The banking sector of Bangladesh is currently navigating one of the most turbulent periods in its history, characterized by deep-seated systemic corruption and a significant erosion of governance. For decades, the financial landscape has been marred by high-profile loan scams, regulatory capture, and the influence of politically connected business groups. As of late 2025, the interim government and the central bank, Bangladesh Bank, have been forced to take drastic measures to prevent a total collapse of the credit market. Factual reporting indicates that the scale of misappropriated funds has reached historic levels, with non-performing loans (NPLs) and hidden liabilities threatening the very foundation of the nation’s economy.
Corruption in the banking industry is not a recent phenomenon but has evolved from isolated incidents of fraud into a structural deficit. Historically, state-owned commercial banks (SoCBs) were the primary victims of these irregularities, but recent years have seen the rot spread into private commercial banks (PCBs) and Islamic banks. The mechanism of corruption typically involves the disbursement of massive loans to shell companies or entities with insufficient collateral, often sanctioned under direct political pressure. These practices have resulted in a liquidity squeeze that hampers legitimate businesses from accessing credit, thereby stifling national growth and increasing the fiscal burden on the state.
The transition of power in mid-2024 served as a catalyst for exposing the true extent of the damage. For years, “cosmetic” reporting and lax classification rules allowed banks to hide their bad assets. However, under new leadership at the central bank, more stringent international standards for loan classification have been implemented. This has led to a sudden surge in reported NPLs, reflecting a more accurate, albeit grim, picture of the sector’s health. The current state of affairs is the result of a long-term failure in oversight, where the regulator was often incapacitated by the interests of the very institutions it was meant to monitor.
The Rise of Systemic Loan Scams and Fraudulent Schemes
The hallmark of bank corruption in Bangladesh is the series of large-scale loan scams that have stripped billions of dollars from the public coffers. One of the most notorious cases is the Hallmark-Sonali Bank scam, which occurred between 2010 and 2012. In this instance, a relatively obscure company, the Hallmark Group, managed to embezzle approximately Tk 3,500 crore from the Ruposhi Bangla Hotel branch of the state-owned Sonali Bank. The fraud was carried out through the use of forged documents and “local letters of credit” (LCs) that had no underlying commercial basis. This case remains a symbol of how internal bank officials can conspire with external actors to bypass every layer of internal audit.
Following the Hallmark scandal, the BASIC Bank scam further exposed the vulnerability of state-run institutions. Under a specific board of directors appointed through political channels, the bank disbursed nearly Tk 4,500 crore in irregular loans over a short period. Investigations by the Anti-Corruption Commission (ACC) and Bangladesh Bank revealed that these funds were distributed to hundreds of fake companies, many of which shared the same addresses or did not exist at all. The failure to hold high-level officials accountable immediately after these discoveries created a culture of impunity that emboldened other groups to replicate these models in the private sector.
In more recent years, the focus has shifted toward the aggressive takeover of private banks by influential business conglomerates. The most prominent example involves the S. Alam Group, which allegedly gained control of several major banks, including the country’s largest Islamic bank, through questionable share acquisitions and board manipulation. Factual reports from late 2024 and 2025 indicate that tens of thousands of crores were withdrawn from these banks as loans to entities affiliated with the group, often violating the single-borrower exposure limits set by the central bank. The fallout from these activities has led to a massive capital shortfall and forced the regulator to appoint observers and administrators to restore order.
The Impact of Non-Performing Loans on Financial Stability
Non-performing loans represent the most visible symptom of the corruption crisis. As of September 2024, official statistics from Bangladesh Bank reported NPLs at approximately Tk 2.85 trillion, which accounted for roughly 17 percent of all distributed loans. However, independent analysts and international financial institutions like the IMF and World Bank suggest the true figure is likely much higher when including rescheduled loans and those tied up in legal disputes. The rapid increase in NPLs is directly linked to the “culture of default” where powerful borrowers feel no obligation to repay, knowing their political connections will protect them from foreclosure.
The accumulation of bad debt has several catastrophic consequences for the banking ecosystem. Firstly, it creates a liquidity crisis. When banks cannot recover their capital from old loans, they lack the cash flow to issue new credit to productive sectors like manufacturing and small-to-medium enterprises (SMEs). This leads to an “inter-bank” liquidity crunch where banks are forced to borrow from each other or the central bank at high rates just to meet daily withdrawal demands. In 2025, several banks were reportedly unable to honor customer checks, leading to a loss of public confidence and occasional runs on specific institutions.
Secondly, the high volume of NPLs requires banks to set aside provisions for potential losses. These provisions are deducted from the bank’s profits, leading to a decline in capital adequacy. Many state-owned banks and several private ones are currently operating with significant capital shortfalls, falling well below the 10 percent minimum ratio required under the Basel III framework. To keep these banks afloat, the government has historically used taxpayer money for recapitalization, which diverts funds away from essential public services like healthcare, education, and infrastructure development.
Regulatory Capture and the Role of Bangladesh Bank
Central to the crisis is the concept of regulatory capture, where the central bank’s ability to enforce laws was compromised by external political influence. For over a decade, the regulator was frequently seen as granting “forbearance” to troubled banks—essentially allowing them to break rules without penalty. This included allowing frequent rescheduling of bad loans with minimal down payments, which served only to hide the true scale of the problem. Instead of penalizing banks for governance failures, the previous regime often extended liquidity support, which acted as a moral hazard by encouraging further risky behavior.
The operational independence of Bangladesh Bank is now a primary focus of reform efforts. In 2025, the interim government introduced the Bank Resolution Ordinance, a landmark piece of legislation designed to give the central bank the power to forcibly merge, acquire, or liquidate failing banks. This ordinance aims to remove the legal hurdles that previously prevented the regulator from taking decisive action against “non-viable” institutions. It also establishes a framework for holding individual directors and executives personally liable for financial losses caused by their negligence or fraudulent actions, a step that was previously rare in the Bangladeshi legal system.
Furthermore, the central bank has begun a process of “cleaning up” the boards of directors of several banks that were dominated by single families or business groups. The “One Family, Two Directors” rule, which was previously relaxed to allow more family members on boards, is being reconsidered to promote professional management. By removing directors who were involved in insider lending or credit fraud, the regulator hopes to restore a semblance of corporate governance. However, the process is fraught with challenges, as these entrenched interests often use the slow-moving court system to block reform initiatives.
The Crisis of Confidence and Depositor Anxiety
The ultimate victims of bank corruption are the millions of ordinary citizens who keep their life savings in these institutions. The year 2025 has seen a notable increase in depositor anxiety as news of multi-billion dollar scams and capital shortfalls became public. In several instances, banks were forced to limit daily withdrawals to manage their cash flow, causing panic among retail customers. While the government has increased the deposit insurance limit, the fund is currently only large enough to cover a small fraction of total deposits, leaving many large-scale individual savers and institutional investors feeling exposed.
The loss of confidence has also led to a decline in the growth of new deposits. People are increasingly looking for alternative ways to store their wealth, such as purchasing government savings certificates, investing in gold, or, in more concerning cases, moving money into the informal hundi system for transfer abroad. This flight of capital further starves the banking system of the resources it needs to recover. Restoring trust will require more than just words; it will require the visible recovery of stolen assets and the successful prosecution of those who orchestrated the scams.
To address these concerns, the banking sector is currently being scrutinized through several Task Forces established by the central bank. These teams are tasked with conducting deep audits of the most troubled banks to identify the exact location of defaulted funds. The government has also sought international assistance from agencies like the FBI and specialized asset recovery firms to track down money that was laundered and sent to offshore accounts in Singapore, Dubai, and Europe. This “asset recovery” phase is seen as a critical component of rebuilding the public’s faith in the financial system.
Mechanisms of Corruption: How Funds are Embezzled
The methods used to bypass banking regulations in Bangladesh are often sophisticated but rely on a fundamental breakdown of internal controls. To understand the scale of the problem, one must examine the specific tactics employed by corrupt actors. Corruption is rarely the work of a single individual; it requires a network of collaborators ranging from branch managers to board members and external auditors who provide “unqualified” audit opinions despite obvious financial discrepancies.
- Creation of Shadow Entities: Borrowers often set up dozens of shell companies that exist only on paper. These entities apply for loans using the same collateral or overvalued property, allowing a single group to bypass single-borrower exposure limits.
- Back-to-Back Letter of Credit (LC) Fraud: This involves opening LCs for imports or exports that never actually take place. The bank pays out the funds based on forged shipping documents, and the money is then diverted to other accounts rather than being used for legitimate trade.
- Insider Lending and Board Manipulation: Directors of banks often use their positions to approve loans for their own businesses or for businesses owned by fellow directors in other banks, creating a “reciprocal lending” network that avoids scrutiny.
- Software and Ledger Manipulation: In some documented cases, bank software was illegally modified to extend credit limits or to hide the overdue status of loans, preventing the central bank’s automated systems from flagging them as NPLs.
- Collateral Valuation Fraud: Corrupt surveyors are hired to provide highly inflated valuations of land or assets used as security. In some cases, the same piece of land is pledged to multiple banks for different loans.
The Path to Recovery: Structural Reforms and New Legislation
Recovering from the current crisis requires a multi-pronged approach that goes beyond temporary liquidity injections. The Bangladesh Financial Sector Report 2025 outlines a comprehensive roadmap for restructuring the industry. One of the primary recommendations is the establishment of a government-capitalized “bridge bank” to take over the performing assets of insolvent institutions, while the bad assets are offloaded to private Asset Management Companies (AMCs). This “good bank/bad bank” model has been used successfully in other countries to stabilize financial sectors after a systemic collapse.
Another critical area of reform is the legal framework for debt recovery. Currently, the Artha Rin Adalat (Money Loan Court) system is bogged down by hundreds of thousands of pending cases, often lasting for decades. Borrowers frequently use “writ petitions” in the High Court to stay the recovery process. Legal experts suggest that a dedicated bankruptcy law and the strengthening of specialized courts are essential to ensure that defaulters cannot use legal technicalities to avoid repayment. Without a credible threat of asset seizure, the culture of default will likely persist.
Furthermore, the role of external auditors is being completely redefined. The Failure of auditors to flag irregularities in banks like BASIC and Sonali has led to calls for stricter licensing and blacklisting of firms that provide misleading financial reports. The central bank is now implementing a system where only a pre-approved panel of top-tier audit firms can conduct audits for banks, and these firms will be held legally accountable for any “material misstatements” that they fail to detect. This move is intended to ensure that the financial statements of banks reflect their true asset quality.
International Cooperation and Asset Recovery
Given the scale of money laundering associated with bank corruption, international cooperation has become a necessity. It is estimated that a significant portion of the defaulted loans has been smuggled out of Bangladesh through trade-based money laundering and the hundi system. The interim government has initiated formal requests to countries like Singapore and the United Kingdom to freeze assets held by individuals and groups accused of massive bank fraud. In November 2025, the Anti-Corruption Commission filed a historic case involving the laundering of over Tk 10,000 crore, specifically citing the transfer of funds to offshore accounts.
The involvement of the International Monetary Fund (IMF) is also pivotal. As part of its multi-billion dollar loan program for Bangladesh, the IMF has set strict “structural benchmarks” for the banking sector. These include reducing the NPL ratio of state-owned banks, increasing capital adequacy, and enhancing the central bank’s supervisory capacity. Compliance with these benchmarks is not only a condition for continued financial aid but is also viewed as a “stamp of approval” that could help regain the trust of international investors and credit rating agencies.
Finally, the government is working on digitizing the entire financial system to reduce human intervention in loan processing. By integrating the Credit Information Bureau (CIB) with other national databases, the regulator aims to make it impossible for chronic defaulters to take out new loans under different names. Advanced data analytics and AI-driven monitoring systems are being proposed to detect suspicious patterns of transactions in real-time, providing an early warning system for potential fraud before it reaches the scale of the Hallmark or S. Alam scandals.
Conclusion
The crisis of bank corruption in Bangladesh is a complex, decades-old issue that has reached a breaking point in 2025. The systemic failures in governance, coupled with the influence of politically backed business cartels, have left the financial sector with a massive deficit of both capital and trust. While the scale of the problem is daunting—with NPLs at record highs and several banks on the verge of insolvency—the recent shifts in regulatory policy offer a glimmer of hope. The introduction of the Bank Resolution Ordinance, the appointment of professional administrators, and the aggressive pursuit of laundered assets represent a significant departure from the era of regulatory forbearance. However, the success of these reforms depends entirely on the government’s ability to maintain the central bank’s independence and resist the pressure of the powerful interests that benefited from the old system. Rebuilding the banking sector is not just a technical requirement for economic growth; it is a fundamental necessity for the country’s social and financial stability. If the current momentum for transparency and accountability can be sustained, Bangladesh may finally be able to transition from a culture of impunity to one of integrity, ensuring that the savings of its citizens are protected and its financial future is secure.
