Why approve another bank

One of the deepest wounds in the economy today lies in the banking sector. The number of banks is disproportionately high relative to the size of the economy. At the same time, most banks are burdened with multiple problems, most notably the steadily rising volume of non-performing loans, capital shortfalls, limited product offerings and a severe deficit of good governance. Against this backdrop, initiatives are once again underway to approve new banks. The draft “Microcredit Bank Ordinance, 2025”, prepared by the Ministry of Finance as part of this initiative, therefore warrants careful review.

Bangladesh now has 62 scheduled banks, of which 43 are under private ownership. A significant expansion occurred when the previous government repeatedly approved new banks on political grounds. Changes were also made at various levels, including bank boards, in line with the preferences of those in power. While the number of banks increased, there was no corresponding improvement in customer service. Branch networks expanded nationwide, pushing up operating costs. To offset these costs, banks pursued aggressive lending, from which politically connected individuals benefited most. A large portion of these loans has since turned non-performing. As a result, the banking sector became heavily politicised, governance weakened, and the capital structure of most banks deteriorated.

After the formation of the interim government, discussions emerged on reforming the banking sector, with particular emphasis on reducing the number of banks. As part of this process, an initiative was taken to merge five shariah-based banks into a single entity. Except for Sonali Bank, all state-owned banks face capital shortfalls exceeding Tk 100,000 crore. Yet instead of prioritising reform and restructuring of state-owned banks, the government is moving towards approving new banks through public initiatives, an approach that is entirely unacceptable. Rather than increasing the number of banks, the focus should be on strengthening governance and capacity across the sector.

I have personal experience of banking sector reforms in China, which offer valuable lessons on the importance of banking stability for economic development. After 1978, China gradually transitioned from a mono-bank system to a modern, bank-based financial system through phased reforms. At one point, non-performing loans in state-owned banks rose sharply. Structural reforms, including an overhaul of central bank operations, new commercial banking laws, adoption of international standards for loan classification, transfer of bad assets through asset management companies and gradual listing on capital markets, helped place the sector on a strong footing. Each bank now has a clearly defined mandate, and none lends outside its designated sector. In contrast, in Bangladesh, most state-owned banks appear to perform the same functions. There are even allegations that the agricultural bank fails to provide loans to farmers.

In comparable economies, the number of banks has been kept limited. In Thailand, Singapore and Malaysia, domestic bank numbers have not risen in line with economic size. Thailand, with a GDP exceeding $500 billion, has six state-owned and 12 private banks. Singapore has only five local banks, while Malaysia has eight locally established banks. Even in neighbouring India, the number of banks is lower than in Bangladesh. These examples send a clear message: the priority should be to enhance the capacity and diversity of products offered by existing banks, not to add more.

Financial inclusion, entrepreneurship development and social business are often cited as reasons for approving new banks. Yet financial inclusion cannot be achieved simply by increasing bank numbers. It is more effectively advanced through technology-driven services and targeted lending programmes.

Rather than approving more banks, the government should focus on reducing the excess burden created by too many institutions and improving the quality of banking services. The same advice applies to the post-election government as well.

The writer is an economic analyst