Bangladeshi Banking System
Banks
Bangladesh Country Report
The Bangladeshi Banking System
Summary Opinion
The Bangladeshi banking system is one of the weakest in emerging Asia, with a weak operating environment contributing to persistently poor performance and solvency issues, especially among the systemically important state‐owned commercial banks (SOCBs). The system is undermined by very weak asset quality, inadequate provisioning for loan losses, poor capitalisation and constrained profitability. The operating environment in Bangladesh is characterised by a weak macro economy and political instabilities, both of which pose significant risks. The weakness in the operating environment is further exacerbated by frequent natural disasters. Bangladesh’s banking system is made up of 48 banks, which include four SOCBs, 30 private commercial banks, nine foreign commercial banks and five development banks. The four SOCBs accounted for 33% of the banking system assets at end‐2007 (1997: 68%). Although the SOCBs are still the most dominant, they are fast losing market share to private banks (52%) and to a lesser extent foreign banks (8%). Despite the various steps taken to turn around the ailing SOCBs — such as privatisation attempts, conversion into limited liability companies (LLCs) and the appointment of new management — progress has been slow. In addition to the challenging operating environment, Fitch Ratings notes that the very weak asset quality in Bangladesh (reported gross NPL ratio of 13% in June 2008) is also influenced by weak standards of corporate governance, underdeveloped risk management systems and directed lending. Asset quality in the SOCB sector is of greater concern given their very high reported gross NPL ratio of 29.3% at end‐ September 2008 (1999: 41%). Fitch also notes that 80% of system NPLs are in the loss category with low probability of recovery, while provision coverage of NPLs was well below the regulatory minimum, as a result of which the system’s net
Bangladesh Country Report
The Bangladeshi Banking System
Summary Opinion
The Bangladeshi banking system is one of the weakest in emerging Asia, with a weak operating environment contributing to persistently poor performance and solvency issues, especially among the systemically important state‐owned commercial banks (SOCBs). The system is undermined by very weak asset quality, inadequate provisioning for loan losses, poor capitalisation and constrained profitability. The operating environment in Bangladesh is characterised by a weak macro economy and political instabilities, both of which pose significant risks. The weakness in the operating environment is further exacerbated by frequent natural disasters. Bangladesh’s banking system is made up of 48 banks, which include four SOCBs, 30 private commercial banks, nine foreign commercial banks and five development banks. The four SOCBs accounted for 33% of the banking system assets at end‐2007 (1997: 68%). Although the SOCBs are still the most dominant, they are fast losing market share to private banks (52%) and to a lesser extent foreign banks (8%). Despite the various steps taken to turn around the ailing SOCBs — such as privatisation attempts, conversion into limited liability companies (LLCs) and the appointment of new management — progress has been slow. In addition to the challenging operating environment, Fitch Ratings notes that the very weak asset quality in Bangladesh (reported gross NPL ratio of 13% in June 2008) is also influenced by weak standards of corporate governance, underdeveloped risk management systems and directed lending. Asset quality in the SOCB sector is of greater concern given their very high reported gross NPL ratio of 29.3% at end‐ September 2008 (1999: 41%). Fitch also notes that 80% of system NPLs are in the loss category with low probability of recovery, while provision coverage of NPLs was well below the regulatory minimum, as a result of which the system’s net