World Bank funds $150m overhaul of Bangladesh’s fragile banking sector
Bangladesh is launching a five-year, Tk 12.76 billion (about US$150 million) project to modernise its banking sector, strengthen the central bank’s supervisory capacity, and protect depositors. The Financial Sector Support Project-2 (FSSP-2), backed by the World Bank’s International Development Association (IDA), will be presented to the Executive Committee of the National Economic Council (ECNEC) on Tuesday for final approval.
The project targets long-standing weaknesses: high non-performing loans, governance failures, and outdated technology. Several state-owned and Islamic banks face liquidity and capital shortages, and some have fallen into negative capital positions. The reforms aim to address these risks through technology upgrades, bank restructuring, and stronger financial safeguards.
Why does Bangladesh’s banking sector need reform?
According to the project proposal, the sector has suffered from chronic mismanagement. Weak ICT infrastructure and fragmented information systems limit Bangladesh Bank’s ability to supervise banks effectively, leaving the system vulnerable to cyberattacks and cross-border financial risks.
Planning Division Secretary SM Shakil Akhter told Prothom Alo: “The project has been taken up to address mismanagement in the financial sector. Through this project, technological development in the banking sector and procurement activities will be modernised and made more transparent. In addition, various reform measures will be implemented at the policy level.”
What will the project actually do?
The project is structured in three phases. The first phase focuses on strengthening supervisory capacity and building technological infrastructure. The second phase will reinforce financial safeguards, support bank restructuring, and reform state-owned banks. The third phase provides administrative and technical support.
Key investments include:
- Tk 7.11 billion (US$83 million) for ICT equipment
- Tk 3.55 billion (US$42 million) for computer software
- Tk 700 million (US$8.2 million) for training 3,565 officials
- Tk 290 million (US$3.4 million) for individual consultants
- Tk 650 million (US$7.6 million) for institutional consultancy
The project will also enhance the Deposit Insurance Trust Fund (DITF) to protect depositors during bank resolution, reduce payout times, and introduce performance-based conditions (PBCs) for restructuring. In practice, this means reforms will be tied to measurable actions and outcomes.
What do economists say about the reform plan?
Former Bangladesh Bank Chief Economist Mustafa K Mujeri welcomed the technology focus but warned that hardware alone is not enough. “If we can ensure the proper use of technology, it will be possible to address risks in the banking sector in the future. However, simply purchasing technology will not solve the problems of the banking sector. We must also develop skilled personnel to ensure its effective use,” he told Prothom Alo.
He also stressed the need for transparency and accountability at every stage, from planning to implementation.
How does this fit with the earlier World Bank project?
FSSP-2 is a continuation of the Financial Sector Support Project approved in 2015, which ran from September 2015 to March 2021. That first phase had an initial budget of US$300 million but spent US$262 million. It covered digital infrastructure for the financial sector and compliance with Basel Core Principles, among other areas.
The new project runs from July 2026 to June 2031. Bangladesh Bank will contribute Tk 140 million (US$1.6 million) from its own resources, with IDA covering the rest.
What are the key challenges ahead?
The success of FSSP-2 depends on execution. Past reforms in Bangladesh have often stalled due to institutional resistance and weak follow-through. The project’s emphasis on performance-based conditions is a step toward accountability, but experts like Mujeri argue that governance culture must change alongside technology.
The Planning Commission has reviewed the proposal and says implementation will strengthen financial safeguards and support technology-driven banking. The real test will be whether the reforms translate into a more resilient sector that can withstand future shocks.