Bangladesh Bank (BB) has evolved into a more hands-on regulator in the past 30 years. Currently, it scrutinizes foreign loan approvals, dollar deposits, and significant transactions on a case-by-case basis, emphasizing caution and responsiveness over strategic planning. However, for a developing economy aspiring to reach middle-income status, this level of micromanagement is no longer sustainable.
In contrast, modern central banks globally prioritize establishing frameworks rather than delving into individual transactions. For instance, the Federal Reserve implements macro-prudential tools like capital adequacy norms and systemic liquidity thresholds without interfering in specific deals. Similarly, the European Central Bank oversees systemic institutions but delegates daily approvals to the banking sector. Even the Reserve Bank of India (RBI), previously criticized for micromanagement, has shifted towards a supervisory approach that promotes self-regulation through compliance-driven incentives.
One of the core issues highlighted is BB’s meticulous scrutiny of each dollar deposit tied to external commercial borrowing. Instead of laying out clear eligibility criteria, compliance requirements, and risk-based pricing guidelines, BB manually approves every incoming dollar deposit. This manual process introduces friction, delays, and encourages opacity in the system. Data from the Bangladesh Investment Development Authority (BIDA) shows that the average approval period for foreign loans exceeds 30-45 days, affecting the country’s competitiveness in the global capital markets.
Furthermore, the stringent enforcement of the Internal Credit Risk Rating System (ICRRS) has unintended consequences. While aiming to shield banks from risky credit exposures, it disproportionately hinders smaller borrowers’ access to credit. Conversely, large political borrowers, often backed by implicit assurances, face minimal obstacles. This imbalance stifles innovation and enterprise financing and fails to curb fraudulent loans in the country.
Under this regime, banks have shifted towards a compliance-oriented mindset rather than critically evaluating factors like how ICRR aligns with future cash flow predictability or industry-specific volatility. Over time, this compliance-driven culture has eroded institutional critical thinking, transforming banks into passive executors rather than strategic financiers. This shift towards blind compliance poses a significant long-term risk in an environment where regulatory frameworks prioritize judgment over blind adherence.
To move forward effectively, BB needs to shift from transactional oversight to sectoral risk frameworks. This includes establishing pre-approved routes for External Commercial Borrowing (ECB) for eligible companies with audited financials, implementing risk-weighted credit limits for banks based on their capital strength and non-performing loan history, introducing dynamic asset-liability matching rules to encourage long-term lending, and creating multiple sandboxes to test regulations and policies.
Countries like Malaysia have successfully implemented credit guarantee schemes and sandbox-based regulations, allowing controlled experimentation resulting in rapid product innovation with minimal regulatory breaches. Following in this path, BB should adopt a proactive supervision model, leveraging AI-backed credit risk surveillance tools to flag high-risk portfolios, conducting regular asset quality reviews for banks above a certain asset threshold, incorporating non-banking data for borrower scoring, shifting focus from collateral-backed lending to alternative asset forms, and learning from best practices like India’s Central Repository of Information on Large Credits (CRILC) for improved stress recognition.
BB should aim to foster market growth rather than dominate it by licensing independent credit rating agencies and asset reconstruction companies, opening private distressed asset markets, and enhancing interbank repo and derivative markets for better price discovery. By embracing reforms and transitioning from an enforcer to an ecosystem architect, BB can empower licensed entities to operate within risk-based parameters, intervening only in cases of systemic risks.
The recent banking reforms supported by international organizations offer a significant opportunity for Bangladesh Bank. Initiatives like the Distressed Asset Management Act, Bank Resolution Ordinance, and proposed deposit protection enhancements mark crucial shifts in the banking landscape. However, the success of these reforms hinges on effective execution and a shift in mindset.
Moreover, it is imperative for Bangladesh Bank to invest in developing the expertise of its regulators in structured finance, international bond markets, and fintech-driven credit models. Without this investment in human capital, BB risks regulating outdated risks with inadequate tools while the future markets remain unregulated.