, it inherited a banking system hollowed out by what Finance Adviser Dr. Salehuddin Ahmed described as “rampant embezzlement, unchecked corruption, and politically driven loan rescheduling.” The official NPL ratio jumped from 10.11% in June 2023 to 20.20% by December 2024 simply by adopting Basel III loan classification standards—revealing the true scale of problems that cosmetic accounting had long concealed.
The Landmark Merger
Structural weaknesses in governance and risk management within several Islamic banks—alongside significant exposure to the S Alam Group—contributed to mounting financial stress and broader stability concerns. Bangladesh Bank’s response was unprecedented. Bangladesh Bank’s response was unprecedented. On September 16, 2025, the central bank’s board approved the forced merger of all five distressed Islamic banks into a single state-owned entity: Sammilito Islami Bank PLC (Combined Islamic Bank). The plan required an estimated Tk 35,200 crore in capital injection, with Tk 20,200 crore from the government and Tk 15,000 crore mobilized from institutional funds and deposit conversions.
The merger represented the most ambitious restructuring in Bangladesh’s banking history. Three banks—First Security Islami, Union, and Global Islami—agreed to the regulator’s plan, while EXIM and Social Islami initially opposed it. The opposition proved futile. On December 23, 2025, Bangladesh Bank dissolved the boards of all five institutions and directed that shares be written down to zero under Section 33 of the newly enacted Bank Resolution Ordinance. Shareholders—including the S Alam and Nassa groups—were left with nothing.
Governor Ahsan H Mansur assured the 75 lakh depositors across the five banks that their funds would be protected. Small depositors with balances up to Tk 2 lakh could withdraw immediately under the deposit insurance fund; larger depositors would receive their money in phases. The merged entity’s 705 branches would continue operating, with some consolidation in densely populated areas and expansion in remote locations.
The Legal Arsenal
The merger was enabled by the Bank Resolution Ordinance 2025, adopted in May and representing one of the most significant expansions of Bangladesh Bank’s powers in history. The ordinance gave the central bank full legal authority to intervene swiftly in failing banks without waiting for lengthy court procedures—installing what analysts described as “a financial sector emergency response mechanism.” Previous bank failures had been plagued by slow regulatory responses that allowed problems to spread.
The three-year reform roadmap announced in mid-2025 committed to additional legislative changes. A new Distressed Asset Management Act will create a framework for licensing private asset management companies and launching a secondary market for trading NPLs—though officials ruled out a state-funded “bad bank” using public money to purchase private sector bad debts. A Bankruptcy Act will introduce corporate insolvency frameworks allowing early restructuring of viable but distressed companies, while amendments to the Money Loan Court Act will clear bottlenecks in loan recovery proceedings.
Transparency requirements were strengthened significantly. Banks must now identify and report their true beneficial owners, while proposed changes to the Bank Company Act will ensure both owners and board members meet proper qualification standards. The transition to IFRS-9 (Expected Credit Loss) accounting standards, with full compliance due by December 2027, will force banks to proactively predict future losses rather than waiting for loans to go bad—creating what reformers hope will be a “much more honest and resilient financial system.”
Asset Quality Under the Microscope
Central to the reform effort are donor-backed Asset Quality Reviews (AQRs) of 18 private banks representing 35% of system assets. The first phase, covering six banks, was completed in May 2025; the remaining 12 were scheduled for review by December. Terms of reference were agreed with the IMF, World Bank, and ADB, with technical assistance secured from Deloitte LLP through a memorandum of understanding with the UK’s Foreign, Commonwealth & Development Office.
State-owned banks face their own reckoning. Though they hold less than 30% of banking assets, they account for more than 45% of problem loans. The authorities are considering requiring state banks to conduct independent AQRs by March 2026. The World Bank’s 2025 assessment warned that unresolved vulnerabilities could reduce Bangladesh’s GDP growth, compromising its aim for upper-middle-income status.
Strict deadlines have been imposed for NPL reduction: state-owned banks must reduce their ratio to 10% by June 2026, while private banks must aim for below 5%. Risk-based supervision will be rolled out starting January 2026, marking a shift from reactive to proactive regulatory oversight.
The Remittance Lifeline
While the banking sector absorbed painful restructuring, the external accounts offered unexpected relief. Expatriate Bangladeshis sent a record $30.33 billion in remittances during fiscal year 2024-25—a 26.8% increase from $23.91 billion the previous year and surpassing the previous record of $24.77 billion set during COVID-19 in FY2020-21. March 2025 alone saw $3.29 billion flow through banking channels—the highest single-month total in history.
This surge transformed the foreign exchange picture. Gross reserves climbed from under $20 billion in 2024 to $31.72 billion by July 2025—a remarkable recovery that eased pressure on import payments and restored banks’ ability to open letters of credit. The exchange rate stabilized at around Tk 122 per dollar after months of volatility.
Bankers attributed the remittance boom to several factors: narrowing gaps between official and informal exchange rates, a crackdown on hundi and hawala operators following the political transition, and a renewed sense of patriotism among overseas Bangladeshis. The government’s 2.5% cash incentive for formal channel remittances also played a role. Over 40 lakh people left Bangladesh for overseas employment in the four years to FY2024-25, creating a larger diaspora base.
Challenges Ahead
The reforms face formidable obstacles. Governance transformation proved more contentious than technical restructuring. Governor Mansur initiated steps to amend the Bangladesh Bank Order 1972 to strengthen central bank autonomy, including removing bureaucrats from the board and reducing political influence.
The S Alam Group has not accepted its fate quietly. In late 2025, the conglomerate filed for arbitration with the International Centre for Settlement of Investment Disputes (ICSID), claiming protection under bilateral investment treaties as Singaporean citizens. The claim—led by international disputes firm Quinn Emanuel Urquhart & Sullivan—could run into hundreds of millions of dollars, creating potential liability for both the interim government and its successors.
The IFRS-9 transition presents its own risks. While the Expected Credit Loss model will create a more honest picture of bank health, it will initially cause NPL figures to spike dramatically, testing public and investor confidence. Banks will need to raise significant capital to absorb the shock—a challenge in an environment where the cybersecurity market alone faces talent shortages shaving 2.4% off forecast growth, and where Bangladeshi banks spend less than 0.1% of revenue on cybersecurity.
A Turning Point, Not a Destination
By year’s end, the financial sector readings told a sobering story: bad loans at record highs, depositor confidence shaken, over a dozen commercial lenders reporting default ratios above 50%. Yet the architecture for recovery was also in place: a functioning resolution framework, donor-backed diagnostic reviews, clear NPL reduction targets, and the largest bank restructuring in the country’s history underway.
The question now is whether lasting fixes will survive the transition to an elected government expected in early 2026. The IMF has reportedly grown frustrated with delays in meeting loan conditions and is withholding $800 million in disbursements until a new administration takes office. Sustaining momentum behind tough, unpopular decisions—including enforcing mergers and holding powerful defaulters personally liable—will require unwavering political commitment that has historically been in short supply.
The year 2025 marked the moment Bangladesh’s banks could no longer hide their problems. Whether it also marks the beginning of genuine recovery will depend on whether the next government treats reform as unfinished business—or as an opportunity to return to the political capture that created the crisis in the first place.
