The World Bank recently urged Bangladesh to implement a comprehensive set of reforms to restore confidence in our financial system, which has been weakened by poor governance, political interference and related lending.

The multilateral lender outlined a 10-point action plan to address long standing structural weaknesses in the banking system, with the restructuring of state-owned commercial banks (SOCB) on top of the list.

Besides, establishing a strong framework to manage non-performing loans (NPLs) and enacting a comprehensive bankruptcy law were given high priority.

It also suggested improving the bank resolution framework, deposit insurance system and corporate governance alongside enforcing banking regulations, adopting international monitoring standards, implementing an emergency liquidity assistance scheme and ensuring the central bank's full independence.

We already know the dismal picture of our banking sector and there are reasons for the prevailing pessimism. But if we look at banking sector reforms in neighbouring countries like India, China, South Korea, Indonesia, or Europe, we have reason to believe that with the right structuring and seriousness, our banking sector could be improved to an acceptable level.

Hence, the banking sector policies and regulations by the central bank need to be fully transparent to avoid ambiguity among banks and facilitate appropriate implementation. Easy and fast access to all relevant regulatory and policy documents should be ensured, and the sub-optimal enforcement of existing regulations must be addressed.

The banking industry as a business is inherently risky. The main focus of risk management practices is to manage an institution's exposure to losses and protect the value of its assets. Senior bankers must ask themselves: what kinds of events/factors can damage my business and by how much? What actions can I take to mitigate such risks?

In Bangladesh, the answers to these questions will vary significantly compared to banks operating in developed economies, where firm regulatory and legal support exists. Here, bankers struggle with external nuisances, such as undue and often ruthless political pressure to forgive bad debts, greedy and selfish motivations of board members, rampant corruption, fear of becoming unemployed, and a lack of financial instruments to hedge risks.

Therefore, in a developing environment like Bangladesh, risk management becomes more complicated and therefore, needs to be taken into account when designing the necessary reforms.

The board of directors within banks dominates the executive branch. In Bangladesh, this is often the root of many problems due to major conflicts of interest. The board of directors are often motivated by personal goals of wealth accumulation. While some members may appear independent, their conflicts of interest become visible upon scrutiny. Regulatory forbearance, where the central bank permits other banks to operate by relaxing standard norms, has led to the rescheduling of large, defaulted loans and the continuous piling up of NPLs.

Therefore, the boards of commercial banks should mostly consist of independent directors and legal systems should be enhanced to support banks in recovering NPLs, particularly from wilful defaulters.

Whenever people are involved, "human-failure" may occur and incorrect decisions will be made. Therefore, automating the banking system will be beneficial as it will equip bankers with the necessary tools to mitigate the risks of loans going bad, and also improve the bank's asset versus liability management ratios.

Digital and alternative banking options will also benefit customers by providing faster services and reducing the need for bank visits.

More importantly, the role of SOCBs should be reassessed, and some transformed into developmental institutions with a clear public mandate and necessary budget support. The rest should either be converted into banks operating on commercial principles or closed. Additionally, the central bank needs to strengthen its regulation and supervision of SOCBs, which depends on its own independence and autonomy.

The author is chairman of Financial Excellence Ltd