Bangladesh’s Banking Sector Faces Persistent Headwinds
Bangladesh’s banking industry is expected to continue struggling with significant challenges, including high credit risks, a fragmented system, and weak governance among certain lenders, according to S&P Global Ratings’ 2025 midyear outlook.
The ratings agency also highlighted concerns about weak liquidity, particularly within some Islamic banks, and capital shortfalls in several state-owned and Islamic financial institutions. S&P predicts that the industry’s poor profitability and strained asset quality will persist through 2026.
Shinoy Varghese, a primary credit analyst at S&P Global Ratings, noted that these issues stem from lax lending standards and ineffective foreclosure laws. State-owned banks, in particular, are burdened with a substantial volume of problematic assets. Varghese explained that the non-renewal of older credit lines and defaults on restructured loans expose the underlying fragility of borrowers’ financial health.
While recent policy changes, such as stricter rules for classifying overdue loans, tighter renewal criteria, and enforcement against willful defaulters, have led to a clearer picture of stressed assets, this “short-term pain will ultimately improve transparency” and bring practices closer to international standards.
Looking ahead, Varghese anticipates that interest rates will remain elevated through 2026, which could dampen demand for credit. However, these higher rates, combined with the implementation of a market-based lending rate system, are expected to benefit banks’ net interest margins (NIMs).
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