Stepping up banking reform efforts

Bangladesh Bank has long been expected to act as a strong regulator without being given the legal space to do so. The latest move to amend the Bangladesh Bank Order and the Bank Company Act is an attempt to reverse that pattern by redefining who holds authority over banks and on what terms. Few now dispute that the central bank must be insulated from day-to-day political pressure if it is to regulate effectively. The central bank governor himself has pressed for swift amendments to the country's banking laws to restore discipline and credibility. This is essential because any central bank vulnerable to external pressure cannot enforce discipline, curb reckless lending or hold powerful defaulters to account. It also cannot maintain the credibility of the financial system in the eyes of depositors and international partners. However, giving the central bank freedom alone does not ensure that this power will always be exercised responsibly. What remains at issue, and rightly so, is whether the current reform push sufficiently recognises that independence without clear accountability can create new risks even as it tries to resolve old ones.

That precise balance constitutes the central challenge of this legislative effort. The proposed laws must empower the institution while simultaneously binding it within a framework of transparency. A framework that grants sweeping powers without explicit accountability mechanisms invites future abuse. A powerful governor today may act with restraint and professionalism, but there is no guarantee that successors will do the same. Without safeguards, the same autonomy that protects the regulator from political interference could also shield it from scrutiny when decisions are arbitrary, inconsistent or influenced by other interests. This is why the law must set clear rules for decision making, establish transparent appointment processes for senior officials and provide independent oversight arrangements capable of reviewing regulatory actions without undermining operational independence. Parliamentary reporting, judicial review and regular public disclosure are anything but obstacles to autonomy. They are what give it legitimacy.

Simultaneously, the Bank Company Act amendments must tackle the source of the sickness within the banks themselves. Granting the central bank autonomy is pointless if the institutions it regulates are allowed to remain dysfunctional. This is especially critical given the pervasive culture of poor governance, lifetime directorships and family-dominated ownership structures that permeate financial institutions. Furthermore, the controversial practice of using taxpayer money to provide artificial life support to insolvent banks creates a dangerous moral hazard. For these reasons, this legislation must mandate professional, term-limited bank boards, effectively separate lending decisions from boardroom influence and establish credible mechanisms for resolving insolvent institutions.

As the interim government's tenure draws to a close, the pressure to act is immense but the priority must be the quality of legislation over the speed of its passage. Rushing through flawed bills would be a disservice to the nation's long-term economic health. If the complex task of finalising both acts proves too daunting within the remaining time, leaving behind comprehensive, well-reasoned notes for the next elected government is a responsible alternative. What matters most is coherence. Central bank autonomy and banking reform legislation must be aligned, mutually reinforcing and grounded in the same philosophy of balanced power. It would be inconsistent to insist on strict discipline for banks and borrowers while leaving the regulator largely beyond question. Reform must be even-handed if it is to command public confidence.