On April 10 this year, the parliament approved a legislative amendment to the Bank Resolution Act, 2026, which may undo months of banking reform and painful adjustments. Under the revised act, former owners of troubled banks, including those who mishandled their respective institutions to the point of insolvency, may acquire the same institutions again by paying less than 7.5 percent of the amounts previously provided by the government and central bank. The remaining 92.5 percent will be amortised over two years at 10 percent simple interest. The new law represents neither reform nor adjustment; rather, it represents surrender.
Based on my 35 years of experience with the Bangladeshi financial system, I am alarmed by this law that directly contradicts every major finding on the proper approach to resolving failed banks. Moreover, it undermines the very foundation upon which Bangladesh's financial sector was saved from complete collapse.
Of the five banks being consolidated into Sammilito Islami Bank, First Security Islami Bank, Social Islami Bank, Union Bank, and Global Islami Bank were controlled either directly or indirectly by the S Alam Group. Exim Bank, the fifth bank included in the consolidation effort, was under the influence of the Nassa Group. Investigations by Bangladesh Bank into these five banks have revealed significant instances of irregular lending practices and outright theft of funds, resulting in voids in their balance sheets. Together, the government and central bank have invested approximately Tk 35,000 crore in capital and liquidity support to prevent total collapse. The interim government's decision to consolidate these banks was difficult. Nevertheless, it represented a paradigm consistent with international norms: when banks fail due to owner misconduct, owners forfeit their position. This represents how accountability functions.
The new law reverses this normative standard. Owners and directors formerly associated with distressed banks can now file applications with the Bangladesh Bank to re-purchase shares, assets, and liabilities. The provisions of the statute requiring applicants to agree to repay government assistance funds, invest additional capital, satisfy depositor claims, and undergo scrutiny appear attractive on paper. However, in practice, the terms are so favourable that they effectively represent a discounted repurchase price for looted banks. According to Zahid Hussain, former lead economist at the World Bank's office in Dhaka, the initial purchase price is so low that former owners can finance the difference by borrowing from the banking sector. Consequently, we will witness the absurd spectacle of a financial system financing its own recapture by the very individuals who destroyed it.
In my study published in The Journal of Developing Areas (2024), examining the interrelationship between uncertainty and non-performing loans in Bangladesh, using data covering the 1990-2018 time frame, my co-author and I demonstrated that uncertainty and non-performing loans mutually reinforce each other in a long-run positive relationship. When depositors and investors become uncertain whether regulatory principles will continue to apply, the quality of bank assets continues to deteriorate. Therefore, a law signalling to the marketplace that financial wrongdoing will carry no lasting consequences will exacerbate uncertainty, not alleviate it.
Banking governance failures are not theoretical constructs. Another study, analysing 52 Islamic banks and 104 conventional banks across 14 countries, demonstrated that governance structures directly affect the risk banks assume and their performance. Similarly, when governance fails, as occurs when boards are "captured" by controlling shareholders treating the bank as a personal treasure chest, risk increases while performance declines. Such was the case with the S Alam-controlled banks. Allowing those same owners back into their former institutions would be to disregard what our empirical research has demonstrated about how failed governance damages financial institutions from within.
Research also indicates that politically connected banks perform poorly in terms of asset quality. Political connections can also lead to higher non-performing loans and distorted loan-loss provisioning. Political patronage creates cosmetic issues in banking; however, it erodes the credit cultures required for a functioning financial system. Replicating previous regimes by reinstating owners linked to prior political connections would be a textbook example of repeating those regimes' mistakes.
So, what should Bangladesh do differently? Solutions to these problems are not unknown. Rather, there are existing answers within the reform programmes initiated by the Bangladesh Bank and supported by the IMF.
Firstly, distressed banks must remain merged and protected. The Sammilito Islami Bank was designed to be a clean slate. If former owners can simply use Bangladesh Bank's newly created mechanism to purchase their institutions back without being subject to any meaningful penalty, then all the work undertaken by re-established boards, asset quality reviews, and capital infusions will have been for nought. The government must revise the Bank Resolution Act to eliminate or significantly limit former-owner acquisition rights before they can be exercised.
Secondly, the Bangladesh Bank must be empowered independently. The draft amendments to the Bangladesh Bank Ordinance seek to reduce government influence over its board and establish transparent processes for the appointment and dismissal of governors. These reforms were delayed by bureaucratic opposition. The new government must resume pursuing these changes. Without an independent central bank that cannot be pressured or manipulated by political considerations, there will never be a viable regulatory body.
Thirdly, a comprehensive framework for addressing distressed assets must be developed. The distress assets recovery framework, the reformed money loan courts, and the bankruptcy laws as envisioned in the IMF programme are all critical elements to developing a functional system for recovering value from bad loans without providing incentives to borrowers who have defrauded lenders.
Finally, depositor protections must receive priority treatment. Millions of average citizens entrust their life savings to these banks; therefore, their interests cannot be subordinated to claims of former owners who wrecked their savings.
The Deposit Protection Act, currently pending enactment, needs to be enacted and funded before any consideration can be given to returning banks to their previous owners under any terms substantially more lenient than those offered today.
Accountability must precede rehabilitation; multiple investigations have found widespread evidence of fraud and embezzlement. Prosecution of criminal offences, freezing of assets, and pursuit of restitution against responsible parties should proceed until completed. Only after full accountability is achieved and restitution is paid can any consideration be given to discussions of ownership restructuring.
Various interest groups are making competing demands from this administration; likewise, there are many legal complexities surrounding the dissolution of a bank merger already underway. However, there is a far greater cost associated with abandoning principles of justice for short-term politics. Bangladesh has walked down this path before. Failure to undertake banking-sector reform during the 1990s led to twenty years of institutionally driven degradation. The country cannot afford to waste another generation on reform.
The signal sent by the Bank Resolution Act, as amended, will convey that rules do not apply to influential individuals; that fraud has an expiration date; and that political patronage is the best form of insurance for individuals seeking impunity for illegal acts committed within a financial system. Once that message is accepted by markets, reversing course will prove extremely difficult, if not impossible.
The citizens of Bangladesh deserve a banking system that serves them, rather than a limited group of influential businessmen who treat depositor funds as their personal resources. The parliament must reconsider what it has done; opportunities for true reform are rapidly disappearing.
M. Kabir Hassan is professor of finance and Moffett chair at the University of New Orleans, the 2016 IDB Prize Laureate in Islamic Banking and Finance, and a member of the AAOIFI Ethics and Governance Board.
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.
