The steady decline in private-sector credit growth is a concerning indicator of the broader economic challenges facing Bangladesh. According to the latest statistics from the central bank, private-sector credit growth dropped to 7.28 percent in December 2024, down from 7.66 percent a month earlier. This figure is notably lower than the Bangladesh Bank's target of 9.80 percent for the first half of the fiscal year, reflecting the complex interplay of factors that are dampening demand for funds.
Several key issues have contributed to this trend. First and foremost, the persistent rise in lending rates has made borrowing more expensive, discouraging businesses from seeking fresh credit. Additionally, political uncertainty-particularly following the fall of the Sheikh Hasina government in August 2024-has created an atmosphere of caution among investors and financial institutions alike. The reluctance of banks to sanction new loans without substantial collateral, stemming from past irregularities in loan classification, has further restricted access to credit.
A significant decline in trade financing has also played a role, with demand for import-related credit remaining weak except for essential commodities. At the same time, many banks are opting to invest their surplus funds in risk-free government securities, which offer attractive yields. While this approach safeguards financial institutions, it diverts much-needed capital away from the private sector, slowing economic expansion.
The impact of recent floods and the broader economic slowdown have only compounded these challenges. With business activities subdued, the appetite for new investments remains low, exacerbating the downward trajectory of credit growth. However, there is room for optimism. The recent rise in import orders ahead of Ramadan suggests that demand for trade financing may pick up in the coming months, potentially reversing the downward trend in private-sector credit growth.
To revitalize credit expansion and bolster economic momentum, a multi-pronged strategy is needed. Political stability is paramount. Uncertainty deters investment, and ensuring a predictable policy environment will encourage both domestic and foreign investors. Additionally, targeted measures to stabilize lending rates and increase access to credit for small and medium enterprises (SMEs) can play a crucial role in revitalizing private-sector activity. Furthermore, addressing structural issues within the banking sector, including improving loan classification practices and enhancing financial transparency, will help restore confidence in credit markets.
Government and central bank must work collaboratively with financial institutions and business leaders to create a more conducive investment climate. A sustained focus on economic stability, business-friendly policies, and financial sector reforms will be critical in ensuring that private-sector credit growth rebounds, driving long-term economic progress for Bangladesh.
