The growth of bank loans to the private sector in Bangladesh slowed to 6.29 percent in September, marking the lowest rate in the past four years, according to economists and banking officials. Analysts attribute the decline primarily to stagnation in new business activities and a slowdown in investment, compounded by political uncertainties and cautious investor sentiment.
Continuous Decline since August: The contraction in private sector lending has been ongoing since August 5, 2024. Economists note that the consistent fall reflects the broader slowdown in economic activity, particularly in capital formation and industrial investment. “The private sector is hesitant to borrow when there is no clear business momentum and investment appetite remains subdued,” said Dr. Mohammad Kamal, a senior economist at the Bangladesh Institute of Development Studies (BIDS).
FDI and Investment Slowdown: Data for the second quarter of 2024 (April-June) show that all indicators for foreign direct investment (FDI) were negative compared to the previous quarter. “There has been no significant inflow of new FDI or equity investments,” noted Dr. Kamal. Economists highlight that foreign investors carefully evaluate the overall economic and political environment before committing capital. While the increase in foreign exchange reserves has been positive, it is overshadowed by political uncertainty and ongoing concerns from rating agencies about Bangladesh’s creditworthiness.
Banking Official Sees Hope in Political Change: A senior official at Bangladesh Bank, speaking on condition of anonymity, suggested that the return of an elected government could restore investor confidence and stimulate borrowing. “Once a stable political environment is established, businesses are likely to import more capital machinery, which will, in turn, increase demand for bank loans,” the official explained. The slowdown in Letters of Credit (LCs) for capital machinery imports underscores this trend. “When investment activity is low, demand for LCs naturally falls, which reduces borrowing from banks,” the official added. High Interest Rates a Barrier to Borrowing: Business leaders also point to high lending rates as a factor discouraging borrowing. “Even if there is some investment opportunity, high bank interest rates make loans unattractive,” said Farhana Rahman, a Dhaka-based entrepreneur in the manufacturing sector. “Reducing borrowing costs would encourage businesses to take loans for expansion, machinery imports, and working capital.” Economists agree that easing interest rates, along with creating a more stable political and regulatory environment, is essential to reviving private sector credit growth.
Implications for the Economy: The slowdown in private sector borrowing has wider economic implications. Private credit is a critical driver of growth, especially for small and medium-sized enterprises (SMEs), which rely heavily on bank financing for operations and expansion. According to Dr. Kamal, “If private sector lending remains subdued, it could slow overall economic activity, delay new investment projects, and affect employment growth in the medium term.”
Sectoral Impact: The manufacturing and industrial sectors are particularly affected. “Industrial investment has fallen because businesses are wary of the uncertain economic and political environment,” noted Shamsul Alam, an industrial economist. “When loans are less accessible or more expensive, capital-intensive projects are postponed, and industrial expansion slows down.” The ready-made garments (RMG) sector, a major contributor to exports, has also felt the impact of reduced bank lending, although foreign orders and export earnings continue to provide some buffer.
Role of Foreign Investment: Experts emphasize that foreign investors’ caution is linked not only to economic indicators but also to governance and regulatory certainty. “Investors look for policy consistency, rule of law, and transparent banking practices before committing funds,” said Dr. Alam. “Political instability and negative signals from credit rating agencies reduce confidence, which directly affects the flow of new investment and private sector borrowing.”
Bangladesh Bank’s Outlook: Bangladesh Bank expects credit growth to rebound once political stability returns and investment activity picks up. The central bank official noted that an uptick in imports of machinery and industrial equipment would naturally boost bank lending. However, officials caution that structural reforms are also necessary to improve the investment climate, including streamlining regulatory processes, reducing bureaucratic hurdles, and ensuring policy predictability.
Policy Recommendations: Economists and business leaders propose several measures to reverse the slowdown in private sector credit growth: Lower Lending Rates: Reducing interest rates on business loans would make borrowing more attractive, particularly for SMEs.
Political Stability: A stable and predictable political environment would restore investor confidence and encourage new investments.
Regulatory Reform: Simplifying loan approval processes and reducing over-regulation would improve the ease of doing business.
Targeted Credit Support: Special credit lines or incentives for capital machinery imports and high-value investment projects could stimulate borrowing.
Farhana Rahman emphasized, “A combination of lower rates, clear policies, and investor-friendly regulations will encourage entrepreneurs to borrow and invest, ultimately supporting economic growth and employment creation.”
The current decline in private sector bank lending to 6.29 percent is a warning signal for Bangladesh’s economic policymakers. While political uncertainties and cautious investor sentiment are major factors, structural issues like high borrowing costs, regulatory complexity, and limited new investments also play a role. Experts agree that a coordinated effort by the government, central bank, and business community is essential to restore credit growth, stimulate private investment, and support sustainable economic development. If timely measures are not taken, the prolonged slowdown in private sector credit could have far-reaching consequences for industrial expansion, job creation, and overall economic stability in Bangladesh.
