Liquidity Glut, Investment Drought Deepen Bangladesh’s Economic Paralysis

Bangladesh’s economy is confronting a dangerous paradox: banks are sitting on Tk4.42 lakh crore in excess liquidity, yet businesses are holding back investment, private-sector credit growth has slumped below 5 per cent and government borrowing costs have fallen to a three-year low. 

Money is abundant, but the confidence to invest "and the appetite to lend "are in short supply. This widening disconnect exposes a deepening crisis of confidence in the banking system and the business environment, threatening to prolong the investment slump, constrain job creation and derail a sustainable economic recovery.

The clearest market signal came on October 11, when yields on all three benchmark Treasury bills fell below 8 per cent for the first time since October 2023. The 91-day bill yield dropped to 7.65 per cent, while the 182-day and 364-day bills yielded 7.75 per cent and 7.89 per cent respectively. The shortest-term yield plunged 48 basis points in a week from 8.13 per cent on October 4.

The decline offers the government cheaper short-term financing but exposes a more troubling reality: banks are finding government securities a more attractive destination for surplus funds than lending to businesses facing uncertain demand, high operating costs and mounting financial risks.

Bangladesh Bank’s latest figures underline the depth of the credit slowdown. Private-sector credit growth stood at just 4.75 per cent year-on-year in August, remaining below 5 per cent for six consecutive months and well short of the central bank’s 6.80 per cent target for December. Growth had slumped to 4.47 per cent in June.
Meanwhile, bank deposits grew by 12 per cent year-on-year to Tk21.31 lakh crore in August, against 10.01 per cent a year earlier. The divergence between deposit mobilisation and lending reflects the banking system’s struggle to turn savings into productive investment.

The reasons are deeply rooted. High borrowing costs, unreliable gas and electricity supplies, rising production expenses, subdued consumer demand and uncertainty over future sales are discouraging businesses from expanding. Banks, weakened by years of irregular lending, poor governance and mounting defaults, are increasingly cautious about extending fresh credit. 

Government securities offer a comparatively straightforward alternative to riskier private-sector loans. But this defensive approach carries a wider economic cost. 

When businesses cannot secure financing "or lack the confidence to invest "industrial expansion, employment and future export capacity suffer. Lower Treasury yields may ease pressure on public finances, but they cannot substitute for private investment as an engine of sustainable growth.

Household finances add to the strain. The Bangladesh Bureau of Statistics’ Living Standards Survey 2025 found that 47.42 per cent of households borrowed to meet expenses. The proportion was 51.91 per cent in rural areas, compared with 40.19 per cent in urban areas and 32.11 per cent in city corporation areas.

Average monthly household income stood at Tk33,513 against expenditure of Tk35,311, leaving a deficit of Tk1,798. Such financial pressure weakens purchasing power, restrains consumption and further undermines businesses’ incentive to expand.

The banking sector’s bad-loan crisis makes the recovery still more difficult. Non-performing loans reached Tk6,06,555 crore at the end of June 2026, equivalent to 32.78 per cent of total outstanding loans of Tk18,50,476 crore. Bad loans increased by Tk49,338 crore in the first six months of the year.

Nearly Tk33 of every Tk100 lent by banks was classified as non-performing, while ten banks accounted for more than 72 per cent of the sector’s bad loans. The burden erodes profitability, increases provisioning requirements and constrains banks’ capacity to finance sound new projects.

Investors are also pricing in these risks. Banking shares traded at an average price-to-earnings ratio of 4.9 on the Dhaka Stock Exchange, compared with 8.5 for the broader market. The discount reflects concerns over loan quality, capital adequacy and future earnings. Low valuations alone cannot make financially distressed banks attractive investments.

Bangladesh is caught in a damaging cycle: weak confidence suppresses investment, bad loans undermine lending capacity, energy shortages constrain production and household financial distress weakens consumption. Breaking that cycle requires more than lower interest rates or cheaper government borrowing.

The priority must be to restore confidence in financial intermediation through stronger bank governance, effective recovery of defaulted loans, transparent recognition of losses, adequate capital and an end to regulatory indulgence towards habitual defaulters. Reliable energy supplies, predictable policies and a more supportive investment climate are equally essential to revive private enterprise.

The ultimate test is whether Bangladesh can turn its banks from holders of government debt into financiers of productive growth. Until businesses regain the confidence to invest and banks rebuild their capacity to lend, the country’s vast financial resources will remain disconnected from the factories, jobs and exports needed to power an economic recovery.