As Bangladesh steps into the new fiscal year 2025-26, the country’s private sector is under increasing pressure from the ripple effects of high interest rates and stringent monetary policies. Aimed at taming inflation and restoring discipline to the financial sector, the central bank’s measures have inadvertently tightened the noose around the necks of many struggling businesses, especially small and medium enterprises (SMEs) that are highly dependent on accessible credit.
While economists and global institutions have commended the Bangladesh Bank’s attempts to bring monetary discipline, business leaders and entrepreneurs across multiple sectors warn that the consequences of these policies are being acutely felt in the real economy. With limited access to affordable credit, many businesses are scaling down operations, shelving expansion plans, and in some cases, shutting down entirely.
Policy Tightening: Intended Discipline, Unintended Fallout: At the heart of the current financial tightening lies a series of policy interest rate hikes initiated by the central bank in early 2025. The aim was clear: to contain persistent inflation, curb speculative lending, and reintroduce financial discipline after a
period marked by loose monetary policy and growing non-performing loans (NPLs). Since January, the policy rate has been raised three times, totaling an increase of 200 basis points. This resulted in a significant rise in lending rates across commercial banks, which are now charging as high as 14-16 percent for term loans. Previously, many SMEs were accessing loans at below 10 percent, with some even benefitting from subsidized lending through stimulus programs during the pandemic recovery phase.
Sadiq Rahman, a Dhaka-based commercial banker, explained the situation from the lenders’ perspective. “Banks are under pressure to maintain asset quality and reduce their exposure to risky clients,” he said. “With the central bank increasing surveillance and tightening regulations, many banks are reluctant to lend to SMEs, fearing loan defaults and regulatory backlash.”
This approach, while understandable from a regulatory standpoint, is choking liquidity for businesses that were already reeling from the impacts of inflation, energy shortages, and declining consumer demand.
Credit Crunch Hits SMEs and Exporters: One of the hardest-hit sectors has been the ready-made garment (RMG) industry, which accounts for over 80 percent of the country’s exports and employs millions of workers. Several mid-sized exporters report that they are unable to finance their working capital needs due to tightened lending criteria.
“We are facing a crisis on multiple fronts - global order volumes are down, gas and electricity are unreliable, and now banks are either denying loans or offering them at unsustainable rates,” said Anwara Begum, managing director of a garment factory in Gazipur. “We’ve had to cut two-thirds of our production just to keep the doors open.”
The crisis extends beyond garments. Light engineering, pharmaceuticals, agribusinesses, and service sector enterprises all report similar struggles. Without accessible credit, businesses are delaying payroll, missing import deadlines, and cutting back on investment in technology and infrastructure.
According to Bangladesh Bank data, private sector credit growth fell to 8.3 percent year-on-year in May - far below the government’s target of 12.5 percent. Economists believe this slowdown in credit growth will continue unless policy measures are adjusted to ensure liquidity support for the productive sectors.
Expert Views: Balancing Discipline with Growth: Experts across the economic spectrum acknowledge that monetary tightening is necessary - but only as one component of a broader strategy. They argue that without a coordinated fiscal and structural response, high interest rates alone could do more harm than good.
Professor Mustafizur Rahman, Distinguished Fellow at the Centre for Policy Dialogue (CPD, noted:”The central bank is right to address inflation and ensure monetary discipline. However, the lack of coordination between monetary policy and fiscal incentives is undermining the intended outcomes. Businesses need breathing space. What we are seeing is a textbook tightening policy being applied in a highly informal and volatile economy, and it’s not working.”
Prof Rahman suggests that selective liquidity support, sector-specific refinancing schemes, and targeted credit guarantees could allow SMEs to weather the storm without compromising overall financial stability.
Political Instability Exacerbates Business Uncertainty: Adding to the burden of high interest rates is a tense political climate. With national elections expected early next year, uncertainty is mounting. Businesses fear that another round of pre-election unrest, similar to what occurred in 2013 and 2018, could push the economy further into turmoil.Fazlul Haque, former president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), emphasized the need for political consensus and institutional stability:”We need to address the roots of instability - the politics, the policy inconsistency, and mob-style extortion. Unless these are tackled, even the best monetary policy won’t work.”
He added that repeated disruptions from extortion, corruption in licensing and customs processes, and local-level political interference are making it increasingly difficult for businesses to survive.
“Businessmen don’t just worry about interest rates. We worry about whether the electricity will be on, whether our trucks will make it through a roadblock, and whether we’ll be asked to pay illegal tolls,” he said. “Fixing the banking sector is important, but fixing governance is equally important.”
Dwindling Business Confidence and Investment Slowdown: Unsurprisingly, the current environment has led to a dramatic erosion of business confidence. Private investment, which accounted for 23.5 percent of GDP in FY 2023-24, has now fallen to 22.4 percent in FY 2024-25, according to provisional government figures. The Board of Investment has also reported a decline in new investment proposals, both domestic and foreign.An internal survey by the Dhaka Chamber of Commerce and Industry (DCCI), shared exclusively with this publication, revealed that over 65 percent of member businesses are delaying expansion plans, while 40 percent report being “financially distressed.”
“Without investment, there can be no job creation,” said DCCI President Ashraf Ali Khan. “And without credit, there can be no investment. It’s that simple.”
The Role of the Central Bank: Walking a Tightrope: In defense of its policies, the central bank maintains that monetary tightening is essential for long-term economic health. A spokesperson for the Bangladesh Bank said:”We are working to bring inflation within the 6 percent target range, reduce bad loans, and stabilize the currency. These are foundational requirements for sustainable growth.”
However, critics argue that the central bank is relying too heavily on blunt instruments like interest rate hikes and needs to innovate more in terms of policy design.
Professor Selim Raihan, Executive Director of the South Asian Network on Economic Modeling (SANEM), said:”There is too much reliance on one-dimensional monetary tools. Where are the credit insurance schemes for small businesses? Where are the structured support systems for export-led sectors? Without these, rate hikes become counterproductive.”
Possible Policy Responses: What Can Be Done: In light of the crisis, several experts have called for an urgent review of monetary policy. Proposals include:Revising the lending cap for SMEs with government-backed guarantees to reduce risk for banks. Introducing sector-specific stimulus packages, especially for export-oriented and labor-intensive sectors. Creating an interest rate subsidy scheme for critical industries hit hard by external shocks. Improving regulatory clarity to help banks make lending decisions without fear of post-facto scrutiny. Developing fintech-driven micro-lending platforms to improve access for small-scale businesses. The central bank has hinted that a review may be undertaken in the second quarter of FY 2025-26, depending on inflationary trends and global economic developments.
A Delicate Balance Ahead: Bangladesh’s economic planners are at a crossroads. The challenge lies in finding the delicate balance between controlling inflation and keeping the lifeblood of the economy - credit and investment - flowing. A continued squeeze on credit could stall recovery efforts, derail job creation, and push hundreds of small businesses toward insolvency.
The solution, experts say, lies in a coordinated approach that blends prudent regulation with business-friendly reforms. Without such action, the economy may stabilize on paper, but collapse in reality - dragged down by rising costs, falling confidence, and a vanishing middle class of entrepreneurs.As Fazlul Haque aptly summarized: “An economy doesn’t run on interest rates alone. It runs on trust. And right now, that trust is wearing thin.”
