Bangladesh’s Islamic Bank Merger: Challenges and Consequences

Highlights:

• Bangladesh’s largest lender merges with five troubled Islamic banks
• Aims to prevent systemic failure and depositor anxiety
• Default loans now account for 77% of the combined portfolio, reflecting deep-rooted corruption
• Taxpayers face a burden of TK20,000 crore, raising moral hazard concerns
• Accountability is crucial for good governance, transparency, and the success of the merger
• Without proper reforms, mergers risk repeating past mistakes

A proposed merger involving five struggling Islamic banks could result in Bangladesh having its largest lender. Anis A Khan, former chair of the Bangladesh Bankers Association, highlights that the new entity would control assets close to TK2.2 lakh crore, surpassing the state-owned Sonari Bank.

On the surface, this merger seems to promise increased stability and sector milestones, but real challenges lurk beneath the surface.

Fahmida Khatun, executive director at the Policy Dialogue Center, emphasizes that the primary motivation for this merger is straightforward: to avert a systemic collapse. The sudden closure of these banks could trigger panic among depositors, businesses, and employees—a risk regulators must avoid at all costs.

Yet, one must wonder—will these mega-mergers actually eliminate corruption, or are we simply combining five failed banks into one gigantic issue?

Central banks must establish robust regulatory frameworks to ensure effective governance and management for merged entities. Prior to depending on taxpayer money, we should consider alternative recapitalization methods.

M Masrur Reaz, Chairman of Policy Exchange Bangladesh

Common Strategies, Divergent Results

Bank mergers are not uncommon globally; they can aim to expand market reach or act as rescue operations.

Take India, for instance. A series of mergers between 2017 and 2020 shrank the number of state-owned banks from 27 to 12. The National Bank of India even absorbed five quasi-banks, positioning itself among the world’s top 50 banks. The aim was to strengthen balance sheets, merge efficiencies, and prepare for a digital landscape.

Conversely, the U.S. financial crisis in 2008 led to entirely different mergers, often related to survival rather than growth. When Bear Stearns failed, JPMorgan Chase stepped in with government support, while Bank of America absorbed Merrill Lynch under similar circumstances. These were not about profits; they were about preventing a financial meltdown.

Bangladesh has also seen some acquisitions. For example, Standard Chartered took over the Bangladeshi operations of ANZ Grindlays Bank in 2000. Similarly, Bank Asia expanded by absorbing operations from various Muslim commercial banks. These actions were mainly strategic rather than rescue-oriented.

The current proposal to merge five Islamic banks is set apart by its scale and intent.

These banks—Security Islami, Global Islami, Union Bank, Social Islami Bank, and Exim Bank—share a troubling heritage, with four previously managed by the S ALAM group, known for its questionable lending practices.

The figures paint a clear picture of corruption: deposits from September 2023 to May 2025 fell from TK1.58 lakh crore to TK1.36 lakh crore, while loan levels increased to TK1.95 trillion. Default loans ballooned to TK1.47 lakh crore, representing 77% of the total loan portfolio. Union Bank shows a staggering 98% bad debt ratio, followed closely by First Security at 96%, and others lagging just slightly behind.

To get by, these institutions have repeatedly tapped into Bangladesh’s central bank’s liquidity windows, living off regulated support. Thus, these mergers tell a story of desperation rather than strength.

Taxpayer funds are being used to remedy the turmoil stemming from defaults on corrupt, politically-connected loans. Hence, the government must enforce stringent accountability regarding these banks’ performance.

Fahmida Khatun, Executive Director of the Centre for Policy Dialogue

Cost of Survival

The draft proposal from Bangladesh Bank outlines that the merger will incur costs of TK35,000 crore. This includes TK20,000 crore being directly sourced from taxpayer funds. Additionally, TK10,000 crore will potentially be drawn from the Deposit Insurance Fund, requiring legal changes to facilitate its use as a loan. The remaining TK5,000 crore is expected from international development partners such as the IMF and World Bank—funds that will eventually fall back on taxpayers.

The government argues that early intervention will shield smaller savers, by converting institutional deposits into new bank shares while absorbing fraud-related debt through the expansion of rural branches.

Reforms in governance are promised, too. Current committees will be disbanded, shares will be cancelled, and a new license issued with an experienced managing director appointed. The ambition is for the bank to function under central bank oversight, possibly setting the stage for future private investors.

The Opportunity Cost

That said, the fiscal implications of recapitalization present tough choices. Khatun notes that Bangladesh’s tax-to-GDP ratio stands at a low 7.4%, the lowest globally. With such constrained revenues, every allocation matters. Setting aside TK20,000 crore to rescue failing banks inevitably means less available for critical sectors like health, education, and climate protection.

“There is undoubtedly a moral hazard,” Khatun asserts. “Using taxpayer money to handle disruptions from defaults on improper loans tied to political interests requires that the government ensures accountability.” Without accountability, recapitalization could risk rewarding corruption instead of addressing the root causes.

In today’s fiscal environment, public funds must be allocated with utmost accountability. Injecting TK20,000 crore from taxpayer money raises real concerns about moral hazards and governance integrity.

Anis A. Khan, former chairman of Bangladesh Bankers Association

The Tough Decision

M Masrur Rez, Chairman of Policy Exchange Bangladesh, characterizes the merger as a “tough decision.” Protecting depositor funds is vital to maintaining confidence, yet there’s the risk of creating larger institutions still vulnerable due to weak governance.

“The Bank of Bangladesh needs to ensure a strong regulatory framework to maintain efficiency within merged banks,” he emphasized. “We should also seek alternative recapitalization strategies, such as issuing bonds.”

For Rez, the ultimatum is finding a balance between depositor security and prudent finance.

Questions of Governance

Anis A Khan, the former ABB president and current managing partner of AAZ & Partners, argues that while the merger reflects bold regulatory actions, its success hinges on governance and transparency.

“Using public funds requires maximal accountability,” he advised. “The injection of TK20,000 crore raises valid fears about moral hazards and the integrity of governance.” Without strong oversight and independent leadership, Khatun warns that we may see repeated cycles of capital fixation without any substantive reforms.

Why Mergers Are Inevitable

The government’s haste is driven by a stark reality: deteriorating public trust in these banks and shrinking lending. A sudden shutdown could trigger systemic chaos, leading to panic withdrawals and widespread instability.

By merging these institutions, regulators hope to address the issues and bolster depositor confidence, buying time for necessary systematic adjustments. Ideally, larger entities with restructured balance sheets can deliver efficiency and stability.

However, the stakes are high. If governance doesn’t fundamentally change—if boards remain politicized and regulations untouched—the new entity may become a larger version of the same problems.

Reform or Merely Repetition?

Ultimately, discussions surrounding the merger are less about numbers and more about governance. The Bangladeshi banking sector has historically faced political interference and cronyism, with systemic issues preventing genuine progress. Without addressing these foundational concerns, recapitalization risks repeating cycles of failure, but at a significantly greater cost.

Experts suggest that this merger could be an opportunity for meaningful change—an avenue for introducing professional management, genuine board independence, and protecting regulatory bodies from political pressures. If handled properly, it might serve as a launchpad for broader reforms.

But there’s a flip side. Investing limited public resources into failing banks without strict accountability could create a norm of rescuing misappropriation without due cost.

The Path Forward

Bangladesh is on the brink of establishing the largest bank in its history. Whether it serves as a stabilizing force or a cumbersome bulwark against reform is yet to be seen, hinging on governance, transparency, and accountability.

As the merger unfolds, lingering questions remain. Will depositor protection yield long-term benefits? Do taxpayers perceive value in their financial rescues? Can regulators maintain independence from political pressures? And can mergers truly pave the way for genuine reforms, or will they merely delay the next crisis?

The answers to these questions will not only affect the five troubled banks but may well determine the integrity of Bangladesh’s entire financial system.