The government is exploring extensive financial and administrative changes connected to three World Bank loan schemes valued at $1.7 billion, which involve the elimination of a contentious provision from the Bank Resolution Act.
Officials from the finance ministry and Bangladesh Bank have revealed that numerous discussions have occurred in Washington, DC and Dhaka, with a recent visit by a World Bank delegation to negotiate terms.
One essential requirement for a $500 million budgetary aid loan is the removal of Section 18 (Ka) from the Bank Resolution Act, 2026, which would potentially enable former owners of five merged Islamic banks to regain control. Additionally, the World Bank has urged for legal measures to segregate the policymaking and implementation functions of the National Board of Revenue.
Furthermore, the $400 million Financial Sector Support Programme II necessitates adjustments to the Bank Company Act, the introduction of a Distressed Asset Management Act, and a 25% decrease in non-performing loans at government-owned banks.
Moreover, approximately $800 million is being reallocated from ongoing projects to provide direct budgetary support. While no specific conditions have been outlined for this reallocation, progress on the aforementioned programs will be crucial for the release of funds through reallocation, as per officials.
Eight projects have been earmarked for reallocation, with officials anticipating funds by June once relevant ministries finalize technical procedures and submit proposals to the World Bank.
Negotiations concerning the $500 million budget support loan are still in progress. Talks for the remaining $1.2 billion are nearing completion, with finance ministry officials anticipating approval from the World Bank board by June.
The banking dispute originated in May 2025, when the interim government merged five troubled Shariah-based private banks into a state-run entity, Sommilito Islami Bank, under the Bank Resolution Ordinance. The inclusion of section 18 (Ka) in the Bank Resolution Act, 2026, by the current government, allowing former owners to reclaim control easily, has sparked widespread criticism.
Opposition lawmakers, economists, anti-graft organizations, and banking associations have called for the repeal of this provision, citing the risk of rewarding individuals associated with past financial irregularities. The World Bank and IMF have also recommended the removal of this section as part of the reform conditions for loans.
According to a central bank official speaking anonymously, the government faces a dilemma amidst mounting criticism. A finance ministry official, also requesting anonymity, hinted that the repeal or modification of the law is under consideration to prevent previous owners from regaining control.
The World Bank has emphasized the separation of the National Board of Revenue’s policy and implementation functions. The government has agreed to pursue this separation, with the World Bank supporting this move. Several amendments to VAT laws are also part of the loan conditions.
Under the $400 million Financial Sector Support Programme, the government plans to amend the Bank Company Act. The World Bank has advised stricter enforcement of related-party lending regulations, enhancing supervisory powers for Bangladesh Bank, and aligning corporate governance with international standards.
Relevant draft amendments, initially prepared during the interim government, have been revisited by the Financial Institutions Division and sent back to Bangladesh Bank for review and consultation due to opposition from bank owners.
Other reforms include amendments to the Deposit Protection Act, the introduction of laws on distressed asset management and insolvency, and the licensing of small enterprises to recover bad loans under Bangladesh Bank’s oversight. New laws, such as the Distressed Asset Management Act (DAMA) and the Insolvency and Bankruptcy Act, will be enacted to strengthen the banking sector.
DAMA will grant legal authority to small companies to recover bad loans, similar to banks, regulated by Bangladesh Bank. It will establish a framework for managing defaulted and non-performing loans, with technical support from the World Bank Group’s International Finance Corporation.
The Insolvency and Bankruptcy Act will align with international best practices to bolster insolvent banks and financial institutions. State-owned banks will undergo asset quality reviews (AQR) to enhance their financial health.
The World Bank has highlighted the weaknesses in Bangladesh’s banking sector, citing issues like poor corporate governance, regulatory capture, and politically influenced lending practices. The sector’s vulnerabilities have led to fraudulent activities and embezzlement by bank shareholders and management.
State-owned banks, holding a significant portion of the sector’s assets, are considered highly susceptible to risks. The Financial Sector Support Project II is crucial for stabilizing the sector by improving deposit protection, enhancing supervisory capabilities, and facilitating the resolution and restructuring of weaker banks, including state-owned banks.
The program aims to restore stability, enhance financial intermediation, and support long-term growth in Bangladesh.