Introduction
When a banking system fails, it does not fail quietly. It fails through the slow accumulation of bad loans that were never properly assessed, through political appointments that replaced qualified judgment with loyalty, and through a culture of impunity that teaches borrowers that money borrowed from a state institution need not be returned.
This is, in essence, the story of Bangladesh’s banking sector in 2025 — a system that is not merely stressed, but structurally compromised. At the same time, across the globe, European banks are operating with non-performing loan (NPL) ratios hovering around 2.28%, backed by decades of credit bureau infrastructure, regulatory independence, and data-driven lending that Bangladesh has largely failed to replicate.
This article examines the deep structural problems of the Bangladeshi banking sector, contextualizes them through a comparative lens with Europe’s credit score-based banking framework, and draws on research evidence and case studies to argue that Bangladesh’s crisis is not primarily a financial one — it is a governance one, and its solution will require more than monetary policy adjustments.
Part I: The Scale of Bangladesh’s Banking Crisis
A Non-Performing Loan Catastrophe
The numbers are staggering. According to Bangladesh Bank data, by the end of June 2025, defaulted loans in the Bangladeshi banking system had surged to Tk 5,304 billion — representing approximately 27.09% of all loans disbursed by banks in the country (Prothom Alo, 2025). To put this in comparative perspective: India reduced its NPL ratio from 7.9% in 2020 to 1.7% by 2023. Taiwan and South Korea, the regional benchmarks, operate with NPL ratios of just 0.1% and 0.2% respectively.
Even countries in crisis outperform Bangladesh on this metric. Sri Lanka, which went through a full sovereign debt collapse, maintained an NPL ratio of 12.6%. Ukraine, actively engaged in a prolonged war, had an NPL ratio of 26.1%. Lebanon, which suffered one of the worst economic collapses in modern history, recorded 23.8%. Bangladesh, without any such comparable external catastrophe, has surpassed all of them (The Daily Star, 2025).
A recently published report by the Asian Development Bank (ADB) has formally identified Bangladesh as ranking highest in Asia in terms of non-performing loans — a distinction no economy would want.
The Hidden Debt: Concealment and Political Transition
What makes the situation more alarming is that a substantial portion of these bad loans was deliberately concealed for years. Following the fall of the Awami League government in August 2024, previously hidden NPLs began surfacing. An additional Tk 4.33 lakh crore in hidden bad loans accumulated during earlier years was subsequently revealed through reassessment (The Business Standard, 2025).
Within a single year, the official share of defaulted loans jumped from 12% to over 28% of total disbursed loans — not primarily because new defaults occurred, but because the old ones could no longer be disguised. This is a systemic transparency failure of historic proportions.
Capital Erosion and Regulatory Alarm
The capital adequacy situation mirrors the NPL crisis. Under Basel III guidelines implemented in Bangladesh by 2019, banks are required to maintain a Capital to Risk-Weighted Assets Ratio (CRAR) of 12.5%. By December 2024, this figure had collapsed to 3.08% for the sector — a fall from 10.64% in June 2023 and 6.86% in September 2024 (The Daily Star, 2025). Five individual banks recorded NPL ratios of over 90% — meaning virtually all of their loan books are unrecoverable.
At the same time, loan concentration has created dangerous systemic fragility: approximately 87% of total loans are concentrated in the Dhaka and Chattogram divisions, and the top-heavy nature of borrowing means that a small number of large, politically connected debtors account for an outsized share of the defaults.
Part II: Why Bangladesh’s Banking System Failed — Root Cause Analysis
1. Political Interference in Loan Sanctioning
The Bangladesh Institute of Bank Management (BIBM), in its Credit Operations of Banks 2024 review, identified governance breakdowns, political interference, fictitious financial statements, and policy leniency towards wilful defaulters as the primary drivers behind record NPLs (The Financial Express, 2025).
This finding is consistent with a substantial body of academic research. Khwaja and Mian’s (2005) landmark study of politically connected firms in South Asia found that such firms received 45% larger loans despite having a 50% higher default rate than unconnected firms — a pattern directly applicable to Bangladesh’s state-owned bank lending behaviour (IJRISS, 2025).
Transparency International Bangladesh (TIB) found through its own research that despite nominal autonomy, the Bangladesh Bank had “become non-functional in controlling defaulted debts by succumbing to leadership inefficiency while political influence has taken an institutional form,” with powerful business syndicates effectively capturing regulatory authority (TIB, 2020).
2. Absence of a Credible Credit Risk Assessment Framework
Unlike European banking systems, Bangladesh has lacked a robust, institutionalised credit bureau infrastructure that would provide lenders with independent, data-driven profiles of borrowers’ creditworthiness before loan approval. In Bangladesh, loan decisions — particularly at state-owned commercial banks — have historically relied on personal relationships, collateral valuation (often inflated), and political endorsement rather than quantitative credit scoring.
A study published in University of Science and Technology Annual (2012, updated findings) found that state-owned commercial banks were significantly more adversely affected by political interference and poor corporate governance than private commercial banks, with their loan disbursement approaches proving structurally inefficient in achieving required recovery targets (USTA, 2012). Nearly a decade of subsequent research has confirmed this structural gap has not meaningfully narrowed.
3. Weak Legal Infrastructure for Recovery
As of recent assessments, approximately 222,000 default loan cases are trapped in slow-moving court processes with virtually no resolution in sight (Policy Research Institute of Bangladesh / PRI, 2025). The Bankruptcy Act 1997 remains largely unreformed. There are no specialised banking tribunals. Defaulters face minimal legal consequences, and rescheduling — the practice of restructuring bad loans to temporarily reclassify them as performing — has been routinely used as a political tool to mask the true scale of defaults rather than as a genuine recovery mechanism.
4. Regulatory Forbearance and Weakened Bangladesh Bank
The Ministry of Finance’s Financial Institutions Division (FID) has in practice exercised considerable control over state-owned banks, effectively subordinating Bangladesh Bank’s regulatory authority to political will. During the pandemic, international NPL classification standards — which were globally suspended as a temporary emergency measure — were retained by Bangladesh long after most countries restored them, artificially suppressing reported default figures. The reimposition of stricter classification rules from April 2025 (loans overdue by three months, down from nine months) under pressure from the IMF’s $4.7 billion loan package revealed the true extent of concealed impairment (The Business Standard, 2025).
Part III: The European Credit Score Model — A Structural Contrast
How the European System Works
European banking operates within a fundamentally different architecture. At its core is the credit bureau system: independent institutions (such as Germany’s SCHUFA, France’s Banque de France’s credit registry, and the UK’s Experian/Equifax/TransUnion network) collect and maintain comprehensive data on individuals’ and businesses’ borrowing histories, repayment patterns, outstanding obligations, and financial behaviour.
When a European bank evaluates a loan application, the process is data-driven by default:
- A standardized credit score is retrieved from an independent bureau
- The score reflects actual payment behaviour across all financial relationships
- Lenders are required by regulation (EU Consumer Credit Directive) to conduct affordability assessments
- The entire process is documented and auditable by supervisors
This system removes — or at minimum dramatically reduces — the role of personal relationships and political connections in credit decisions. It institutionalises risk pricing: riskier borrowers receive higher interest rates or are declined, rather than receiving preferential access regardless of default probability.
Europe’s NPL Performance: The Data
The results of this framework are visible in the numbers. According to the European Central Bank (ECB)’s supervisory banking statistics, the aggregate NPL ratio for significant EU banks stood at just 2.28% in Q4 2024, with a total NPL stock of approximately €352 billion across a loan book of €15+ trillion (ECB, 2025). The aggregate Common Equity Tier 1 (CET1) capital ratio stood at a robust 15.81% as of mid-2024 — more than four times Bangladesh’s collapsed 3.08% figure.
Even among Europe’s weaker performers, the contrast is instructive. Greece, which experienced the continent’s most severe debt crisis and whose banks still carry one of the EU’s highest NPL ratios, operates at a fraction of Bangladesh’s distress level. Germany and France, which saw modest NPL increases in 2024 driven by real estate sector stress, still registered aggregate NPL ratios well below 3% (Scope Ratings, 2025; Banca IFIS, 2025).
Case Study: Germany’s SCHUFA and Credit Discipline
Germany’s SCHUFA (Schutzgemeinschaft für allgemeine Kreditsicherung) is perhaps the most instructive example. Established in 1927, SCHUFA operates as a credit reference agency to which virtually all German lenders contribute data and from which they retrieve credit assessments. It covers approximately 68 million individuals and holds data on over 6 billion individual credit features.
Key features of the SCHUFA model that matter for this comparison:
Data comprehensiveness: SCHUFA tracks not just loan repayments, but mobile phone contracts, utility agreements, and other financial obligations — creating a multi-dimensional picture of financial behaviour that a single bank relationship cannot replicate.
Lender neutrality: Because all lenders contribute to and access the same data pool, there is no information asymmetry that a borrower can exploit by cycling between banks. A default with Bank A is visible to Bank B before any new loan is approved.
Regulatory embedding: German banking regulation (Kreditwesengesetz / Banking Act) requires lenders to demonstrate credit assessment adequacy. Using a SCHUFA score is not optional — it is standard practice reinforced by supervisory expectation.
The result: German banks maintain NPL ratios that, even in periods of stress, remain a fraction of what Bangladesh’s most stable banks carry on their best days.
Case Study: France’s Fichier Central des Chèques and Banque de France Credit Registry
France operates a dual system: the Fichier Central des Chèques (FCC) for negative credit incidents, and the Banque de France’s FIBEN database for corporate credit assessments. The Banque de France assigns credit ratings to approximately 250,000 French companies annually, providing banks with independent assessments that are required inputs in corporate lending decisions.
This institutionalised, central bank-led credit assessment function is particularly relevant to Bangladesh, where corporate lending to large, politically connected borrowers accounts for a disproportionate share of NPLs. In the French model, even a company with strong political connections cannot simply walk into a state-backed bank and obtain a large loan on the strength of those connections — the Banque de France’s independent credit assessment must be satisfied.
Part IV: Comparative Analysis — What Bangladesh Lacks That Europe Has Built
| Dimension | Bangladesh | European System |
| Credit assessment basis | Relationship, collateral, political influence | Independent credit bureau scores, repayment history |
| Central bank independence | Subordinated to Ministry of Finance | Legally and operationally independent |
| NPL ratio (2024–2025) | 20–27% and rising | 2.28% and stable |
| Capital adequacy (CRAR) | 3.08% (Dec 2024) | ~15.81% CET1 (EU average) |
| Loan recovery mechanism | Slow courts, 222,000 backlogged cases | Expedited insolvency frameworks, AMCs |
| Defaulter accountability | Culture of impunity; political protection | Legal enforcement; credit score consequences |
| Data transparency | Historically suppressed; now being corrected | Mandatory reporting; supervisory transparency |
| Regulatory framework | Basel III nominally adopted; weakly enforced | Basel III adopted; ECB directly supervises significant banks |
| Political interference | Institutionally embedded | Legally prohibited; supervisory independence protected |
Part V: What Bangladesh Must Do — Evidence-Based Policy Directions
Establish an Independent National Credit Bureau
The most structurally transformative reform Bangladesh could undertake is the establishment of a fully independent national credit bureau — analogous to SCHUFA or France’s FIBEN — that covers both individual and corporate borrowers. Research by the CGAP (Consultative Group to Assist the Poor, 2023) confirms that statistical credit models significantly standardize and improve lending decisions in emerging markets, reducing the role of subjective judgment that political interference exploits.
A 2024 study in MIS Quarterly (Li et al., 2024) found that AI-enabled credit scoring models, when adopted by banks previously using relationship-based assessments, significantly improved loan approval quality and reduced defaults — particularly for previously underserved segments. This offers a dual dividend: better risk management and genuine financial inclusion.
Restore Bangladesh Bank’s Regulatory Independence
Research and TIB analysis consistently identify the subordination of Bangladesh Bank to political influence as a foundational cause of the NPL crisis (TIB, 2020; BIBM, 2025). Restoring genuine central bank independence — through legislative reform that insulates appointment processes and supervisory decisions from executive branch pressure — is not merely desirable but a precondition for any other reform to be effective.
The IMF’s $4.7 billion loan package, which has already forced tighter NPL classification rules, may provide the external pressure needed to advance this agenda. The lesson from Europe’s post-2008 reforms is clear: the ECB’s creation of the Single Supervisory Mechanism (SSM) — which directly supervises significant banks and is operationally independent — dramatically improved the reliability of European bank supervision (ECB, 2024).
Establish Specialised Banking Tribunals
Bangladesh’s current judicial infrastructure is wholly inadequate for resolving 222,000 backlogged default cases. Specialised banking courts — analogous to commercial courts in Germany and the UK — with dedicated judicial officers and expedited timelines are essential. The Bankruptcy Act 1997 must be modernised. Without credible legal consequences for default, no credit assessment system will be fully effective.
Expand Financial Inclusion Through Credit Infrastructure — Not Around It
Bangladesh’s unbanked and underbanked population represents a genuine development imperative. However, the instinct to expand credit access by relaxing standards — or to treat political loan disbursement as a form of poverty alleviation — has historically produced the exact NPL outcomes the country is now experiencing. Research on financial inclusion and stability (Danisman & Tarazi, 2020; Ofoeda et al., 2024) consistently finds that financial inclusion supports banking stability only when it is paired with effective risk management and regulatory oversight — not in its absence.
The European experience is instructive here too: countries that expanded credit access through digital payment infrastructure and credit bureau coverage (not through politically directed lending) achieved both inclusion and stability.
Conclusion: Governance Is the Variable That Matters
Bangladesh’s banking crisis is not a mystery. It is the predictable outcome of a system where loans were approved by political endorsement rather than financial analysis, where defaulters were protected rather than prosecuted, where regulatory data was suppressed rather than disclosed, and where the institutions meant to enforce discipline were captured by the interests they were supposed to regulate.
Europe’s low NPL ratios are not the product of superior economic conditions alone. They reflect decades of institutional investment in credit infrastructure, regulatory independence, legal enforceability, and a culture in which financial obligation is understood to carry real consequences — for borrowers and for the institutions that lend irresponsibly.
The gap between Bangladesh and Europe on banking sector health is wide, but it is not unbridgeable. India’s remarkable reduction of NPLs from 7.9% to 1.7% between 2020 and 2023 demonstrates that meaningful reform is possible within a developing economy context — when political will, regulatory independence, and institutional capacity are aligned.
Bangladesh is at a crossroads. The concealed rot of years is now surfacing. The IMF is watching. The interim government has an opportunity — perhaps a narrow one — to build the institutional architecture that its banking sector has long lacked. The choice is between building systems that lend by evidence and recover by law, or continuing to lend by relationship and forgive by politics.
The numbers make clear which path leads where.
References
- Asian Development Bank (ADB). (2025). Asia-Pacific financial indicators report: Non-performing loan comparative analysis. ADB Publications.
- Banca IFIS. (2025, September). NPL market watch: European non-performing loan market scenario 2025–2027. Banca IFIS Research.
- Bangladesh Institute of Bank Management (BIBM). (2025). Credit operations of banks 2024: Review workshop findings. BIBM, Dhaka.
- Bangladesh Bank. (2024–2025). Banking sector statistics: NPL data Q3 2024 – Q2 2025. Bangladesh Bank Publications, Dhaka.
- Centre for Policy Dialogue (CPD). (2025). Spike in loan defaults drains bank liquidity [Analysis by Fahmida Khatun]. CPD, Dhaka.
- Danisman, G. O., & Tarazi, A. (2020). Financial inclusion and bank stability: Evidence from Europe. The European Journal of Finance, 26(18), 1842–1855.
- European Central Bank (ECB). (2024, June). Supervisory banking statistics on significant institutions: Q1 2024. ECB Banking Supervision.
- European Central Bank (ECB). (2025, March). Supervisory banking statistics on significant institutions: Q4 2024. ECB Banking Supervision.
- International Journal of Research and Innovation in Social Science (IJRISS). (2025). Corruption in Bangladesh banking and financial sector: A qualitative and quantitative assessment. IJRISS, IX(XV).
- Khwaja, A. I., & Mian, A. (2005). Do lenders favor politically connected firms? Rent provision in an emerging financial market. The Quarterly Journal of Economics, 120(4), 1371–1411.
- Li, C., Wang, H., Jiang, S., & Gu, B. (2024). The effect of AI-enabled credit scoring on financial inclusion: Evidence from an underserved population of over one million. MIS Quarterly, 48(4), 1803–1834.
- Ofoeda, I., Agbloyor, E., & Abor, J. (2024). Financial inclusion and bank stability: Conditional effects of regulatory oversight. Journal of Financial Regulation and Compliance, 32(1).
- Policy Research Institute of Bangladesh (PRI). (2025). NPL surge triggers systemic banking shock: Analysis of Bangladesh’s distressed assets. PRI Policy Brief.
- Prothom Alo English. (2025, September). Why Bangladesh is leading in defaulted loans in Asia. Prothom Alo.
- Scope Ratings. (2025). EU banks NPL heatmaps: Asset quality stable for now but downside risks remain. Scope Ratings Research.
- The Business Standard. (2025). Banks brace for stricter NPL rules; fear loss and eroding capital base. TBS News.
- The Daily Star. (2025). The banking sector’s dangerous free fall while defaulters thrive. The Daily Star, Opinion & Views.
- The Financial Express Bangladesh. (2025). Governance breakdowns, political interference behind record NPL. The Financial Express.
- Transparency International Bangladesh (TIB). (2020). Supervisory role and regulating defaulted loan: Governance challenges of Bangladesh Bank and way forward. TIB Research Report.
- University of Science and Technology Annual (USTA). (2012). The perspective of loan default problems of the commercial banking sector of Bangladesh: A closer look into the key contributory factors. USTA, 18(1), 71–87.
