As Bangladesh bids farewell to what has been one of the most tumultuous years for its financial sector, the country is grappling with multiple crises that have significantly destabilized its banking system. A combination of soaring inflation, a severe liquidity crunch, exchange rate volatility, and a growing Non-Performing Loan (NPL) crisis, along with political instability, has put Bangladesh’s financial institutions under extreme pressure.
Strains on the Banking Sector
The year 2024 has seen Bangladesh’s financial sector struggling with unprecedented challenges. The liquidity crisis, driven by panic withdrawals, has tested the endurance of many commercial banks. The problem was exacerbated by practices such as leveraged and insider lending, as well as the questionable control of some banks by influential “oligarchs” whose businesses are now under scrutiny. Investigations have revealed that much of the capital siphoned off by these insiders has contributed to the current financial instability.
These issues severely dented depositor confidence, especially in both conventional and non-conventional banks, leading to mass panic withdrawals. With banks unable to meet the surge in demand, many faced difficulties continuing regular operations, resulting in a deeper crisis of trust in the sector.
Central Bank’s Intervention
In response to the crisis, Bangladesh’s central bank, Bangladesh Bank (BB), resumed injecting high-powered money into the system after a pause of several months. Over Tk 250 billion was injected to assist liquidity-starved banks in meeting depositor demands. Despite these efforts, the situation remains dire for several commercial lenders, which are now under increasing pressure to maintain solvency and operational continuity.
The dire state of the sector came into sharper focus following the political upheavals of August 2024, when Prime Minister Sheikh Hasina’s regime was toppled. In the aftermath of the regime change, the then-central bank governor, Abdur Rouf Talukder, stepped down amid fears of retribution for his role in the financial crisis. He was replaced by Dr. Ahsan H. Mansur, signaling the beginning of a major leadership shift at Bangladesh Bank.
Taskforces and Reforms
In a bid to address the mounting problems, the interim government formed three taskforces aimed at restructuring and reforming the banking sector. The focus is on improving corporate governance in banks and enhancing regulatory oversight. In the meantime, the central bank moved to dissolve the boards of 11 struggling commercial banks, before proceeding with their restructuring efforts.
Soaring Non-Performing Loans (NPLs)
The NPL crisis was another sore point for the banking industry throughout 2024. Non-performing loans surged by Tk 1.39 trillion during the first three quarters of the year, reaching a staggering Tk 2.85 trillion, compared to Tk 1.46 trillion at the end of 2023. This sharp increase in bad loans is indicative of the systemic issues plaguing the banking sector and is a major concern for financial stability.
Exchange Rate Volatility
Another significant issue in the banking sector this year was extreme volatility in the foreign exchange market. The Bangladeshi taka hit a record low of Tk 127 against the US dollar, far exceeding the upper limit of Tk 120 set by the IMF under its prescribed crawling-peg system. This overshoot prompted the central bank to step in and regulate the market more strictly, in an effort to stabilize the exchange rate and prevent further devaluation of the taka.
Positive Developments
Despite the ongoing crises, some positive developments have emerged. In May 2024, Bangladesh Bank removed the cap on lending rates, following pressure from the IMF. This move reintroduced market-based interest rates after more than four years of stringent controls. While this shift is expected to help in the long term by promoting more efficient allocation of resources, it also raised concerns about the impact of higher borrowing costs on the private sector.
Conclusion
In summary, the financial sector in Bangladesh faced a challenging year in 2024, marked by a liquidity crunch, rising non-performing loans, volatile exchange rates, and a loss of depositor confidence. While the central bank and the government have taken steps to stabilize the situation, including injecting liquidity, restructuring troubled banks, and removing interest rate caps, the long-term health of the banking system remains uncertain. Ongoing political instability and the need for deeper reforms in corporate governance and regulatory oversight suggest that 2025 will be another crucial year for Bangladesh’s financial sector.
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