By Prof. Dr. Asif Mizan Vice-Chancellor, Daaru Salaam University (Somalia); Analyst in International Politics, Human Rights, and Criminology.

The Structural Core of Financial Stability

The primary catalyst of a nation’s macroeconomic stability is its financial sector, centered squarely upon the banking system. Banks are not merely passive conduits for accepting deposits and disbursing loans; rather, they serve as the paramount institutional foundation for capital formation and the allocation of economic surplus.

However, in the developing world—and notably within emerging economies like Bangladesh—the dynamics of the banking sector are not dictated solely by classical market forces or the conventional laws of supply and demand. Beneath the surface lies a complex matrix of power dynamics, vested interest networks, and regulatory leverage: a phenomenon captured in economic literature as ‘Political Economy.’

The structural fragility, liquidity constraints, and escalating Non-Performing Loans (NPLs) currently haunting the banking sector are neither accidental financial misadventures nor isolated administrative blunders. Instead, they represent the inevitable evolution of a long-standing political-economic culture. To meaningfully address this crisis, we must look beyond mere "management failures" and objectively analyze the underlying political and institutional equations.

Theoretical Dimensions: Rent-Seeking and Crony Capitalism

From a theoretical standpoint, modern political economy demonstrates that ‘crony capitalism’ and ‘rent-seeking’ behavior exert the most damaging influences on the banking sector. In their seminal work, Why Nations Fail, economists Daron Acemoglu and James Robinson demonstrate that when a nation’s economic institutions transition from being ‘inclusive’ to ‘extractive,’ the concentration of wealth within a select elite becomes institutionally entrenched.

Institutional Shift: Inclusive System ➔ Extractive System ➔ Resource Concentration

This structural degeneration is vividly evident in the banking sector—from the arbitrary licensing of new commercial banks to the politicized composition of boards of directors. When bank ownership and governance are dictated by political allegiance rather than market efficiency, institutional integrity inevitably collapses like a house of cards.

Consequently, we witness a systemic culture where shell companies receive colossal credit facilities, which are subsequently rescheduled or written off in violation of standard regulatory norms. This process functions essentially as an institutional mechanism to transfer the hard-earned savings of ordinary depositors to privileged interest groups under state patronage.

Regulatory Capture and the Moral Hazard Dilemma

The second critical dimension of this crisis is ‘Regulatory Capture.’ In an ideal financial system, the central bank must function as a fully autonomous and uncompromised regulator. According to the framework established by Nobel Laureate George Stigler:

Regulatory capture occurs when an institution tasked with safeguarding the public interest becomes subverted to serve the commercial or political interests of the dominant entities it was designed to regulate.

When central regulatory authorities repeatedly relax the definition of defaulted loans or expand single-borrower exposure limits, such policy shifts often reflect external political pressures rather than sound economic rationale.

Granting special concessions to chronic defaulters sends a perverse signal—a classic ‘Moral Hazard’—to compliant borrowers. It fosters a destructive market psyche that defaulting on financial obligations is ultimately lucrative, thereby dismantling the fundamental ethical fabric of credit discipline.

State-Owned Banks and the Burden on Public Funds

While many view this crisis as an affliction exclusive to private commercial banks, the condition of state-owned banks is arguably more precarious. Under the guise of serving the "public interest," credit allocation in public banks has frequently been governed by political expediency.

IssueCauseConsequenceCapital ShortfallsPoliticized lending decisionsMisallocation of national resourcesSystemic RiskRecurrent state-funded bailoutsErosion of fiscal equityOpportunity CostTaxpayer funded recapitalizationDeprived investment in health & education

Compounding the problem, the recurring practice of recapitalizing these banks using taxpayer funds to offset capital deficits cannot be sustained. This practice effectively subsidizes institutional inefficiency directly from the national treasury.

These resources could otherwise fund inclusive development priorities such as education, healthcare, and social safety nets. By diverting public wealth to absorb institutional losses, the political economy of the banking sector directly undermines social justice and macroeconomic equity.

The Cost of Reform: A Strategic Roadmap

Reversing this trajectory is achievable only if we confront the root causes with unyielding political resolve. A comprehensive reform agenda must prioritize three core interventions:

Establishment of an Independent Banking Commission: An autonomous, non-partisan, and politically immune Banking Commission must be instituted immediately. Operating strictly within economic and legal parameters, this body should conduct comprehensive forensic audits of default loans and bring perpetrators to justice.

Absolute Central Bank Autonomy: The central bank must be empowered to exercise its legal mandate without executive interference. Decisions regarding board appointments, credit approvals, and enforcement actions must fall exclusively under the sovereign authority of the central regulator.

Legal and Judicial Overhaul: Bankruptcy laws and the operations of Financial Courts (Artha Rin Adalat) must be modernized and expedited. Legal loopholes that allow influential individuals to operate above the law must be systematically closed.

Conclusion: Securing Economic Sovereignty

The systemic malaise afflicting the banking sector is far less an administrative issue than it is an institutional and political one. If we aspire to build a resilient, equitable, and high-growth economy, we must liberate the financial sector from this vicious cycle.

Ensuring governance in the financial sector is neither an act of political benevolence nor an optional luxury; it is a fundamental legal guarantee of national economic sovereignty and the security of public savings. Only through decisive political will and unbiased institutional reform can public trust and systemic stability be restored. Failure to act risks condemning the broader macroeconomic framework to prolonged stagnation—an outcome no responsible society can afford.