Banking reform a vital step

Over the past decade, many banks have operated under a dangerous paradox. Despite high levels of non-performing loans (NPLs) and liquidity issues, dividends were easily paid out to shareholders. For example, in 2023, several banks with non-performing loan ratios exceeding 15 per cent paid double-digit dividends-not from real profits but through window dressing and weak internal controls. This practice not only eroded depositor trust but also exposed these institutions to greater risk. Thus, the Bangladesh Bank's decision to limit dividends for under-capitalised banks or those not compliant with liquidity requirements is a necessary step, compelling institutions to prioritise solvency over shareholder satisfaction. This shift was long overdue.

What resonates most is the Bangladesh Bank's emphasis on accountability. Prohibiting dividends from being paid out of retained earnings prevents banks from masking poor performance using past reserves. This stands in contrast to the "extraction culture," where powerful stakeholders exploit companies at the expense of depositors. Another critical aspect of the reform is tying dividend eligibility to capital adequacy ratios (CAR), which incentivises banks to strengthen their balance sheets amid global economic uncertainties.

Critics may argue that stricter regulations could deter investors. However, a stable banking sector is fundamental to economic growth. Transparency and sustainability should take precedence over short-term dividends. The Bangladesh Bank's reforms align with global best practices, including Basel III norms, which emphasise capital conservation during downturns. These measures also complement upcoming initiatives, such as stricter non-performing loan recognition, to form a cohesive framework for addressing systemic risks.

To build on these gains, authorities must resist political pressures that have historically enabled reckless banking practices. Empowering depositors through increased public awareness could further strengthen the sector. While the Bangladesh Bank's efforts require public support, sustained vigilance remains crucial. Let this reform serve as a catalyst for deeper structural changes, including the swift resolution of legacy bad loans and enhanced governance, to rebuild a resilient financial ecosystem.

Mohammad Nazif Uddin

Student, School of Business and

Economics, North South University mohammadnazifuddin@gmail.com