By Naima Sultana
A sweeping consolidation drive is underway in Bangladesh’s banking sector, targeting five struggling Islamic banks beset by years of reckless lending, regulatory complacency, and sponsor mismanagement. But the pertinent question remains: is bank merger truly a panacea for the sector’s deep-rooted problems? Are all five banks at comparable levels of distress? Could some of them recover without burdening the public exchequer?
The ongoing crisis in these banks is the result of collective failures: both institutional and regulatory. In essence, the sector is reaping the consequences of seeds long sown. The question now is: what tangible change will the central bank’s merger strategy bring? Even with substantial public funding injected into the restructured entity, can it be safeguarded from future political exploitation? Have the necessary lessons been learned to ensure history does not repeat itself?
Unless structural reforms are enforced and accountability is upheld, merger alone risks becoming a mere band-aid over a festering wound.
Why Merge?
The rationale is stark. EXIM Bank PLC, Social Islami Bank PLC, First Security Islami Bank PLC, Union Bank PLC, and Global Islami Bank PLC collectively face an equity shortfall of nearly Tk 40,000 crore. Most have exceeded prudent lending limits, advancing far more than their deposit base. Alarmingly, around 70 percent of their aggregate loan portfolio is now classified as non-performing.
Four of these institutions were effectively controlled by the S Alam Group through opaque ownership arrangements, flouting single-family ownership restrictions. Allegedly, billions were siphoned off through trade mispricing and insider lending. In extreme cases, such as Union Bank and Global Islami Bank, as much as 90 percent of loans were reportedly directed towards S Alam-linked entities, many of which have since defaulted.
In response, the central bank is invoking powers under the newly enacted “Bank Resolution Ordinance 2025”, aiming to preempt a broader financial crisis through swift intervention.
Government Involvement And Bridge Banks
To support the restructuring process, the government is expected to inject between Tk 10,000 crore and Tk 12,000 crore in capital over the next three years. The remainder of the capital shortfall is to be addressed by offloading confiscated shares of delinquent sponsors to strategic investors.
The ordinance empowers the Bangladesh Bank to establish “Bridge Banks”—interim entities that assume the assets and liabilities of troubled banks. These institutions will operate under the central bank’s direct supervision, with stringent governance requirements, and may subsequently be sold, wound up, or merged with permanent banks. This framework is consistent with international best practice, providing a structured resolution mechanism rather than a disorderly collapse.
Will It Solve The Sector’s Woes?
A merger, in itself, is no silver bullet. Unless the Bangladesh Bank closes ownership loopholes, enforces exposure limits, and imposes meaningful penalties on wilful defaulters, the new entity risks becoming yet another vehicle for vested interests. Alarmingly, existing regulations allow directors of failed banks to return to the board after just five years, raising the prospect of repeat malpractice.
The central bank must justify why these particular banks were chosen for forced merger. Ideally, each troubled bank should have been asked to submit a resolution plan; merger or liquidation should follow only where recovery is deemed unviable. After all, the banks in question are not uniformly distressed—some might recover through targeted reform rather than wholesale consolidation.
Furthermore, before committing taxpayer money, the feasibility of divesting shares to private investors should have been fully explored.
The governor’s assurances that no jobs or branches will be lost post-merger also appear overly optimistic. It is neither economically rational nor operationally efficient to retain redundant infrastructure and personnel following such a significant consolidation.
Policy Concerns And Accountability
Equally troubling are the merger policy guidelines, which permit directors of failed institutions to return after a brief hiatus, often the very individuals who presided over the banks’ downfall. This provision serves as a de facto immunity clause, undermining efforts to establish real accountability.
Those responsible for plundering the sector must be held to account, not afforded a second chance.
Meaningful change demands discarding the old playbook. Structural reform must establish robust safeguards against abuse, closing avenues for overexposure, trade misinvoicing, and family domination of bank boards. Legal loopholes must be sealed; they are invitations to misconduct. Only with these reforms in place can mergers yield sustainable improvements.
A Matter Of Institutional Integrity
Ultimately, this rescue effort hinges not on financial manoeuvring, but on institutional integrity. Without robust regulation and credible enforcement, the sector risks further bailouts—financed once again by public funds.
Unless real reform follows, the merger may simply delay, rather than prevent, the next banking crisis.
