Years of corruption, mismanagement, fragile governance and bank looting have left several banks in distress in Bangladesh. To support these struggling banks, the Bangladesh Bank has taken numerous measures over the last six months, including printing money. However, many of these banks continue to struggle. Recently, Bangladesh Bank Governor Ahsan H Mansur indicated that closing some of these weak banks might be necessary.

From an optimistic perspective, closing weak banks would certainly enhance overall stability in the banking sector. Banks plagued by poor governance and high non-performing loans (NPLs) have become a burden, and shutting them down would prevent further financial damage to the economy. Instead of allocating more time and resources to these failing institutions, funds should be redirected to well-managed banks that can create a more efficient and sustainable banking system. Besides, closing weak banks would send a strong message about accountability and governance, compelling the remaining banks to improve their risk management, due diligence, compliance and governance standards.

From a macroeconomic standpoint, printing money to support failing banks increases inflationary risks in society. If these weaker banks are shut down, the central bank will no longer need to print money to sustain them, ultimately helping to curb inflation. In the long run, customers and investors will have greater confidence in the financial system when only well-governed, solvent banks operate in the market. This would encourage savings and investment, taking the country to the next level of economic development.

However, there are also drawbacks to consider. First, depositors will face massive uncertainty, leading to panic among customers. The closure of banks would also result in job losses for thousands of employees, causing economic and social challenges, particularly if alternative employment opportunities are not available. Furthermore, renowned global rating agencies assess banking stability when determining a country's creditworthiness. If banks are closed, Bangladesh's credit rating could decline, making it more difficult to attract foreign investment. This situation might also discourage foreign banks from operating in the country. Besides, many enterprises, including SMEs, depend on bank loans and conduct transactions with these institutions. The closure of these banks would create further difficulties for their business operations and future growth.

Considering global experiences and expert predictions, the closure of weak banks must be carefully managed. Bangladesh Bank should take specific steps to minimize negative consequences. First and foremost, depositors' interests must be protected. The central bank may increase deposit insurance coverage and facilitate mergers or acquisitions by stronger banks where possible to safeguard customers' funds. Affected bank employees should receive compensation packages for an extended period, and the central bank should assist them in transitioning to new jobs where feasible. Entrepreneurs should be supported in securing alternative funding sources from stronger banks or government-backed initiatives. Moreover, in light of this closure process, the central bank must reinforce its regulatory framework to prevent future banking crises. This includes stricter monitoring of capital adequacy, loan disbursement, and governance practices. Lastly, the government should engage in transparent communication with investors and international agencies, outlining the measures taken to stabilise the financial sector and prevent future collapses.

While closing weak banks may create short-term challenges, it can lead to a more robust and sustainable banking system in the long run. As a nation, we must take proactive measures to ensure a smooth transition, protecting depositors, supporting employees, and minimising economic disruptions. Successfully navigating this process can restore confidence in the financial sector, attract investment, and pave the way for stronger economic growth.

The author is a banker.