Fixing the financial architecture: A roadmap for Bangladesh’s banks, tax system, and investment climate

Illustration: TBS

Bangladesh stands at a rare inflection point. The confluence of an IMF programme, a newly elected government with a parliamentary supermajority, record remittance inflows of $30.33 billion in FY2024-25, and the most significant regulatory overhaul of the financial sector in the country's history has created a window for structural reform that may not reopen for another generation.

The question is no longer whether reform is necessary; that debate was settled when Bangladesh Bank's Asset Quality Reviews revealed NPLs of 35.73% of total disbursed loans by late 2025, equivalent to over Tk6.44 trillion in bad assets. 

The question now is sequencing, political will, and technical execution.

Part I: The burning platform — where we actually stand

Bangladesh Bank's adoption of Basel III loan classification standards — under which a loan becomes sub-standard after just three months of overdue instalments — caused the official NPL ratio to jump from 10.11% in June 2023 to 20.20% by December 2024, and to an unprecedented 35.73% by late 2025. This is not a deterioration. This is a revelation. The rot accumulated over the preceding decade, hidden beneath politically driven loan rescheduling, cosmetic provisioning, and what Finance Adviser Dr Salehuddin Ahmed correctly described as "rampant embezzlement." 

Once off-balance-sheet exposures and restructured loans to connected parties are counted, distressed assets are likely two and a half to three times the reported figure.

The governance failure was structural and bipartisan. State-owned banks, holding less than 30% of banking assets, account for more than 45% of problem loans. Several private banks, particularly Islamic banks exposed to a few designated groups, were hollowed out. 

Bangladesh Bank's response from August 2024 onwards — board reconstitution, forced mergers, liquidity injections, the Islamic bank consolidation — was without precedent. But the asset recovery task force has produced limited results, the stolen money is largely abroad, and the new exposure rules raising single-borrower limits to 25% of capital risk reinforcing exactly the concentration dynamics that produced this crisis.

On the fiscal side, Bangladesh's tax-to-GDP ratio has hovered at 7-8% for years, one of the lowest in the developing world. LDC graduation in 2026 will begin eroding the trade preferences that subsidised the apparel sector's export competitiveness. Corporate tax for unlisted firms stands at 27.5%, above the regional average of approximately 21%. Revenue forecasting credibility is so low that NBR missed its July-November FY2026 target by Tk24,000 crore, even while posting 15% year-on-year growth.

Meanwhile, FDI stood at $1.77 billion in 2025, still below the 2019 peak of $1.8 billion; concentrated in textiles, finance, and power, with limited diversification into the higher-value sectors Bangladesh needs for upper-middle-income status by 2031.

Part II: Rehabilitating the banking sector

Phase 1: Complete the diagnostic and draw the line (FY2026 — Immediate)

Bangladesh Bank's single most important immediate task is completing the Asset Quality Reviews for all state-owned banks before its self-imposed June 2026 deadline. Independent AQRs by firms of the calibre of KPMG and EY, already conducted for private banks, must now be applied to Sonali, Janata, Agrani, and Rupali with equal rigour and equivalent public disclosure. You cannot build a recovery plan on numbers that nobody believes.

The NPL reduction targets BB has imposed — state-owned banks to 10%, private banks below 5% by June 2026 — are the right signal, but almost certainly unachievable for the state banks. The response to missing them should not be to adjust the targets; it should be to accelerate the resolution tools and be honest with the public about the timeline. BB's credibility is rebuilt through candour, not adjusted benchmarks.

BB's new Prompt Corrective Action framework — triggered by capital shortfall, NPL thresholds, and dividend policy violations — must be applied without exception. The temptation to grant discretionary waivers to politically connected bank owners under the new government must be resisted as firmly as it was not resisted under the last.

Phase 2: Build the resolution architecture (FY2026–2027)

The Bank Resolution Ordinance 2025 is the most consequential financial legislation Bangladesh has enacted since the Bangladesh Bank Order 1972. It gives BB legal authority to intervene in failing banks without court proceedings, create bridge banks, protect depositors, and limit judicial challenges to compensation claims rather than the resolution action itself. The substance must now follow.

Distressed Asset Management Act: This legislation, when enacted, must create a genuine secondary market for NPL trading, not a mechanism for connected parties to purchase distressed assets at discounts and return them to affiliated borrowers at par. The AMCs licensed under it must include foreign participation to prevent regulatory capture. The decision not to create a state-funded "bad bank" is correct — public money should not absorb private sector fraud.

Bankruptcy Act: Bangladesh desperately needs a corporate insolvency framework that allows genuinely distressed but viable companies to restructure under creditor supervision rather than defaulting entirely. It must be time-bound — 180 days with extensions — not the open-ended litigation the Money Loan Courts currently produce.

Money loan court reform: The pledge to amend the Money Loan Court Act by the first quarter of FY2026 is welcome, but amendments alone are insufficient. Bangladesh Bank must fund a dedicated case management unit within the court system, staffed with transaction advisors, asset valuers, and enforcement specialists — and recovery performance must be measured by money recovered, not cases filed.

The "Golden Exit" and "Wilful Defaulter" distinction: BB's rescheduling framework for genuine businesses is pragmatic; the critical reform is the legal definition and enforcement of "wilful default" — where borrowers have the capacity to repay but choose not to. The asset recovery task force, working with BFIU, ACC, and international partners, must pursue these cases publicly, internationally, and to conviction. One high-profile recovery from an international jurisdiction does more for credit culture than a hundred circulars.

Phase 3: Structural reform of the state bank model (FY2027–2029)

The Policy Research Institute has proposed the most analytically coherent framework: privatise all state banks except Sonali, restructured as a pure treasury operations bank. This is directionally correct but politically difficult; a more sequenced approach is achievable.

Janata, Agrani, and Rupali should undergo full corporatisation with stock market divestment, management control transferred to professional boards without ministry interference, and performance contracts signed with Bangladesh Bank rather than the Finance Division. State banks reporting to the Finance Ministry rather than the central bank is among the most damaging structural features of the system; Basel III compliance cannot coexist with ministry-directed lending.

Sonali Bank retains strategic importance for government payments and rural access; it should be restructured as a narrow bank for deposits and treasury functions, with its NPL portfolio ring-fenced under a dedicated resolution vehicle. Basic Bank and Bangladesh Development Bank have no viable commercial case; supervised wind-down under the Resolution Ordinance is the appropriate end-state.

Phase 4: Building the preventive architecture (FY2026–2030 ongoing)

Bangladesh Bank autonomy: The proposed amendment to the Bangladesh Bank Order 1972 to grant full operational and regulatory independence is foundational to every other reform — all reversible if BB can be instructed by the Finance Ministry or PMO. The amendment must include fixed-term appointments for the Governor and Deputy Governors removable only for cause, a statutory bar on ministerial direction of supervisory decisions, and independent funding through a levy on supervised institutions.

IFRS 9 implementation by December 2027: The shift from incurred-loss provisioning to forward-looking Expected Credit Loss provisioning is the single most important accounting reform. It will force capital raising, short-term NPL spikes, and enormous pressure on weaker banks. The transition must be accompanied by a well-designed capital market access plan so that solvent but under-capitalised banks can raise tier-1 capital through public issuance.

Corporate bond market: The Monetary Policy Statement for H1 FY2026 correctly identifies over-reliance on bank financing as one of Bangladesh's critical structural vulnerabilities. The bond market reform agenda — Green Sukuk, listing of large domestic companies, commodity exchanges, and blockchain-based settlement — must be accelerated.

Part III: Reforming revenue — expanding the tax net without strangling investment

The NBR restructuring must be completed, not abandoned

The Revenue Policy and Revenue Management Ordinance of May 2025, separating the former NBR into a Revenue Policy Division and a Revenue Management Division, was structurally correct and long overdue; separating policy from collection eliminates an obvious conflict of interest. The six-week officer strike and the subsequent partial retreat by the interim government do not invalidate the reform architecture; they reveal the institutional resistance that must be managed rather than appeased.

Broadening the tax base: The path to 12% Tax-to-GDP

The medium-to-long-term revenue strategy (MLTRS FY2026-FY2035) correctly identifies that Bangladesh could reach a 15% tax-to-GDP ratio without raising rates if compliance improves and leakages are eliminated. Modelling by PRI suggests annual revenue shortfalls of approximately Tk589 billion. The roadmap to 12% by 2030 requires three simultaneous interventions:

Digital integration as the core infrastructure: The Customs Modernization Strategic Action Plan, ASYCUDA World, online income tax filing, VAT e-invoicing, and the proposed national taxpayer identity system must be treated as a single programme under a central programme management office, not a collection of departmental IT projects. Bangladesh Bank's real-time payment infrastructure (RTGS, BEFTN) already exists; connecting it to the Revenue Management Division's collection systems would close a major leakage point instantly.

VAT rationalisation: Bangladesh's VAT system has multiple rate slabs, sector-specific exemptions, and supplementary duty structures with approximately 113 variations, creating enormous compliance arbitrage. The reform must cut effective VAT rates to no more than three (zero, a reduced rate for essential goods, and the standard rate), extend the VAT base to the currently exempt service sector, and replace most supplementary duties with a simple, transparent excise system. The service sector, where most of Bangladesh's formal value-add now resides, is the single largest available base expansion.

Income tax compliance — from 3.5 million to 10 million filers in five years: Bangladesh has approximately 3.5 million registered taxpayers against a workforce of 70 million. Three targeted interventions close most of the gap: mandatory TIN registration for all formal sector employees and directors, cross-matching of bank transaction data with declared income under a legal framework that prevents misuse, and a graduated presumptive tax for the informal sector low enough to encourage voluntary compliance. The revenue authority's documented history of using discretionary assessment powers as an extortion mechanism — "tax terrorism" — is precisely why a fully digital, auditable assessment process is a precondition.

Part IV: The investment climate — making Bangladesh competitive again

Aligning Bangladesh Bank guidelines with investment facilitation

Several BB prudential guidelines, individually defensible, collectively make the investment climate harder to navigate than necessary. Two changes would make an immediate difference:

Foreign exchange regulations: Restrictions on retained earnings repatriation, the complexity of the back-to-back LC framework for non-garment industries, and the shallow liquidity of the USD/BDT swap market are among the barriers most frequently cited by foreign investors. BB should establish a Foreign Investor Facilitation Desk with delegated authority to resolve individual investor FX issues within 10 working days, similar to Singapore's MAS One-Stop framework. The broader reform is a managed shift toward current account convertibility under a rules-based managed float.

Credit guarantee schemes for SMEs: Commercial banks lend predominantly to large corporates, while SMEs — which generate most of the country's employment — access credit at punitive rates or not at all. BB should establish a Credit Guarantee Fund, capitalised through a small levy on large corporate lending, that provides first-loss coverage for SME loans below Tk5 crore.

The corporate tax rate must come down

A corporate tax rate of 27.5% for unlisted firms, against a regional average of approximately 21%, is a structural competitive disadvantage at a moment when Bangladesh must compete with Vietnam, Cambodia, and Indonesia for China-plus-one manufacturing investment. The rate reduction should be sequenced against broadening: lower the rate to 22.5% in FY2027 and to 20% in FY2029, conditional on demonstrable improvements in compliance enforcement and the phase-out of sector-specific exemptions. A lower headline rate on a broader base raises more revenue than a high headline rate on a narrow, riddled base. The listed-unlisted rate gap should be maintained as a deliberate capital market deepening tool.

The one-stop investment facilitation architecture

Bangladesh Investment Development Authority (BIDA) has been institutionally strengthened but remains operationally fragmented. A foreign investor seeking to establish a manufacturing facility must navigate five separate agencies — BIDA, BEZA, NBR, BB, and the relevant line ministry — each with its own documentation requirements, processing times, and informal expectations.

The solution is not another "one-stop shop" circular; Bangladesh has had several of those. The solution is a genuine integrated digital processing system, with BIDA as the lead agency, legally binding processing timelines, and a senior-level escalation mechanism involving the PM's office directly when processing stalls. Investors in Vietnam and Indonesia know that if the bureaucracy fails to respond in 30 days, they can call a government hotline and expect a response from a Deputy Minister. That accountability infrastructure must now be built in Bangladesh.

Part V: The political economy of reform — sequencing and sustainability

The IMF programme has provided the external scaffolding for these reforms. The reported withholding of $800 million in disbursements over delayed conditions is a warning, not a detail. Bangladesh's access to concessional financing, critical for bridging the LDC graduation fiscal gap, depends directly on reform performance.

The sequencing logic is straightforward. FY2026 is for institutional and legislative action: completing the AQRs, submitting the NPL resolution legislation to parliament, legislating the NBR restructuring through parliament rather than ordinance, and publishing the first full Tax Expenditure Report. 

FY2027 begins execution: the IFRS 9 transition, the first AMC licensed, the Bankruptcy Act operational, the first corporate tax cut, and the digital tax-banking data bridge. By FY2029, the sustainable architecture should be in place: a fully autonomous BB, state bank privatisation substantially complete, tax-to-GDP at 10%, and a functional corporate bond market.

None of this is technically difficult. Every instrument described above has been implemented in comparable middle-income economies. What has been missing in Bangladesh is the combination of political insulation from vested interests, institutional memory inside the civil service, and sequenced execution discipline.

Conclusion: A sector we can be proud of

Bangladesh's financial sector failed its people not through market forces but through deliberate regulatory capture. The roadmap is visible. The current reform moment — with IMF accountability, donor support, new political leadership, and a central bank that has demonstrated it can act independently — is the best opportunity in a generation to build institutions that outlast any single political dispensation.

History will not remember who managed the first ECNEC meeting, but it will most certainly remember who fixed the banks at a time of complete distress.

Sketch: TBS

A former investment banker and sports development professional, Sayeed Ibrahim Ahmed is currently an assistant professor of finance at AIUB and serves as a director of the Bangladesh Cricket Board (BCB).

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.