Moody's recently downgraded the outlook for Bangladesh's banking sector to negative due to increasing asset risks and worsening economic conditions. Key concerns include declining asset quality, high inflation, and a slowdown in GDP growth, which is projected to fall to 4.5 percent in FY25. By September 2024, the systemwide non-performing loan (NPL) ratio had jumped to 17 percent, up from 9 percent just nine months earlier.

Social unrest, supply chain disruptions, and weakening demand drove this surge. State-owned banks remain undercapitalised, with a capital-to-risk-weighted-assets ratio of -2.5 percent in September 2024. Despite stable liquidity, the systemwide loan-to-deposit ratio stands at 81 percent.

Strong leadership is crucial for navigating the crisis facing the banking sector. Effective leaders can drive the necessary reforms and strategic investments to address challenges such as scams and corruption. They play a pivotal role in fostering a culture of transparency and accountability, which is essential for restoring public trust.

Strong leadership is also vital for implementing transformation initiatives that can enhance operational efficiency and resilience. It is recommended that the appointment of board members in commercial banks be based solely on qualifications and experience, rather than political or social affiliations. This aims to enhance governance and ensure that decisions are made in the best interests of stakeholders.

In the early 1980s, Bangladesh allowed the establishment of new private sector commercial banks (PCBs), which were predominantly led by CEOs and senior management transitioning from state-owned banks. This era saw a focus on expanding trade finance and private sector lending, although there was less emphasis on modernising business processes, risk management, and developing robust delivery platforms. Subsequent reform programmes in the banking sector have initiated changes in managing classified loans and at-risk assets. However, areas such as IT, modern management practices, human resource development, and governance have received less attention.

The late 1990s marked a shift, as young professionals with global perspectives — often coming from foreign banks — joined PCBs, pushing for change. Their efforts were bolstered by second-generation, foreign-educated entrepreneurs on bank boards and supportive central bank officials with international training. The introduction of "core risk management guidelines", developed with input from foreign bank executives, was a pivotal step in transforming risk management practices.

The sale of ANZ Grindlays Bank and the exit of several foreign banks left a pool of experienced professionals who could be integrated into the local banking system. Successful transformations in certain banks instilled confidence among private sector bank directors to attract senior managers with international experience, embedding change into their growth strategies.

In recent times, many banks prioritise tech-savvy CEOs because technology drives innovation and efficiency. A CEO skilled in technology and banking can lead digital transformations crucial for competitiveness and meeting customer expectations. They foster a culture of innovation by integrating emerging technologies like AI, blockchain, and data analytics to enhance services and operations. Additionally, tech-savvy CEOs improve risk management and compliance using sophisticated tools.

As consumer behaviour shifts to digital banking, they expand digital channels and improve the customer experience with user-friendly apps and personalised services. Ultimately, a tech-savvy CEO positions the bank to navigate digital challenges and opportunities for sustainable growth and competitive advantage.

Despite current challenges, there is a growing acknowledgment among PCB owners and directors of the need to attract talent from top-tier banks to sustain the transformation. They recognise that change is inevitable and essential for future banking success.

Although state-owned banks are yet to see similar leadership transitions, a shift in this area may occur. Bangladesh's banking sector is undergoing significant transformation, with a focus on integrating global practices and fostering leadership that can navigate the evolving landscape.

The author is an economic analyst who has worked with several global banks and consulting firms for more than 35 years.