In what is being hailed as a landmark intervention in the country's banking sector, the interim government has launched formal procedures to merge five financially distressed Islamic banks into the country's largest state-owned Shariah-based banking institution. As part of the arrangement, administrative teams will be deployed to manage the five banks. While their boards of directors will technically remain in place, their powers and functions will be suspended. The banks slated for merger are the First Security Islami Bank, Union Bank, Global Islami Bank, Social Islami Bank, and Exim Bank. To support the transition, the government has pledged Tk 200 billion in fresh capital, though the Bangladesh Bank estimates the total requirement at Tk 352 billion. The remaining shortfall is expected be mobilised through assistance from development partners.
The merger marks the most ambitious restructuring effort in Bangladesh's banking history. Officials have described the step as essential to avoid a costly liquidation process and to restore market confidence in Shariah-compliant finance, which commands a large and growing customer base. At the same time, the move exposes the gravity of the crisis afflicting privately run Islamic banks, many of which became deeply entangled with politically connected business groups accused of siphoning off funds. Since the change of government in August 2024, the Bangladesh Bank dissolved the boards of these banks and replaced them with new ones. Forensic audits revealed staggering levels of mismanagement, with non-performing loan ratios surpassing 90 per cent in three of the institutions. Against such a backdrop, consolidation is being viewed as the only viable path.
The banks had earlier submitted restructuring blueprints of their own, but those were dismissed by regulators as unrealistic. Four of the lenders-First Security Islami, Union, Global Islami, and Social Islami-were closely controlled by the Chattogram-based S Alam Group, which allegedly borrowed aggressively from them and diverted funds through shell companies. The Exim Bank, meanwhile, was long dominated by the former chairman of the Bangladesh Association of Banks. The broader context is equally troubling. According to an Asian Development Bank report published last month, Bangladesh now carries the highest ratio of bad loans in Asia, with defaults accounting for 20.2 per cent of total lending in 2024. The stock of distressed assets stood at $20.27 billion, up 28 per cent year-on-year, placing Bangladesh among the countries with the region's "most fragile banking system."
Whether the consolidation will actually restore stability, however, remains uncertain. Critics argue that the infusion of government funds and the shift to state ownership may not by themselves restore public confidence or instill the operational dynamism required for revival. Experience shows that state-owned banks in Bangladesh have historically underperformed, weighed down by inefficiency, political interference, and weak governance. For now, the hope is that the interim government will proceed cautiously, ensuring that the merged institution is managed with professionalism and transparency. Otherwise, what is intended as a solution could risk creating yet another unwieldy public-sector bank-potentially the country's largest but also the most problematic.
