When WB, IMF reform prescriptions fail, who shares responsibility for banking crisis?

Bangladesh's banking sector is confronting its gravest crisis in decades. What was once perceived as the distress of a handful of troubled private banks has spread across the financial system, affecting public confidence and financial stability alike. Even the four major state-owned commercial banks-Sonali, Janata, Agrani and Rupali-long regarded as the pillars of public finance, are operating under significant pressure. Years of weak governance, politically influenced lending, poor risk management and recurring allegations of large-scale financial misconduct have steadily weakened their balance sheets and exposed deep institutional vulnerabilities.

Questions also remain about the security of nationally important assets held by banks, including the Daria-i-Noor diamond under the custody of Sonali Bank. Authorities should clarify its present status and explain whether any security lapses occurred during or after the political transition following the July uprising. Likewise, the severe liquidity pressures that emerged in parts of the banking system immediately after 5 August 2024 deserve a transparent public explanation. Without credible answers, restoring depositor confidence will remain difficult.

Bangladesh's banking crisis is primarily the product of domestic failures: prolonged political interference, regulatory weakness, ineffective corporate governance, poor enforcement of banking laws and the influence of powerful borrowers who exploited institutional weaknesses. Those failures rest largely with successive governments, regulators, bank management and influential business interests.

These objectives were not unreasonable. Many countries have benefited from market-oriented banking reforms. Yet Bangladesh's experience raises an important question: what happens when reform frameworks are introduced in an institutional environment that lacks the governance structures necessary for their success? More importantly, when internationally supported policy frameworks fail to produce their intended outcomes, who bears responsibility?

The answer cannot be reduced to blaming a single institution. Bangladesh's banking crisis is primarily the product of domestic failures: prolonged political interference, regulatory weakness, ineffective corporate governance, poor enforcement of banking laws and the influence of powerful borrowers who exploited institutional weaknesses. Those failures rest largely with successive governments, regulators, bank management and influential business interests.

However, international financial institutions also deserve thoughtful scrutiny. Their recommendations have significantly influenced Bangladesh's financial-sector reforms over several decades. While neither the World Bank nor the IMF directly managed the country's banks, their policy advice helped shape the direction of reform. That influence inevitably carries some responsibility for assessing whether the assumptions underlying those reforms adequately reflected Bangladesh's political and institutional realities.

One important lesson from Bangladesh's experience is that ownership alone does not determine banking performance. Reform debates often assumed that transferring ownership from the public to the private sector would automatically improve accountability, efficiency and prudent lending. Reality has proved far more complex.


This does not necessarily mean that reform recommendations were fundamentally misguided. Rather, it suggests that ownership reforms were insufficient without parallel investment in the institutions that make markets function effectively. Independent regulation, competent supervision, transparent corporate governance, an efficient judicial system and effective loan recovery mechanisms are indispensable foundations of a healthy banking system. Without these safeguards, changes in ownership merely transfer control while leaving underlying governance problems unresolved.

Defenders of the World Bank and the IMF may reasonably argue that their reform programmes always included governance improvements alongside market reforms and that many recommendations were only partially implemented. That argument deserves consideration. Nevertheless, Bangladesh's experience also illustrates that reform strategies underestimated the country's political economy. Institutional weaknesses were not temporary obstacles but structural realities that fundamentally shaped how reforms would operate in practice.

Another important issue often overlooked in international reform frameworks is the distinctive role of Bangladesh's state-owned commercial banks. Institutions such as Sonali, Janata, Agrani and Rupali have historically performed functions extending beyond conventional commercial banking. They have financed agriculture, supported rural development, facilitated government programmes, participated in infrastructure financing and maintained financial services in areas where private banks have shown limited interest. Many of these responsibilities were imposed as matters of public policy rather than commercial choice. This created an inherent contradiction. Governments expected state-owned banks to pursue national development objectives, while international lenders increasingly evaluated them according to commercial performance indicators. Profitability alone cannot be the sole measure of institutions simultaneously expected to fulfil public responsibilities. Their operational shortcomings deserve criticism, but so too should the policy environment that often required them to balance commercial objectives against developmental obligations.

The cumulative consequences are evident today. Non-performing loans have remained persistently high. Public funds have repeatedly been used to recapitalise troubled institutions. Confidence in the banking system has weakened, while concerns about governance continue to discourage investment and erode public trust.
Recognising shared responsibility is not about assigning blame alone. It is about learning from experience. Domestic policymakers must strengthen regulatory independence, enforce banking laws consistently, improve corporate governance and ensure that politically connected borrowers are no longer treated differently from ordinary citizens. Bangladesh Bank must also be equipped with greater operational independence to supervise financial institutions without political interference.

International financial institutions also have an opportunity to reflect on the lessons of Bangladesh's experience. Future assistance should place greater emphasis on building durable institutions rather than focusing predominantly on ownership structures or market incentives. Reform frameworks must be adapted to local political realities instead of assuming that institutional capacity will naturally emerge after market reforms are introduced.

The central lesson is straightforward. A poorly governed private bank can be as damaging as a poorly governed state-owned bank. Sustainable banking depends not primarily on ownership but on strong institutions, impartial regulation, professional management and consistent accountability.

Bangladesh's banking crisis therefore offers a broader lesson for financial reform worldwide. Policies cannot be separated from the institutional environment in which they operate. Reform models that succeed in one country may perform poorly in another if they overlook differences in governance capacity, political incentives and administrative capability.

The future of Bangladesh's banking sector will depend less on ideological debates over public versus private ownership than on the difficult work of rebuilding institutions that command public confidence. Strong regulation, transparent governance, effective law enforcement and accountability for all market participants-not ownership labels alone-will ultimately determine whether the country's banking system regains its stability and credibility.