Reforms tied to $1.7b WB loans: Govt mulls changing bank merger clause

The government is considering sweeping financial and administrative reforms linked to three World Bank loan programmes worth $1.7 billion, including removal of a controversial clause from the Bank Resolution Act.

Finance ministry and Bangladesh Bank officials said multiple rounds of talks have taken place in Washington, DC and Dhaka, while a World Bank mission visited Dhaka this month to negotiate terms.

A key condition for a $500 million budget support loan is to scrap Section 18 (Ka) of the Bank Resolution Act, 2026, which would allow former owners of five merged Islamic banks to regain control. The WB has also pressed for legal steps to separate the National Board of Revenue’s policymaking and implementation functions.

Another component, the $400 million Financial Sector Support Programme II, requires amendments to the Bank Company Act, enactment of a Distressed Asset Management Act, and a 25 percent reduction in non-performing loans at state-owned banks.

Additionally, about $800 million is being repurposed from existing projects into direct budget support. Although no direct conditions have been set for the repurposing, progress on the two previously mentioned programmes will be necessary for fund release through repurposing, officials said.

Eight projects have been identified for repurposing, and officials expect funds by June once respective ministries complete technical procedures and send proposals to the WB.

Discussions regarding the $500 million budget support loan are still ongoing. Negotiations for the remaining $1.2 billion are nearly complete, and finance ministry officials expect World Bank board approval by June.

BANKING DISPUTE

The issue dates back to May 2025, when the interim government merged five troubled Shariah-based private banks into a state-run entity, Sommilito Islami Bank, under the Bank Resolution Ordinance. The five banks are First Security Islami Bank, Social Islami Bank, Union Bank, Global Islami Bank, and Exim Bank.

But when the current government passed the Bank Resolution Act, 2026, it included section 18 (Ka), enabling former owners to regain control under easy terms, sparking widespread criticism.

The government defends the clause, saying it lacks fiscal capacity to rescue distressed banks with budgetary funds.

Opposition lawmakers, economists, Transparency International Bangladesh and other anti-graft groups, and the Bangladesh Association of Banks demanded its repeal. They say the provision risks rewarding those linked to past financial mismanagement rather than ensuring accountability for scams.

The WB and IMF also recommended scrapping the section as part of their reform conditions for loans.

A central bank official, speaking on condition of anonymity, told this newspaper that the government remains in a dilemma amid mounting criticism.

A finance ministry official, who also requested anonymity, indicated repeal or amendment of the law is now under consideration to ensure that the previous owners cannot reclaim banks.

Draft rules based on the act have been prepared, but their fate will depend on the government’s final decision on the law.

REVENUE REFORMS

Beyond banking, the WB has insisted on separating NBR’s policy and implementation functions.

Officials admitted a previous ordinance by the interim government to do so was overly ambitious and never executed.

The current administration has now agreed to pursue separation, and the WB has no objection.

Several VAT law amendments are also part of the loan conditions.

BANKING OVERHAUL

Following conditions under the $400 million Financial Sector Support Programme, the government plans to amend the Bank Company Act.

The WB has advised stricter enforcement of related-party lending rules, full supervisory powers for Bangladesh Bank, and corporate governance aligned with international norms.

Officials said relevant draft amendments prepared during the interim government were shelved due to opposition from bank owners. The Financial Institutions Division has now sent them back to Bangladesh Bank for review and consultation.

Other reforms include amending the Deposit Protection Act, enacting laws on distressed asset management and insolvency, and licensing small companies to recover bad loans under Bangladesh Bank’s regulation.

Two new laws, the Distressed Asset Management Act (DAMA) and the Insolvency and Bankruptcy Act, will be enacted.

Under DAMA, small companies will be licensed to recover bad loans with legal authority similar to banks, regulated by Bangladesh Bank.

The law will establish a framework for recovery, management, securitisation, and trading of defaulted and non-performing loans.

The World Bank Group’s International Finance Corporation will provide technical support.

The Insolvency and Bankruptcy Act will align with international best practices to strengthen insolvent banks and financial institutions.

State-owned banks will also undergo asset quality reviews (AQR). The interim government conducted AQR in nine private banks, after which five were merged into Sommilito Islami Bank.

‘WEAK, INEFFICIENT’ SECTOR

According to the WB’s programme documents, Bangladesh’s banking sector assets stood at $212.2 billion, or 88 percent of total financial sector assets and 50 percent of the GDP, at the end of June 2024.

The sector comprises 62 scheduled banks under the Bangladesh Bank Order and five unscheduled banks established under separate acts.

The documents noted structural weaknesses, including poor corporate governance, regulatory capture, and politically influenced related-party lending.

Loopholes in definitions allowed complex inter-family relationships to obscure the scale of related-party lending, leading to fraudulent and willful defaults, and embezzlement by banks’ shareholders and management.

“A few big business groups siphoned off billions of dollars from the banking sector. In addition, the lack of proper enforcement and regulatory forbearance has exacerbated the problems, encouraging risky behavior, impacting market discipline, and delaying necessary reforms,” said the WB.

State-owned banks are the most vulnerable, holding 27 percent of total assets, over $50 billion or 12 percent of GDP. Three state-owned commercial banks are systemically important.

In this context, the Financial Sector Support Project II is seen as critical for stabilising the sector. It aims to strengthen deposit protection, improve supervisory capacity, and support resolution and restructuring, including reforms of state-owned banks.

“These interventions will address longstanding issues, improve authorities’ preparedness for and management of the current banking sector turmoil, paving the way for resolution and restructuring of weaker banks including possible recapitalization of the reformed SOBs,” said the WB.

The programme is expected to restore stability, strengthen intermediation, and support long-term growth.