Bangladesh Bank, the central bank of Bangladesh, was established in 1971 following the country's independence. Initially staffed by former employees of the State Bank of Pakistan (SBP), it has since evolved into one of the most successful public institutions in the nation. Over the past five decades, the Bank has played a crucial role in maintaining inflation stability and implementing key financial sector reforms. Notably, the Financial Sector Reform Program of the 1990s marked a turning point, enhancing the regulatory framework, establishing credit and bankruptcy systems, promoting private banking, and liberalising foreign exchange controls.

By 1993, the Bangladesh Bank had achieved significant independence from the Ministry of Finance. However, in the last decade, this autonomy has been progressively undermined by increasing ministerial interference in areas such as interest rate determination, exchange rate policy, and bank governance.

Global literature strongly advocates for central bank independence, warning that political control can lead to destabilising policies, such as unsustainable deficit financing or favouritism in bank regulation. Micro-level political interference, particularly the tolerance of non-performing loans (NPLs), remains a critical issue in Bangladesh, potentially suppressing gross domestic product (GDP) growth by 1.25-1.75 percentage points.

Central banks must be entrusted with achieving national macroeconomic targets, including low inflation and financial stability, while maintaining operational independence. Bangladesh Bank, like the United States (US) Federal Reserve, is tasked with controlling inflation and supporting economic growth. However, despite its nominally floating exchange rate regime, Bangladesh Bank and the Ministry of Finance have regularly interfered. This has led to an overvalued exchange rate, leading to a distortionary multiple exchange rate system.

The governance structure of the central bank is also problematic. Its Board, dominated by current and former government officials, lacks the independence necessary for credible oversight. The Board should be responsible for determining monetary policy and supervising the condition of the banking system. A reformed Board should comprise professionals from diverse fields such as banking, law, accountancy, and academia, and exclude active or retired civil servants. Board members should be full time officers with appropriate compensation. Transparent eligibility and vetting criteria must be instituted to ensure merit-based appointments.

OPERATIONAL AUTONOMY AND BUDGETARY GOVERNANCE: The central bank should limit its intervention in private banks to enforcing prudential regulations and ensuring financial integrity, avoiding undue influence over human resources or compensation policies. Any behaviour by the central bank officials involving nepotism or solicitation of employment or financial contributions from private banks must be explicitly prohibited and penalised.

Bangladesh Bank must uphold ethical standards, resisting the misuse of its regulatory authority for personal gain. Regular training and seminars on ethical conduct should be instituted.

In terms of budgeting, the central bank should enjoy autonomy from the executive branch, with oversight provided by the appropriate Parliamentary committee. Key budgetary components include: (1) Staff compensation - determined independently from civil service scales; (2) Staffing levels - aligned with operational needs, including on-site supervision; (3) Technology investments - particularly in cybersecurity; (4) Training and capacity development - including international exposure and advanced degrees; (5) Capital and maintenance expenditures - for infrastructure and logistics.

The Governor should also play an advisory role to the Government, formally engaging with the Prime Minister and Minister of Finance on matters including fiscal deficits, balance of payments, state-owned banks, and systemic risks. Public testimony before Parliament should occur biannually, promoting transparency and accountability.

STRENGTHENING BANK SUPERVISION: Supervision of commercial banks is a critical function of Bangladesh Bank. Effective on-site inspections are essential for: (a) Validating the recognition and provisioning of NPLs; (b) Monitoring large loans and loan rescheduling; (c) Ensuring foreign exchange compliance and preventing money laundering; (d) Verifying IT system security; (e) Evaluating the overall risk profile of banks.

A rigorous, CAMEL-based assessment (Capital, Assets, Management, Earnings, Liquidity) must be implemented. Special attention is required for large loans and listed companies, and inspectors must be adequately trained, including through mandatory stints at commercial banks.

Anti-corruption measures must be strengthened to maintain public confidence.

MANAGING PROBLEM BANKS: The Bangladesh Bank has historically struggled to effectively manage problem banks, defined as institutions with high non-performing loan (NPL) ratios and eroding capital bases. Such banks often spiral into insolvency due to poor governance or deliberate malpractice.

Once a private has been earmarked as a problem bank, a decisive approach is required: (1) Replace the Board and senior management; (2) Conduct independent audits and assess the potential for loan recovery; (3) Implement cost-cutting and branch rationalisation; (4) Bangladesh Bank may inject capital contingent on a viable recovery plan and with a sovereign risk guarantee; (5) As appropriate, deposits greater than the maximum of Deposit Insurance would be converted into shares or zero-coupon bonds; (6) Sell the rehabilitated bank to qualified investors.

The recovery period to reach capital adequacy should be no longer than three years. If recovery is unfeasible, a merger may be an option. If all of this proves unsuccessful, the Bank should be closed, depositors paid up to the limit of the Deposit Insurance, and loans transferred to an Asset Management Company.

A dedicated department should oversee problem banks and manage deposit insurance premiums.

Deposit insurance coverage should be increased significantly. [The current level of Deposit Insurance covers all deposits of Tk 2 lakh or less. For private and Islamic Banks, this covers 92 per cent of the number of deposits and 6 per cent of the value.] Additionally, an independent Asset Recovery Organisation (ARO) and dedicated Tribunal should be established to expedite loan recovery.

The proposed framework ensures timely identification and restructuring of problem banks, safeguarding depositor interests while minimizing fiscal costs. The Bangladesh Bank must adopt a proactive and transparent approach to ensure the resilience of the financial sector.

STATE-OWNED BANKS: These banks are insolvent, failing to meet capital adequacy requirements, and are operating without Central Bank Forbearance on required provisions. Historically, these have been centres of corruption and channels for inappropriate Government projects. The following actions are needed: (a) Abolish the position of Secretary, Financial Institutions Division, and turn over the regulation of the State-Owned Banks to the Bangladesh Bank; (b) Stop all lending to the private sector by State-Owned Banks; (c) All loans to State Owned Enterprises should have sovereign guarantees; (d) If capital adequacy cannot be achieved in five years, then banks are merged, privatised, or closed.

CONCLUSION: Bangladesh Bank stands at a crossroads. Its legacy of competence and service must now be matched with renewed independence, enhanced governance, and institutional reform. A professional, autonomous central bank, guided by ethical leadership and empowered by robust legal and budgetary frameworks, is crucial for Bangladesh's sustained economic progress.