The pace of private-sector investment in the country is gradually slowing, a trend clearly reflected in the growth of bank credit.
For six consecutive months, private-sector credit growth has remained stuck below 7%. As the gap – spread – between lending and deposit interest rates has widened abnormally, borrowing has become increasingly expensive.
Economists and entrepreneurs say the combined pressure of high interest rates and investment uncertainty has pushed businesses into a dual crisis – hampering industrial expansion, job creation, and overall economic recovery.
According to Bangladesh Bank data, the sluggish credit growth up to November last year signals stagnation in new industrial and expansionary investments. As investment declines, the demand for bank loans has also fallen, which stakeholders fear could ultimately have negative effects on economic growth, employment, and exports.
Prof Mustafizur Rahman, distinguished fellow of the Centre for Policy Dialogue (CPD), said without new investment, the demand for bank credit in the private sector does not increase. Current credit growth clearly indicates that new industrial and expansionary investments are extremely limited. Bankers echo this view, noting that due to high interest rates, weak demand, and policy and political uncertainty, entrepreneurs are reluctant to take new loans.
Bangladesh Bank data show that during the July-November period of the current fiscal year, settlements for capital machinery imports declined by more than 16%.
Economists consider this a major indicator of investment stagnation.
Experts also note that many factories of large industrial groups are either shut down or operating at partial capacity, further reducing demand for bank loans. As several top industrial enterprises have significantly cut production, the need for new borrowing has also diminished.
The abnormal increase in the spread between lending and deposit rates has made borrowing progressively more expensive, directly affecting business and investment. Entrepreneurs say high interest rates have raised production costs and reduced appetite for new investment. Bangladesh Bank itself views the situation with concern.
According to the central bank’s latest data, in October, banks on average collected deposits at an interest rate of 6.40% while lending at an average rate of 12.14%, resulting in an average spread of 5.74%. In reality, however, this gap exceeds 8-10% in some banks, creating significant pressure on businesses.
Bangladesh Bank officials say the move towards a fully market-based interest rate system has allowed some banks to increase spreads abnormally. This has raised borrowing costs and hurt businesses, particularly small and medium-sized entrepreneurs. While neighbouring countries maintain lending-deposit spreads below 3%, Bangladesh’s high spread is undermining its competitive capacity. Investigations show that in European countries the spread is no more than 1%, in the United States it ranges from about 1.5% to a maximum of 2%, and in India it remains within 3%.
The issue was discussed seriously at a bankers’ meeting held at Bangladesh Bank on 7 December. At the meeting, BB Governor Dr Ahsan H Mansur described the rising spread as alarming and urged collective efforts to bring it down to a tolerable level. However, instead of issuing specific directives, the central bank is relying on moral suasion to rein in banks.
Some bankers say deposits are shifting from weaker banks to comparatively stronger ones, allowing those banks to attract large deposits even at lower interest rates. However, lending rates have not been reduced proportionately. On the other hand, due to weak private-sector credit demand, banks are investing in treasury bills and bonds and earning interest of more than 10%. These factors have further widened the spread. Analysts believe that while a high spread boosts bank profits, it is not positive for the economy. High borrowing costs discourage new industrial setups, business expansion, and job creation.
It is worth noting that from April 2020 to June 2023, a maximum interest rate cap of 9% on bank loans was in effect. Under International Monetary Fund conditions, the SMART system was introduced in July 2023, and the cap on the maximum spread was lifted in November of the same year. In May 2024, the Bangladesh Bank fully liberalised interest rates.
Business leaders say unless discipline is ensured in the market-based interest rate regime, high borrowing costs will remain a major obstacle. Therefore, various quarters are demanding effective measures to control the spread in order to revive investment and production.
At present, the deepest crisis in the country’s economy is investment stagnation. Both private and foreign investments have fallen to their lowest levels in recent times. This stagnation is likely to emerge as the biggest challenge for the new government. Due to high bank interest rates and political uncertainty, domestic and foreign investments are not increasing. The pace of development budget implementation is the slowest in the past decade.
In this context, the CPD warns that unless investment and employment are placed at the centre of economic policy, the crisis will deepen further. Recently, CPD Executive Director Dr Fahmida Khatun said, “The decline in investment is currently the biggest problem in Bangladesh’s economy. When investment falls, employment declines, unemployment rises, and economic discomfort intensifies.”
A balanced bank interest rate is essential to enhance product competitiveness in domestic and international markets and to energise economic activity. However, commercial banks are simultaneously increasing both deposit and lending rates. Currently, interest rates in Bangladesh exceed 14%, while small and medium businesses in competitive markets earn profit margins of only 10-11%. In such a situation, high interest rates are by no means business-friendly, and surviving in the global market with high-cost loans is extremely difficult.
Economic analysts argue that the main causes of current inflation are raising production costs and structural supply-side problems. In such circumstances, when inflation is driven by supply-side factors, a policy of merely raising interest rates can weaken investment and further increase production costs through higher borrowing expenses.
Therefore, raising interest rates alone is not sufficient to fully resolve the crisis. The backbone of the country’s economy – the small and medium enterprise (SME) sector – is currently facing serious challenges due to inadequate access to credit and high interest rates. As a result, many small businesses are unable to survive, hindering job creation. To overcome this difficult situation, the government must create a balance among interest rates, investment, and inflation.
Lower interest rates will reduce production costs and help firms achieve a stronger market position. New investment will lead to the establishment of new industries and businesses or the expansion of existing ones, creating employment opportunities for a large number of people. In particular, small and medium entrepreneurs (SMEs) could rapidly expand their businesses and generate jobs if they had access to low-interest loans.
Thus, a balanced bank interest rate and structural reforms have become essential to maintaining economic stability. To attract new investment, bank lending rates must be reduced. Otherwise, both domestic and foreign investment may collapse. Interest rates must be lowered to overcome investment stagnation. Priority sectors – especially agriculture, SMEs, health, education, renewable energy, housing, garments, and women entrepreneurs – should be provided with low-interest loans on easy terms.
Many entrepreneurs have already set up industries by taking loans at interest rates below 9%, but are now paying 14-15%. If policy rates continue to rise in this manner, borrowing costs will increase further and create an overall crisis. Bangladesh will lose competitiveness in international markets, and those who invested with high-interest loans may become defaulters under the burden of debt.
Bangladesh’s economy is currently going through an extremely difficult phase. On one hand, rising inflation has increased the cost of daily necessities, making it hard for ordinary people to manage living expenses. On the other hand, in an effort to control inflation, the central bank has raised interest rates. These high rates have reduced new investment in industry and commerce and curtailed job creation. As a result, economic growth is being hampered, and the economy is losing momentum. With no new jobs being created, the economy is slowing down.
In this situation, the biggest challenge for policymakers is to set a rational, balanced, and investment-friendly interest rate structure to keep the economy moving.
Bd-pratidin English/Lutful Hoque
