Although the state of Bangladesh’s banking sector has been deteriorating over time, special initiatives in the industry have never really stopped. Over the past five decades, one after another, several programs have been introduced and implemented in the sector—such as the FSRP (Financial Sector Reform Program), CRM (Credit Risk Management), ALM (Asset-Liability Management), Basel I, II, and III, asset quality reviews, and many others. In continuation of these initiatives, the latest addition is Risk-Based Supervision (RBS).
Bangladesh Bank is moving away from the traditional system of inspection and is set to introduce risk-based supervision. To make this modern supervisory method effective, the central bank has already been working actively. Discussions with several senior and junior bankers reveal that Bangladesh Bank has completed training programs for banking officials and even conducted pilot projects in multiple private banks.
The central bank is also in the process of building a large-scale database, which is an essential component of RBS. In short, Bangladesh Bank is determined to fully implement risk-based supervision starting next year.
As a result, both the central bank and commercial banks are now heavily preoccupied with this transition, and the issue has become the central focus of the sector.
In modern banking, risk-based supervision is considered one of the most effective tools. Traditional inspections—covering all transactions and clients indiscriminately—are not only impractical but also ineffective, given the limited resources available. Since not all clients or transactions carry the same level of risk, it makes more sense to focus supervision on areas of higher risk rather than spending time where risk is minimal. That is why this approach has been widely adopted across developed economies.
It is worth noting that the idea of risk-based supervision was first recommended by the Financial Action Task Force (FATF) to combat money laundering and illicit transactions. Consequently, countries that have implemented RBS did so primarily to strengthen anti–money laundering and counter-illicit transaction frameworks.
However, risk-based supervision cannot be applied universally without adequate preparation. A few prerequisites must be ensured:
- Industry-wide Standards: Banking operations must adhere to uniform, non-negotiable industry practices across all institutions.
- Self-Regulation: Banks must function as self-regulatory organizations (SROs), ensuring compliance with all rules and laws internally.
- Digitization: Entire banking operations must be digitized so that laws, regulations, and risk-control parameters are enforced automatically, preventing irregularities even from top executives.
If these conditions are met, RBS can deliver excellent results. But without them, it could backfire. Unfortunately, none of these standards are currently in place in Bangladesh’s banking sector, which is already plagued by irregularities and mismanagement. Introducing the most advanced supervisory tool in such a fragile system may yield little benefit—like recommending daily exercise to a cancer patient.
Historically, most of the reforms introduced in Bangladesh’s banking sector have been externally driven—often at the suggestion of international bodies such as the IMF, World Bank, and ADB. Many of these models were borrowed wholesale from advanced economies, sometimes even adopting discarded systems that failed elsewhere, such as the loan classification system (CL). These measures have done little to improve the sector’s health, as today’s worsening conditions clearly show.
Whether RBS meets the same fate as previous initiatives remains to be seen. The key point is that the nature and scale of problems in Bangladesh’s banking sector are unique and cannot be solved by blindly copying foreign models. Instead, local expertise and experience must be applied to adapt or develop solutions tailored to our context. If that happens, the sector could gradually improve. The task is undoubtedly challenging, but not impossible.
The author is a certified anti-money laundering specialist & a banker in Toronto, Canada
