Bangladesh private sector credit growth stays under 5% as weak investment curbs loan demand

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Bangladesh private sector credit growth

Highlights

Private sector credit growth in Bangladesh declined to 4.17% in September, staying below 5% for the seventh consecutive month despite a policy rate cut to 9.50%.
Over 400 factories have closed since January as high lending rates, energy price hikes, and persistent power shortages continue to deter new investment and expansion.
Banks have shifted funds to treasury bills and bonds, with record investments in government securities and rising income from these sources, reflecting structurally weak loan demand and high non-performing loans.

September slowdown persists despite rate cut

The Business Standard reports that Bangladesh Bank's 50 basis point cut in the policy rate to 9.50% on 30 July has yet to lift borrowing demand from businesses. Private sector credit growth stands at 4.17% in September, after 4.75% in August, and remains below 5% for the seventh consecutive month.

The slowdown follows readings of 4.72% in March, 4.75% in April, 4.98% in May, 4.47% in June and 4.62% in July. Bankers, economists and business leaders say the prolonged weakness points to subdued economic activity and limited appetite for new loans.

Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office, says credit growth will rise when the economy starts gaining momentum, adding that little has happened over the past seven months to support stronger bank lending. He says demand for credit needs new industries, factory investment and higher foreign investment, while high inflation and rising input costs are also holding businesses back.

Business leaders say entrepreneurs remain reluctant to expand existing operations or launch new ventures because of high lending rates, deteriorating law and order, and complications around VAT and taxation. They add that renewed increases in energy prices and concerns over fuel shortages are making investment decisions even harder, while banks are staying cautious in assessing fresh loan applications.

Factory closures and cautious banks reshape financing

Imran Kader Turjo, director of the Bangladesh Knitwear Manufacturers and Exporters Association and managing director of Southern Knitwear, says the current business climate is not supportive of investment. He says more than 400 factories have shut down since January, and businesses have also been told the country's power supply situation is unlikely to improve before 2030, further discouraging new projects.

Private sector credit growth has been declining since August 2024 after the political transition, with several large industrial groups shutting factories and others cutting production by 30% to 40%. Md Touhidul Alam Khan, managing director and chief executive officer of NRBC Bank PLC, says the drop to below 5% is the lowest in more than three decades and reflects structural constraints, weak domestic and export demand, low capacity utilisation and banks' caution amid high lending rates and large non-performing loans.

As demand for business loans stays weak, banks are increasingly shifting funds into treasury bills and bonds, where investments have reached record levels over the past two to three years. Commercial bank annual reports also show income from government securities rising relative to earnings from lending, marking a departure from the traditional model in which interest income from loans is the main revenue source.

Khan says the fallout is already visible in slower job creation, rising unemployment and weaker export competitiveness because of uncertainty over utility supplies and limited trade destinations. Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue, says Bangladesh Bank's Tk60,000 crore stimulus package could help revive credit growth through its 15 financing schemes, but persistently high inflation and the 9.50% policy rate leave limited room for banks to offer much cheaper loans while remaining commercially viable.

Our earlier article on Pakistan’s push to expand lending in housing, agriculture and SMEs detailed how the government set targets to raise farm and SME credit to Rs1.5 trillion by June 2027 and tied bank incentives to stronger priority-sector performance. It also outlined planned steps to ease access to finance, including faster processing, fewer documentation requirements, regulatory tweaks and risk-sharing mechanisms aimed at overcoming structural barriers to credit growth.

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