High financing costs, weaknesses in the banking sector and persistent business uncertainty are prompting many entrepreneurs in Bangladesh to delay expansion plans, limiting fresh investment and weakening the pace of economic recovery.
The investment slowdown comes as businesses continue to face elevated borrowing costs, energy shortages, weak consumer demand and uncertainty over future market conditions. Although Bangladesh Bank has recently eased its policy rate, the cost of borrowing for businesses remains relatively high, making new investment less attractive.
The Asian Development Bank (ADB) has lowered its growth forecast for Bangladesh’s FY2027 economy to 4% from its earlier projection of 4.5%, citing weak investment recovery among the factors weighing on growth.
Economists say the investment problem is no longer simply a question of interest rates. Businesses need predictable demand, reliable energy supplies, access to credit and greater certainty about the regulatory environment before committing substantial funds to new factories, machinery or capacity expansion.
Borrowing costs remain a major hurdle: Bangladesh Bank reduced its policy rate by 50 basis points to 9.5% in August, but lending rates have remained elevated. For businesses, high interest rates increase the cost of working capital as well as long-term investment. Entrepreneurs considering factory expansion or new production lines must calculate whether expected returns will be sufficient to cover financing costs.
When borrowing becomes expensive, businesses often choose to preserve cash and postpone expansion rather than take on additional debt. Taskeen Ahmed, president of the Dhaka Chamber of Commerce and Industry (DCCI), said lower interest rates alone would not automatically
lead to higher investment. Businesses would invest when they see sufficient demand, stable economic conditions and a reasonable return on investment, he said. His observation highlights the wider uncertainty confronting businesses. Even if financing becomes cheaper, entrepreneurs may remain reluctant to borrow if they are uncertain about future sales, production costs or the operating environment.
Weak banks restrict credit access: The condition of the banking sector has added another layer of difficulty for businesses. Bangladesh’s banks are dealing with a large volume of non-performing loans, while several institutions face capital and liquidity weaknesses. These problems have reduced banks’ capacity and willingness to extend fresh credit.
Private-sector credit growth has remained weak, reflecting subdued demand for loans as well as constraints on the supply of credit. Weak banks are also more likely to become cautious about lending to businesses, particularly new borrowers and companies seeking loans for expansion. As a result, even businesses with viable investment proposals may find access to financing more difficult or expensive.
Md Ezazul Islam, director general of the Bangladesh Institute of Bank Management (BIBM), has stressed the importance of improving lending practices and ensuring consistent enforcement of banking regulations.
A healthier banking system, he has argued, is essential for restoring confidence and ensuring that credit reaches productive sectors of the economy.
Bad loans affect good businesses: The banking-sector crisis has consequences beyond borrowers who have defaulted on loans. When banks carry large amounts of non-performing assets, they need to set aside provisions and strengthen their capital. This reduces their ability to provide new loans.
Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, has pointed to weak credit discipline, regulatory forbearance and governance problems as contributors to the banking-sector crisis.
The resulting credit constraints can affect otherwise viable businesses that need financing for machinery, technology upgrades, working capital or capacity expansion. In such circumstances, entrepreneurs may rely more heavily on internal funds, which can significantly slow investment.
Energy costs add to financing pressure: The investment environment has also been affected by rising energy and transportation costs. The government increased diesel, petrol, octane and kerosene prices by up to Tk 20 per litre in September. Higher fuel prices have increased transportation costs and are expected to raise production and distribution expenses.
For manufacturers, the combination of expensive credit and higher operating costs can significantly alter the calculation behind an expansion project. A factory may have sufficient market demand but still postpone investment if it cannot ensure reliable gas and electricity supplies or if energy costs make production less competitive.
Economist Masrur Reaz said the relationship between energy, inflation and investment had become increasingly clear. He said fuel and electricity supplies needed to improve because without reliable energy, new investment would remain difficult and existing businesses would also be reluctant to expand.
According to Reaz, some industries are unable to fully utilise their existing capacity because of energy shortages, discouraging entrepreneurs from investing in additional capacity.
Inflation weakens investment demand: Persistent inflation is another factor affecting business decisions. When prices of essential goods rise rapidly, household purchasing power declines. Consumers then tend to reduce spending on non-essential goods and services. For businesses, weaker demand means lower expected sales and uncertain returns from investment. This can create a cycle: high inflation reduces purchasing power, weaker demand discourages investment, and lower investment limits production and employment growth.
At the same time, efforts to contain inflation through tight monetary policy can keep borrowing costs high. This leaves policymakers facing a difficult balance between controlling inflation and creating conditions for investment to recover.
Business uncertainty delays decisions: Beyond financing costs, entrepreneurs are also concerned about regulatory uncertainty, energy supply, market demand and the broader economic outlook.
Investment decisions usually involve long-term commitments. A new factory or production line can require substantial capital and may take years to generate returns. Businesses therefore tend to delay such decisions when future operating conditions are difficult to predict.
The ADB has identified weak investment recovery, energy shortages, higher production costs and uncertainty as constraints on Bangladesh’s growth outlook. The development is particularly significant for employment because large-scale private investment is closely linked to the creation of new industrial capacity and jobs.
Alternative financing could ease pressure: The banking-sector problems have also highlighted the need to strengthen Bangladesh’s capital market and other sources of long-term financing.
Humaira Azam, managing director and CEO of LankaBangla Finance, has said Bangladesh needs stronger capital and bond markets to finance long-term investment.
According to her, commercial banks could focus more on working capital and trade finance, while capital and bond markets could play a greater role in providing long-term financing for business expansion.
A more diversified financing system could reduce companies’ dependence on bank loans and provide alternatives when banking-sector credit is constrained.
Investment recovery depends on broader reforms: The current investment slowdown suggests that lowering interest rates alone may not be enough to restart private-sector expansion.
Businesses need a combination of affordable financing, reliable energy, stable demand and predictable regulations. At the same time, banking-sector reforms are necessary to restore lenders’ capacity to provide credit. The government and regulators therefore face the task of addressing several constraints simultaneously.
Improving bank governance and recovering bad loans could strengthen the financial system. Ensuring reliable electricity and gas supplies could improve factory utilisation. Containing inflation could restore household purchasing power, while regulatory reforms could reduce uncertainty for investors.
For entrepreneurs, the key question is ultimately whether a new investment can generate an adequate return under prevailing economic conditions. Until financing costs fall to more manageable levels and uncertainty surrounding demand, energy and banking-sector conditions is reduced, many businesses may continue to delay expansion decisions.That caution could keep private investment subdued and make it more difficult for Bangladesh to achieve a stronger and more sustained economic recovery.
