Uncertainty continues to weigh on private credit growth

Bangladesh's private credit growth edged up slightly in July but remained far below last year's levels, as investment demand remains weak amid political uncertainty, volatile law-and-order situation, and strict scrutiny by banks.

Credit to businesses in July grew 6.52 percent year-on-year to Tk 17.42 lakh crore, according to latest Bangladesh Bank (BB) data.

This marks the second-lowest growth in private sector lending, which accounts for two-thirds of the country's investment, in at least one and a half years. In June, growth had stood at 6.49 percent.

"We do not see any considerable turnaround in business activities even though export orders show a sign of increase. Growth in the domestic market-oriented businesses appears to remain flat," said Ahmed Shaheen, additional managing director of Eastern Bank PLC.

"Investment has been sluggish as well. There is less appetite for immediate fresh investment. Investors seem to be waiting for a political transition," he added.

July data on the import of capital machinery, a key indicator of investment, is not yet available. However, in the fiscal year 2024-25 (FY25), the opening of letters of credit for the import of capital machinery fell 25 percent year on year. Imports of intermediate goods and industrial raw materials also declined.

"Business confidence has been struggling to improve and the law-and-order situation is a reason," said Shaheen.

Two more factors, the crisis in the banking sector and greater scrutiny by bankers to avoid risky lending, have also had an impact on private credit growth.

"Many bankers are playing safe to avoid any adverse consequences in the future. An alternate investment in government securities is also safe and with high yield," he added.

Shah Md Ahsan Habib, professor selection grade at the Bangladesh Institute of Bank Management (BIBM), expressed similar views.

"A large number of banks are under the regulatory scanner because of reform measures in the financial sector. So, banks have become overcautious. They will not lend if they find any compliance gap," he said.

"We may not see any jump in credit growth unless there is any surge in economic activities," he added.

Bangladesh's economy has struggled over the past three years. In FY25, growth slowed to 3.97 percent, the lowest in five years, down from 4.22 percent the previous year.

Noting the slowing growth of credit to the private sector, the central bank projects a 7.2 percent expansion in loans to private businesses by December 2025.

It expects that overall credit will increase 8 percent at the end of June next year, "assuming a contractionary nature of monetary policy aimed at containing persistently high inflation and lower credit demand from non-bank financial corporations."

Meanwhile, Fahmida Khatun, executive director at the Centre for Policy Dialogue (CPD), noted that the tight monetary policy is not the main factor inhibiting faster expansion of loans.

"How can investors invest under such an uncertain and volatile situation," she said. "We see increased violence. Many have doubts whether the election will take place on due time under such an uncertain situation."

Besides, the cost of doing business has not dropped. "There are complaints that it has risen because of increased energy prices and corruption."

Khatun added that a jump in private credit growth is unlikely before a stable government takes office post-election. "But the slow credit growth will have a negative impact on employment generation and the poverty situation."