Mahfuja Mjukul
Bangladesh’s banking sector is facing a puzzling contradiction. Private-sector credit growth has fallen to a 33-year low, yet several banks continue to struggle with severe liquidity shortages.
According to Bangladesh Bank’s latest data, private-sector credit growth fell to just 4.47%, the lowest level since 1993. The weak credit demand indicates that businesses are reluctant to take new loans, while investment and industrial expansion have slowed significantly.
Under normal circumstances, lower credit demand should leave banks with more excess liquidity. But several banks are still struggling to meet customers’ withdrawal demands and are relying on emergency liquidity support from Bangladesh Bank.
The central bank has provided more than Tk76,000 crore in liquidity support to troubled banks over the past one and a half years. Islami Bank alone has recently received more than Tk17,000 crore in emergency liquidity assistance. The situation raises a critical question: If businesses are not borrowing, why are some banks still short of cash?
The liquidity puzzle: Bank liquidity generally depends on deposit mobilisation and lending. When deposits rise while new lending falls, banks should theoretically have more funds available. Bangladesh is currently experiencing both trends. Deposit growth has improved, remittance inflows have reached record levels and private-sector credit growth has fallen sharply. Yet liquidity stress persists at several weak banks.
Economists and banking-sector observers say the problem cannot be explained by current credit demand alone. Rather, it reflects years of financial irregularities, poor lending practices, rising non-performing loans and weak corporate governance.
During the previous government’s 15-year tenure, allegations emerged that powerful business groups exerted influence over banks and secured large loans through political connections. Multiple loans to the same groups, weak collateral and inadequate regulatory oversight contributed to deterioration in banks’ asset quality.
A significant amount of money was subsequently siphoned out of the banking system through loan defaults and alleged illicit transfers abroad, leaving banks with loan assets on their balance sheets but little recoverable cash.
Bad loans keep cash from returning:The central problem is that banks are not receiving sufficient cash from loans already disbursed.Bangladesh Bank data show that classified loans reached Tk5,88,704 crore at the end of March this year. At the same time, banks’ provisioning shortfall rose to Tk2,05,665 crore.
The volume of distressed loans has exceeded Tk10 lakh crore, equivalent to around 60% of total loans, according to the report. As a result, even though banks are issuing fewer new loans, repayments from existing loans are also inadequate. This leaves banks with assets on paper but insufficient liquid funds to meet depositors’ demands.
The situation is particularly severe among full-fledged Islamic banks, where the non-performing loan ratio has risen to 58.4%. In some banks, the advance-to-deposit ratio has exceeded 120%, meaning they have lent more than the deposits they collected. Consequently, when depositors withdraw money simultaneously, these banks struggle to meet their obligations without central bank assistance.
Why businesses are avoiding new loans: Businesses are increasingly reluctant to borrow because of a combination of high interest rates, gas shortages, electricity supply disruptions, weaker export orders, exchange-rate uncertainty, law-and-order concerns and a lack of confidence in the investment environment.
Many entrepreneurs say the problem is no longer simply access to financing. They are uncertain about whether they can operate profitably after taking a loan. For manufacturers, unreliable gas and electricity supplies have become major obstacles. Entrepreneurs are reluctant to borrow for new factories or expansion projects when there is no guarantee of uninterrupted energy supplies.
Mahiyuddin Rubel, founder and CEO of Bangladesh Apparel Voice and a former director of BGMEA, told The Daily Industry that the 33-year low in private-sector credit growth is not merely a banking-sector statistic but a reflection of the country’s industrial and investment environment.
“Normally, lower borrowing by businesses should increase banks’ liquidity. But many banks are still dependent on emergency liquidity support from the central bank. This means the problem is not new lending, but the failure to recover a huge volume of previously disbursed loans, the abnormal rise in non-performing loans and years of governance deficiencies in the banking sector,” Rubel said.
He said many entrepreneurs, particularly in the apparel and manufacturing sectors, are now prioritising survival of existing businesses rather than taking new loans for investment. “Uncertain gas and electricity supplies, high borrowing costs, pressure on global demand, rising production costs and overall economic uncertainty are prompting entrepreneurs to postpone new investment decisions,” he said.
Deposits are growing-but not everywhere: The apparent contradiction becomes clearer when the distribution of deposits is considered. Deposit gro: wth in the banking system has started to improve, while remittances have reached record levels. Foreign exchange reserves have also risen to around $36 billion, and the foreign exchange market has become relatively stable.
However, much of the new money is flowing toward financially stronger banks with better governance. Customers are increasingly reluctant to place fresh deposits with weaker banks and, in some cases, are withdrawing existing deposits. This is worsening liquidity pressure at troubled institutions. As a result, the banking sector is experiencing a three-way strain: weak credit demand, liquidity shortages at vulnerable banks and capital deficiencies.
Why emergency support is not enough: Finance Minister Amir Khosru Mahmud Chowdhury told Parliament that troubled banks had received more than Tk75,903 crore in emergency liquidity support up to June this year.
However, economists say such support mainly helps banks meet immediate withdrawal demands. It does not resolve the structural problems weakening their balance sheets.
The underlying issues include high non-performing loans, loan fraud, weak corporate governance, politically influenced lending, alleged capital flight, capital shortages and the rapid accumulation of distressed assets. Without addressing these problems, continued liquidity injections may only postpone the crisis.
Banking reforms underway: Following the July uprising, the interim government initiated broad reforms in the banking sector, many of which have continued under the current government.
The measures include restructuring the boards of weak banks, merging five Islamic banks, introducing risk-based supervision, strengthening bank-resolution mechanisms, recovering defaulted loans, establishing an asset management company and amending the Bank Company Act.
Analysts say the initiatives are positive but that decades of irregularities cannot be resolved within one or two years. Rubel said banking-sector reform is essential, but meaningful progress in recovering defaulted loans, ensuring corporate governance, restructuring weak banks and restoring depositors’ confidence is necessary for long-term stability. “At the same time, uninterrupted gas and electricity supplies, policy stability and competitive financing conditions must be ensured for productive industries,” he said.
Confidence is the key: The current crisis is therefore not simply a liquidity problem-it is also a crisis of confidence. Businesses are postponing investment because they lack confidence in the operating environment, while depositors at weak banks are increasingly concerned about the safety and availability of their funds.
Rubel said reducing the policy rate or announcing incentives alone would not be enough to revive investment. “Unless entrepreneurs regain confidence, simply lowering the policy rate or announcing incentives will not deliver the desired increase in investment,” he said.
He added that failure to revive productive investment would eventually put employment, exports and overall economic growth under pressure. The central contradiction in Bangladesh’s banking sector is therefore becoming increasingly clear: businesses are borrowing less, yet some banks still have insufficient cash. Analysts say the explanation lies in years of weak lending discipline, loan defaults, governance failures and erosion of confidence.
Resolving the crisis will require more than emergency liquidity assistance. Recovering bad loans, strengthening bank governance, restructuring weak institutions and restoring confidence among both businesses and depositors will be crucial to putting the banking sector on a sustainable footing.
