In October 2025, Bangladesh's interim government announced the Deposit Protection Ordinance, and one should acknowledge what the ordinance gets right before examining what it misses.
The technical improvements are meaningful. Doubling coverage from Tk 100,000 to Tk 200,000 provides tangible protection to 93% of depositors—the small savers, pensioners, and middle-class families whose accounts represent their entire liquid savings.
For a widow with Tk 150,000 in fixed deposits or an SME maintaining working capital, this change matters. The old Tk 100,000 limit, established in 2000, had been eroded by years of inflation; updating it represented overdue housekeeping.
The claim settlement acceleration from 180 working days to 17 is also impressive. If implemented, this transforms deposit insurance from theoretical comfort to practical relief. A small business owner who loses access to cash for six months goes out of business; one who recovers funds in three weeks survives. This compression suggests the interim government understands that the speed of resolution determines whether insurance functions or merely exists on paper.
The structural changes—creating separate funds for banks and financial companies, establishing a trustee board under Bangladesh Bank supervision, mandating premium payments within 30 days of licensing—reflect sophisticated institutional design. The provision allowing the Trustee Board to recommend triennial adjustments to coverage limits builds in adaptive capacity. These are meaningful reforms.
One might even detect, in the ordinance's emphasis on "safe investment, diversification, and liquidity preservation," an awareness that deposit insurance funds themselves can become vehicles for looting if not carefully structured. The explicit prohibition against inter-fund borrowing and separation from other Bangladesh Bank funds addresses this vulnerability directly.
For an interim government facing multiple crises simultaneously, producing coherent financial legislation deserves recognition. The ordinance addresses real technical deficiencies, and would serve Bangladesh well—if the banking sector's problems were technical.
They are not.
The Deposit Protection Ordinance represents the institutional equivalent of installing fire alarms in a building while arsonists roam the halls with jerry cans.
Chief Adviser Muhammad Yunus's press secretary declared it "a landmark law for ensuring financial stability," as though the problem facing Bangladesh's banking sector were one of inadequate insurance rather than systematic looting.
The ordinance's very competence highlights what it avoids. Every provision is defensible; every mechanism is sound; every protection is properly calibrated. What it lacks is any engagement with the political economy that created the crisis it purports to address.
Consider what the ordinance accomplishes: it ensures that when a bank fails, small depositors receive compensation quickly. This is valuable.
Now consider what Bangladesh actually faces: Bangladesh's distressed loans have exploded to Tk 7.56 lakh crore (approximately $63 billion), accounting for 45% of outstanding loans by December 2024. The banking sector's capital adequacy ratio has collapsed to 3.08%, the lowest in South Asia and far below the regulatory minimum of 10%. Pakistan, Sri Lanka, and India maintain ratios of 20.6%, 18.4%, and 16.7% respectively.
The ordinance protects depositors after extraction has occurred. It does nothing to prevent extraction in the first place.
This is the fundamental inadequacy: it treats the symptom while ignoring the disease.
What Bangladesh faces is not a banking crisis but a crisis of political economy masquerading as technical difficulty. The numbers tell a story of industrial-scale capture.
The S Alam Group took approximately Tk 1 lakh crore from Islami Bank, with loans secured by collateral worth less than Tk 6,000 crore—a loan-to-collateral ratio that would embarrass a pawnshop. At Islami Bank's Khatunganj branch alone, S Alam Group secured Tk 23,295 crore in loans.
The pattern repeated across institutions. Non-performing loans in eight S Alam-controlled banks surged throughout 2024. Islami Bank, once the country's premier private lender, declared no dividend for the first time in 32 years, facing a provision shortfall of Tk 69,770 crore as default loans jumped from 4% to 40% in a single year.
This wasn't banking; it was wealth transfer with paperwork. The former Bangladesh Bank governor, Abdur Rouf Talukder, actively prevented S Alam Group's defaulted loans from being classified, a regulatory intervention that enabled the group to extract even larger sums. When regulatory capture reaches the central bank governor's office, the distinction between state and private interest ceases to exist.
Consider the deposit insurance landscape elsewhere. The United States' FDIC insures deposits up to $250,000 per account, while the UK's Financial Services Compensation Scheme protects £85,000, with temporary extensions up to £1 million for six months following large deposits from property sales or inheritances. The European Union mandates protection for at least €100,000 per person.
But more instructive than Western comparisons are Bangladesh's immediate neighbors and regional peers. The contrasts are stark and revealing.
India's Deposit Insurance and Credit Guarantee Corporation (DICGC) protects deposits up to ₹5 lakh (approximately $6,000), covering 97.8% of all deposit accounts—a coverage ratio Bangladesh now matches at 93%. India increased this limit from ₹1 lakh in February 2020 following the Punjab and Maharashtra Co-operative Bank crisis, and the government is actively considering raising it further.
Pakistan's Deposit Protection Corporation insures deposits up to PKR 1,000,000 (approximately $3,600), launched in 2018 after a decade of planning. The Philippines just doubled its coverage to ₱1 million (approximately $17,000) in March 2025, protecting 98.6% of deposit accounts. Malaysia's PIDM covers deposits up to RM 250,000 (approximately $56,000), protecting 97% of depositors. Indonesia's LPS guarantees up to IDR 2 billion (approximately $125,000) per depositor per bank, covering 99.94% of commercial bank accounts. Sri Lanka's deposit insurance covers LKR 1,100,000 (approximately $3,300), increased from LKR 600,000 in 2024, protecting over 90% of deposit accounts.
Bangladesh's Tk 200,000 coverage (approximately $1,670) sits at the bottom of this regional hierarchy—lower than Pakistan's, less than a third of Sri Lanka's, despite similar per capita incomes, and roughly 2.5% of Indonesia's protection when measured in absolute terms.
Yet these numerical comparisons miss the essential point. What matters isn't the quantum of insurance but the quality of enforcement. Even deposit insurance schemes in developed markets face severe limitations during systemic crises, as demonstrated when Northern Rock's retail deposits of £17.31 billion dwarfed the UK's entire FSCS funding cap of £4.03 billion. Deposit insurance protects against isolated institutional failures, not systematic extraction.
Consider the institutional contexts. India's DICGC operates under the Reserve Bank of India, which, while imperfect, maintains operational independence and prosecutes financial crimes with vigor. When Yes Bank faced a crisis in 2020, RBI swiftly superseded the board, imposed a moratorium, and orchestrated a restructuring within weeks. Pakistan's DPC, despite the country's governance challenges, functions within a State Bank of Pakistan that has demonstrated a willingness to revoke banking licenses. The Philippines' PDIC has a track record of swift payouts, completing claims within 30-60 days. Malaysia's PIDM benefits from strong supervisory institutions and genuine judicial independence.
Bangladesh lacks these institutional prerequisites. When the former Bangladesh Bank governor actively prevented S Alam Group's defaulted loans from being classified, regulatory capture reached its logical conclusion. In India or Malaysia, such an intervention would trigger criminal investigations and Parliamentary inquiries. In Bangladesh, it enabled further extraction.
Bangladesh's Tk 200,000 coverage (approximately $1,670 at current rates) represents roughly 0.08% of the equivalent US protection when adjusted for GDP per capita. Yet the real comparison isn't the quantum of insurance but the quality of enforcement.
In the United States or the United Kingdom, a borrower who extracted eight times their collateral value while regulators looked away would face criminal prosecution, not merely civil proceedings.
The new ordinance creates two separate funds—one for banks, another for financial companies—under trustee board management. It mandates initial premiums of at least 0.5% of capital. These are reasonable technocratic provisions for a functional system. Bangladesh does not have a functional system.
The ordinance says nothing about:
Judicial enforcement capacity: Between August 2024 and February 2025, Tk 1,78,277 crore was stuck in 72,543 cases under the Money Loan Court Act and the Bankruptcy Act. Approximately Tk 2.5 lakh crore remains stuck in various courts—money loan courts, High Court, and Supreme Court. The bottleneck isn't deposit protection; it's the inability to process fraud cases with any speed.
Beneficial ownership transparency: Little-known companies purchased Islami Bank shares in October 2017, and no authorities questioned the source of their substantial funds. This opacity enabled the subsequent extraction. Without mandatory disclosure of ultimate beneficial owners and source of funds verification, the same pattern will repeat.
Criminal liability for directors and beneficial owners: Bangladesh's problem isn't civil recovery—it's deterrence. When an investigation discovers massive loan irregularities, civil proceedings to recover deposits feel inadequate. Where are the prosecutions?
Central bank independence: A White Paper committee found that the dual regulatory system, where both Bangladesh Bank and the Financial Institutions Division of the Ministry of Finance oversee institutions, contributes to inefficiencies and a lack of accountability. The ordinance maintains this structure.
Bangladesh's banking crisis reflects a particular developmental trap. As economies grow and investment opportunities expand, the temptation to use the banking system as a private financing vehicle increases. When political connections determine credit allocation rather than commercial viability, you get directed lending programs that never expect repayment.
Bangladesh Bank data showed that the amount of non-performing loans shot up by more than Tk 1 lakh crore to Tk 2,84,977 crore in September 2024 from Tk 1,82,295 crore at the end of March. This isn't incidental corruption; it's systematic capital flight enabled by financial institutions operating as extraction mechanisms for connected elites.
The August 2024 political transition revealed what had been carefully hidden. Previously concealed defaulted loans began surfacing after Sheikh Hasina's government fell, with practices like "window dressing" having allowed banks to conceal the true extent of defaults. One of the Awami League government's conditions for IMF lending was to reduce NPLs to 10% by 2024; instead, they exceeded 30%.
This speaks to a deeper pathology: when the state itself profits from opacity, reform becomes impossible. The deposit insurance ordinance does nothing to change these incentives.
Bangladesh needed something categorically different. Consider what a serious approach might include:
Debt-equity swaps with ownership consequences: Rather than lengthy court proceedings, force automatic conversion of defaulted loans above Tk 50 crore into equity stakes, transferring ownership to a resolution trust. Sell these stakes to strategic investors who do not have political connections. This creates immediate consequences while recovering value.
Time-bound special tribunals: Establish tribunals exclusively for bank fraud cases, with a six-month maximum proceedings before automatic judgment. Staff them with retired judges on fixed terms to prevent political pressure. As one economist noted, "Unless the top defaulters of the banking sector are tried in tribunals and the judicial process is expedited, there will be no way out".
Beneficial ownership registry with criminal penalties: Require public disclosure of all beneficial owners holding more than 5% of any financial institution. Make the use of a shell company for bank shareholding a criminal offense with mandatory five-year sentences. No discretion, no exceptions.
Central bank operational independence: Remove the Financial Institutions Division's concurrent jurisdiction. Give the Bangladesh Bank sole regulatory authority with a governor appointed for fixed terms, removable only by a parliamentary supermajority or a mechanism that can’t be influenced by political connections. Fund it through levies on regulated institutions, not government appropriations.
Mandatory forensic audits: Require all banks with NPL ratios above 15% to undergo forensic audits by Big Four firms or firms with no local political relationships. Publish results within 90 days. This creates external accountability that domestic processes lack.
Connected lending prohibition: Ban any lending to companies where a bank director or major shareholder holds more than 10% interest. When a single branch approved Tk 23,295 crore in loans to one conglomerate, you know the system has failed fundamentally.
Depositor preference in bankruptcy: Give depositors super-priority in bankruptcy proceedings ahead of all other creditors, including the government. This creates political constituencies for bank stability.
These measures would face fierce resistance. They should—they threaten the political economy that made the crisis possible. Their absence from the ordinance tells you where real power lies.
Bangladesh faces a version of the middle-income trap that's more political than economic. Rapid growth created opportunities for extraction that outpaced institutional development. The banking sector became a mechanism for converting political access into private wealth, with loan books functioning as accounting fictions for transfers.
Dan Wang has written in his new book Breakneck about China's banking system, where implicit state guarantees created moral hazard, but political consequences for malfeasance remained severe. Chinese bank executives who enabled corruption face genuine criminal liability, creating some deterrent effect despite weak formal institutions. Bangladesh combined moral hazard with impunity—the worst of both worlds.
The deposit insurance ordinance suggests the interim government understands it must be seen to act without understanding what action means. It's technocratic window dressing—the kind of reform that succeeds in Geneva presentations while failing in Dhaka's money loan courts.
Real reform requires accepting three uncomfortable truths:
First, a significant portion of the banking system's loans will never be recovered, and someone must absorb these losses. The choice is whether to spread them across depositors, taxpayers, or the political-economic elite who extracted them.
Second, that without criminal consequences for bank capture, the incentive structure ensures repetition. Civil proceedings that might recover 20% of stolen funds over seven years don't deter theft.
Third, that technical fixes like deposit insurance matter only after you've solved the political economy problem. Doubling insurance coverage while the same extraction mechanisms remain in place merely increases the eventual cost.
The Deposit Protection Ordinance-2025 represents a sophisticated governance failure. It demonstrates technical competence while avoiding substantive challenge to the systems that created the crisis. It protects 93% of depositors while doing nothing about the fact that 45% of all loans are distressed.
This is governance as performance—reform as theatre. The interim government can point to doubled insurance coverage and accelerated claims processing while the capital adequacy remains at 3.08%, the lowest in South Asia.
What Bangladesh needed was consequences. What it got was compensation. The difference explains why the banking crisis will continue, insurance notwithstanding. You cannot insure against systematic extraction. You can only prosecute it or accept it.
The ordinance suggests Bangladesh has chosen acceptance, wrapped in the language of reform.
