Bangladesh's banking sector is plagued by a burgeoning crisis of bad loans, and the roots of this problem run deeper than economic downturns or political turmoil. 

This isn't a story of global forces or financial instability; it's a tale of cronyism, political patronage, and a culture of impunity, say experts concerned.

For years, habitual defaulters have exploited the system, securing political backing regardless of the ruling party.

This unholy alliance has shielded them from consequences, allowing them to amass debts with little fear of repercussions.

As a result, say experts, a toxic cycle of non-performing loans threatens to derail the nation's economic aspirations.

A number of economists of the country have long been saying that this crisis in the banking sector isn't just a financial issue; it's a cancer eating away at the heart of Bangladesh's development.

Economist Dr Rashed Al Mahmud Titumir says the role of the central bank to regulate the banking industry has come under criticism since the 1980s.

But it has been much worse during the last two terms of the Awami League government when both threats and opportunities reigned in the market.

Under the Awami League government, defaulted loans amounted to Tk 225 billion in 2009, Tk 502 billion in 2014, Tk 943 billion in 2019, Tk 887 billion in 2020, and as high as Tk 1,560 billion in 2023—almost double the amount of what it was during the Covid year.

“This upward trend does not justify any rationale related to the real economic situation,” says Dr Titumir.

This bad loan bonanza stifles private investment, strangles employment opportunities, and fuels illicit activities like money laundering, says Dr Titumir.

“It's a drag on GDP growth, a roadblock on the path to prosperity.”

The concerning numbers

Center for Policy Dialogue (CPD) has exhaustively been analyzing the problems persisting in the banking sector.

In its recent findings, it put it out very simply: a group of oligarchs are manipulating Bangladesh's banking system for their own gain and that's the root of all problems.

CPD executive director Dr. Fahmida Khatun said that just a  handful of powerful people and companies have monopolized the whole banking sector.

Five of the 10 shariah-based banks are now in liquidity crisis and those had been plagued by poor governance since their ownership changed, she said, adding that the banks' financial health deteriorated because of institutional weaknesses.

The problem is, the whole banking sector in Bangladesh is shrouded in a haze of misleading figures and obscured truths.

Banks are playing a dangerous numbers game, manipulating data to downplay the extent of their non-performing loans (NPLs) and capital shortfalls, all in a bid to inflate their profits.

The reality behind the facade is alarming. Of the Tk 16 trillion in outstanding loans to the private sector, a staggering Tk 4 trillion are classified as risky, with an estimated Tk 1.6 trillion officially declared as defaulted.

However, an investigative report by Prothom Alo suggests that the true figure of defaulted loans could be more than double this amount, due to the use of lenient definitions and reporting practices.

This manipulation of data not only misrepresents the health of individual banks but also masks the true risks facing the entire financial sector.

The reasons behind

Economists say the lack of transparency and accuracy undermines confidence in the system and hinders effective regulatory oversight.

The Prothom Alo recent report, citing data from the World Bank, reveals that the rate of default loans is significantly higher than officially reported, ranking second highest in South Asia.

While the official figures place Bangladesh's default rate at 10.11%, experts believe this number is deliberately understated.

In reality, the problem is likely far worse. This alarming figure is a stark contrast to the 4.8% default rate recorded in 2013, indicating a rapid deterioration of the situation.

Compared to its regional neighbors, Bangladesh lags behind in managing its default loans. Sri Lanka holds the unenviable position of having the highest rate at 13.33%, while Pakistan and India fare better with 7.4% and 3.9%, respectively.

Economist Dr Birupaksha Pal says despite steady economic growth exceeding 6% since 2013, the country has emerged as a regional leader in default loans.

This alarming trend, he argues, is not driven by economic factors but rather by a "culture of indulgence" fostered by willful defaulters with political backing.

"While Sri Lanka's financial crisis in 2023 makes it an outlier, Bangladesh's high default rate is not reflective of its economic performance," Pal explains. "This is a political issue, where influential individuals exploit the system for personal gain."

Pal's analysis suggests that a network of lobbyists and advocates actively promotes this culture of default, allowing financial delinquents to embezzle funds and engage in rent-seeking behavior.

This institutionalized corruption not only undermines the banking sector but also threatens the nation's overall economic stability.

By identifying the political nature of the default loan crisis, he calls for urgent action to “dismantle the network of patronage and hold those responsible accountable.”