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The World Bank said the project will help Bangladesh establish the tools, systems, and safeguards needed to protect small depositors.
It will lay the groundwork for the resolution and restructuring of weaker banks, including possible recapitalisation of reformed state-owned banks.
The other initiatives will include an enhanced deposit insurance system and an effective emergency liquidity assistance framework.
“The project, which forms part of a coordinated approach by development partners including the IMF and the Asian Development Bank, supports measures to bolster crisis preparedness and build the authorities’ capacity to manage banking sector stress,” said Toshiaki Ono, World Bank senior financial sector specialist and task team leader for the project.
The World Bank said the banking sector continues to face severe challenges caused by weak corporate governance, regulatory capture, and related-party lending.
The non-performing loan ratio reached 32.6 percent at the end of March 2026, far above the South Asian average of 7.9 percent. Meanwhile, the sector’s capital-to-risk-weighted assets ratio stood at negative 2.6 percent at the end of December 2025.
The lender also plans to support the modernisation of Bangladesh Bank’s information and communications technology infrastructure to address growing cybersecurity risks and improve sector-wide data collection and risk-based supervision.
LEGAL CHANGES
Finance ministry officials told The Daily Star that the government intends to amend the Bank Company Act under the programme.
The World Bank has recommended stricter enforcement of related-party lending rules, full supervisory authority for Bangladesh Bank, and corporate governance standards aligned with international best practices.
Officials said draft amendments prepared during the interim government had been shelved following resistance from bank owners. The Financial Institutions Division has since returned the proposals to Bangladesh Bank for further review and consultation.
Other planned reforms include amendments to the Deposit Protection Act and the enactment of two new laws: the Distressed Asset Management Act (DAMA) and the Insolvency and Bankruptcy Act.
Under DAMA, licensed asset management companies will be authorised to recover bad loans under Bangladesh Bank’s supervision. The law will create a framework for the 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 be designed to align Bangladesh’s framework with international standards and strengthen mechanisms for dealing with insolvent banks and financial institutions.
State-owned banks will also undergo asset quality reviews. During the interim government’s tenure, similar reviews were conducted in nine private banks, leading to the merger of five lenders into Sommilito Islami Bank.
In its programme documents, the World Bank said that state-owned banks are considered the most vulnerable segment of the sector, holding $50 billion or 27 percent of total banking assets, equivalent to around 12 percent of GDP. Three state-owned commercial banks are classified as systemically important.
WEAKNESSES RUN DEEP
According to the World Bank programme documents, Bangladesh’s banking sector held assets worth $212.2 billion at the end of June 2024, accounting for 88 percent of total financial sector assets and about half of GDP.
The sector comprises 62 scheduled banks regulated under the Bangladesh Bank Order and five unscheduled banks established through separate laws.
The documents identify structural weaknesses including poor corporate governance, regulatory capture, and politically influenced related-party lending.
Loopholes in legal definitions allowed complex inter-family relationships to conceal the true scale of related-party lending, contributing to fraudulent lending, wilful defaults, and embezzlement by bank owners and management, the World Bank said.
“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 behaviour, undermining market discipline, and delaying necessary reforms,” it said.