Bangladesh’s central bank’s plan to merge five financially distressed Islamic banks into a single Shariah-compliant institution has ignited widespread debate among economists, banking professionals, and policymakers. Experts warn that, without a solid governance and risk management framework, the consolidation could amplify rather than resolve the sector’s existing fragilities—posing significant long-term fiscal, operational, and credibility risks for the country’s banking system.
Merger of Five Islamic Banks: Experts Warn of Structural and Systemic Risks to Bangladesh’s Financial Stability
The initiative, announced in early 2025, involves Social Islami Bank Limited (SIBL), Global Islami Bank, First Security Islami Bank, Union Bank, and EXIM Bank. All five have faced varying degrees of liquidity shortages, governance issues, and exposure to non-performing assets (NPAs). Bangladesh Bank (BB) has presented the merger as part of a broader reform effort under the new Bank Resolution Ordinance 2025, which seeks to restructure weak banks through mergers or acquisitions rather than outright liquidation.
However, prominent economists and industry experts caution that the merger—if executed without transparent financial restructuring, regulatory discipline, and professional oversight—could undermine both depositor confidence and market stability.
Bangladesh’s Banking Context: A System Under Stress
As of 2025, Bangladesh operates a bank-dominated financial system, comprising 61 scheduled banks:
- 6 state-owned commercial banks,
- 3 specialised development banks,
- 43 private commercial banks, and
- 9 foreign commercial banks.
Among the private commercial banks, 10 operate fully under Islamic Shariah principles, with several others running dual (Islamic and conventional) banking windows.
According to Bangladesh Bank’s Financial Stability Report 2024, the total asset base of Islamic banks accounts for roughly 28% of total banking sector assets, and deposits under Islamic banking principles exceed Tk 4.5 trillion. Despite rapid growth in recent years, the sector has been marred by weak governance, related-party lending, and insufficient liquidity buffers—particularly among newly established and politically linked institutions.
The latest central bank data reveal that the combined non-performing loan (NPL) ratio in Islamic banks now exceeds 8%, compared to the sector-wide average of 9.9%. However, unofficial assessments by independent analysts suggest that the real NPL rate may be significantly higher, as some troubled assets remain evergreened through accounting manoeuvres or informal rescheduling.
The Merger Proposal: Policy Rationale and Objectives
The proposed merger aims to address chronic weaknesses within these five Islamic banks through consolidation of assets, capital, and management. According to Bangladesh Bank Deputy Governor Dr Md Kabir Ahmed, the decision followed a six-month feasibility and stress-testing study.
“The central bank initially preferred liquidation, but liquidation would mean that shareholders and depositors lose everything—potentially damaging public trust in the banking system,” Dr Ahmed said at a recent roundtable discussion titled “Transition of Banking Sector in Bangladesh: Challenges and Way Forward,” jointly organised by the University of Dhaka’s Department of Banking and Insurance and the Policy Think & Economic Research Centre (PTERC).
He added that the new consolidated entity is expected to become profitable within a year of operation under close supervision and enhanced governance oversight. The central bank will also establish a Bank Resolution Fund—modelled after the European Union’s Single Resolution Fund (SRF)—to manage potential future interventions in the banking sector.
Expert Reactions: Concerns Over Fiscal Burden and Governance Weakness
Despite the central bank’s assurances, leading financial experts are sceptical. Dr Toufic Ahmad Choudhury, former Director General of the Bangladesh Institute of Bank Management (BIBM) and current Director General of the Bangladesh Academy for Securities Markets (BASM), expressed deep reservations:
“These five troubled banks could become an even greater problem in the future. There is little synergy among them, and no evidence that a merger of weak entities will produce strength. The banking sector must be managed according to international best practices—not through makeshift solutions.”
Dr Choudhury also called for an end to “dual regulation,” referring to the overlapping oversight of Islamic banking operations by both the central bank and Shariah boards, which often lack uniform standards. He argued that Bangladesh Bank should be given full statutory authority to supervise all banking institutions—Islamic or conventional—with a consistent prudential framework.
Similarly, Faruq Mayeenuddin Ahmed, Vice Chairperson of Brac Bank Limited, warned that the proposed consolidation might merely combine individual weaknesses into a systemic risk.
“These five banks have already created five separate holes in the financial system; merging them without a credible capital restoration plan might simply create one large hole,” he said.
He emphasised that non-performing loans (NPLs) must be categorised accurately and independent directors appointed based on expertise rather than political considerations.
Islamic Banking Under Pressure: A Broader Industry Perspective
Islamic banking in Bangladesh—governed under Shariah principles prohibiting interest (riba)—has grown rapidly since its inception in the 1980s, driven by strong demand from Muslim-majority clientele. Yet this growth has not always been accompanied by adequate institutional governance.
According to a 2023 BIBM study, over 65% of Islamic banks’ directors have political affiliations, and 30% of Shariah board members lack formal training in finance or risk management. Moreover, liquidity constraints have intensified since 2022 due to the global dollar shortage and domestic inflationary pressures, pushing several banks to breach their Statutory Liquidity Ratio (SLR) requirements.
The proposed merger thus reflects deeper structural inefficiencies within the Islamic finance ecosystem in Bangladesh—chiefly weak internal controls, inadequate risk diversification, and concentration of lending to connected borrowers.
Comparative Lessons: Bank Mergers at Home and Abroad
Bangladesh has experimented with bank mergers and bailouts in the past—mostly involving state-owned or politically exposed institutions—with mixed outcomes.
- In 1983, several nationalised banks were restructured under the Financial Sector Reform Programme (FSRP), but this failed to curb rising NPLs.
- In 2019, Padma Bank Limited (formerly Farmers Bank) was recapitalised with public funds and rebranded, yet continues to face high default risks and poor profitability.
Globally, successful bank mergers have typically required strong pre-merger due diligence, clear asset valuation, governance reform, and capital support mechanisms. For example, the Banking Union framework in the European Union ensures that mergers occur under strict stress-testing and recapitalisation protocols, with shareholder losses absorbed before public funds are deployed.
In contrast, Bangladesh’s current merger plan appears regulator-driven rather than market-driven, raising concerns about transparency and long-term sustainability.
Fiscal Implications: Risk of a Public Burden
Experts warn that the merger could create a “too big to fail” Islamic institution—increasing the government’s contingent liabilities in case of further instability. If the merged bank underperforms, the government may be compelled to provide ongoing liquidity or recapitalisation support.
Preliminary estimates by PTERC suggest that the combined asset base of the five merging banks stands at over Tk 1.6 trillion (USD 14.4 billion), while their combined capital shortfall exceeds Tk 80 billion. Without external investors or a robust capital injection plan, the merged entity could struggle to meet Basel III capital adequacy standards.
Moreover, absorbing weaker loan portfolios could deteriorate asset quality. If even 10% of inherited loans become unrecoverable, public liabilities could increase by Tk 160 billion, equivalent to 0.35% of GDP.
Regulatory Independence and Institutional Reform
At the policy level, analysts stress that Bangladesh Bank must be allowed to operate independently and professionally, without political influence in licensing, appointments, or recapitalisation decisions.
Dr Md Ezazul Islam, Executive Director (Grade-1) at Bangladesh Bank, acknowledged that traditional supervisory mechanisms have failed to detect governance lapses early enough. He added that dedicated monitoring teams are being formed to oversee the post-merger transition.
“We have learned from past mistakes. This time, we are establishing accountability at every step. The independence of Bangladesh Bank must be safeguarded to ensure transparency and credibility,” he said.
However, several economists argue that regulatory capture remains a persistent problem, with political and business interests often shaping central bank decisions. Unless the new Bank Resolution Ordinance 2025 explicitly insulates the central bank’s decisions from external interference, experts fear the merger may repeat old mistakes under a new name.
Privatisation Roadmap: From Rescue to Reform
Ahsan Ullah, Advisor to the Governor of Bangladesh Bank, outlined the central bank’s medium-term vision: once the merged bank reaches break-even, the regulator intends to gradually privatise the institution.
This aligns with a global trend where governments first intervene to stabilise distressed banks and then divest ownership once profitability and governance improve. However, successful privatisation would depend on attracting credible strategic investors, improving asset quality, and ensuring Shariah compliance within internationally accepted frameworks.
Analysts also suggest that foreign Islamic financial institutions—such as those from Malaysia or the Gulf Cooperation Council (GCC) countries—could be invited to acquire minority stakes, bringing in capital and expertise.
Broader Systemic Risks
The merger occurs at a time when Bangladesh’s financial system faces growing dollar liquidity stress, import payment backlogs, and declining foreign exchange reserves (now hovering around USD 20 billion).
At the same time, overall NPLs have reached an all-time high of Tk 1.82 trillion by late 2024, equivalent to nearly 10% of total loans. Analysts warn that, under such conditions, merging weak institutions could further strain supervisory capacity and risk contagion effects across the financial system.
Additionally, Islamic banks’ reliance on short-term mudaraba deposits makes them particularly vulnerable to liquidity runs, since they lack access to traditional lender-of-last-resort facilities. Without a robust Shariah-compliant interbank liquidity mechanism, the merged bank’s resilience could remain limited.
Expert Recommendations: A Framework for Safe Consolidation
Participants at the University of Dhaka roundtable proposed several recommendations to ensure that the merger strengthens, rather than weakens, financial stability:
- Transparent Due Diligence: Conduct independent audits to identify the true extent of NPLs and asset quality before merger completion.
- Capital Injection Conditions: Any government support should be conditional upon governance reform, including board restructuring and executive accountability.
- Unified Regulatory Oversight: Eliminate overlapping Shariah and central bank oversight to ensure uniform prudential standards.
- Time-Bound Privatisation: Prepare a three- to five-year plan for partial privatisation once profitability is restored.
- Public Disclosure: Publish all merger-related decisions and financials to maintain market confidence and transparency.
A Crossroads for Bangladesh’s Banking Sector
The merger of five Islamic banks marks a defining moment for Bangladesh’s financial system. It offers a potential pathway toward stability but also carries significant systemic and fiscal risks if not handled with transparency, technical rigour, and institutional independence.
As Dr Toufic Choudhury aptly summarised:
“Rescuing banks is not the issue—rescuing them the wrong way is.”
Whether the merger becomes a milestone for reform or a repeat of past failures will depend on the central bank’s ability to uphold integrity, independence, and international standards in one of the most consequential financial experiments in Bangladesh’s recent history.