Bangladesh Banks Awash With Cash But Credit Demand Stays Sluggish

💰 Bangladesh's banking sector is drowning in cash that nobody wants to borrow. By June 2026, total excess liquidity in the banking system surged by 39.40% year-on-year to exceed Tk 4 lakh crore, even as private-sector credit growth slumped to a multi-decade low of 4.47%. The paradox of cheap money with no takers has emerged as one of the most puzzling macroeconomic challenges for Bangladesh Bank as it tries to revive investment without aggravating inflation.

📊 Interest rates have steadily declined as banks accumulate vast excess liquidity amid weak credit demand. Simultaneously, Bangladesh Bank has shifted towards an easier monetary stance by cutting its benchmark policy rate, placing further downward pressure on money-market yields. The foreign-exchange market shows a similar imbalance: robust dollar inflows and weak import demand have created upward pressure on the taka, prompting the central bank to resume dollar purchases from commercial banks on 1 September at Tk 122.75 — above market remittance rates of Tk 122.30-122.60.

🏛 Why Bangladesh Bank Cut Rates

In July 2026, Bangladesh Bank lowered its policy rate by 50 basis points to 9.5% in a bid to spur private investment. The move marked a clear departure from the tight monetary stance maintained since 2022, during which the policy rate was gradually raised from 5% to 10% and kept there for nearly two years from October 2024.

"Our earlier assumption was that raising the policy rate would make money expensive, reduce liquidity, and curb inflation," a senior Bangladesh Bank executive told The Business Standard on condition of anonymity. "However, that mechanism failed in our context. Despite keeping the rate high for two years, inflation remained stubborn."

The official added that elevated interest rates instead drove up corporate financing and production costs, which firms passed directly to consumers. "We are now testing a supply-side strategy: lower the policy rate to reduce production and import costs. If supply expands and unit costs fall, prices should moderate," the executive explained.

⚠ Stagflation Risks Loom

This rate decline occurs against a fragile macroeconomic backdrop marked by sluggish growth, persistent inflation, and high unemployment, raising fears of stagflation. Although inflation eased to 8.26% in August 2026, it remains comfortably above the government's 7.5% target for FY27. Because prices were already elevated last year, ongoing inflation compounds a high baseline, keeping consumer prices uncomfortably high for households across income groups.

In response, Bangladesh Bank is injecting liquidity via stimulus measures and planning further monetary easing to reignite investment. However, economists and bankers warn that injecting liquidity without addressing structural bottlenecks will fail to revive real demand and could aggravate inflation.

📜 Md Ezazul Islam, Director General of the Bangladesh Institute of Bank Management, argues that lower interest rates are a symptom of economic paralysis rather than a sign of policy success. "Economic activity remains constrained by gas and electricity shortages, the lingering aftershocks of recent political instability, and global uncertainty," Islam noted.

📈 Structural Hurdles Mute Credit Demand

Despite lower borrowing costs, credit demand shows no sign of recovery. City Bank, one of the country's prominent private lenders, recorded just 7%-8% credit growth over the first nine months of the year — half its historical average — despite double-digit deposit growth. A senior executive at the bank noted that expected credit demand failed to materialise even after post-election political uncertainty subsided.

"Even when we offer competitive rates to large corporate clients, many refuse to borrow due to persistent gas shortages," the City Bank executive said. Consequently, the bank redirected surplus liquidity into government debt and deployed over Tk 2,000 crore into the central bank's stimulus fund. The executive also cast doubt on the official 4.47% private-sector credit growth figure for June, suggesting real growth is likely negative with much of the headline figure reflecting forced loans and accrued interest on existing facilities.

• 💸 Excess liquidity crosses Tk 4 lakh crore (39.4% YoY growth)
• 📅 Private-sector credit growth at just 4.47% in June 2026
• 📉 City Bank credit growth at 7-8% versus historical average of 14-16%
• 💵 Policy rate cut from 10% to 9.5% in July 2026
• ⚠ Inflation at 8.26% in August, above 7.5% FY27 target
• 📦 BB stimulus: Tk 60,000 crore (~3% of total bank loans)

🤝 Bankers Weigh In On The Liquidity Glut

Tareq Refat Ullah Khan, managing director of BRAC Bank, emphasised that falling rates stem directly from surplus liquidity rather than intentional economic stimulus. "When credit growth halts, money builds up. Lowering rates alone cannot create demand if the wider business environment remains unsupportive," Khan observed.

BRAC Bank has lowered corporate lending rates to 11%-12% (with select prime clients receiving 9%-10%), while SME rates have dropped to 14%-15% and retail rates to 11%-12%. Deposit rates across sound banks have settled around 8%-9%. Distressed banks continue offering 11%-12% on deposits solely to maintain liquidity, rather than to finance new lending — a sign that the banking system remains bifurcated between healthy private lenders and weaker banks dependent on high-cost deposits.

Abul Kashem Md Shirin, former managing director of Dutch-Bangla Bank, observed that major industrial borrowers are holding back expansion plans due to broader uncertainty. "When liquidity is abundant and credit demand falls, rates drop naturally. Bangladesh Bank spent years trying to force interest rates down through directives, but market forces are finally driving the adjustment automatically — which is precisely how a market economy ought to function," Shirin argued.

🌏 What It Means For Bangladesh's Growth Outlook

The Tk 60,000 crore stimulus package equals roughly 3% of total bank loans. Even if fully implemented, bankers estimate it would only push credit growth to 7%-8% — far below the 15%-16% required to support the government's 6.5% GDP growth target for FY27. "Banks will not take the risk of lending to distressed or insolvent businesses simply because money is cheap," the City Bank executive cautioned.

For Bangladesh's export-oriented economy, the credit freeze carries particular risks. Ready-made garment (RMG) manufacturers, who account for over 80% of merchandise exports, are among the businesses holding back on capacity expansion. Without working-capital injections and capacity-building investment, the export sector's competitiveness could erode at a time when global buyers are already diversifying sourcing away from Bangladesh. The political imperative to revive credit demand, therefore, extends beyond macroeconomic management — it is a strategic necessity for an economy facing intensifying competition from Vietnam, India and Cambodia.

The path forward requires more than monetary easing. Gas and electricity supply stabilisation, regulatory predictability, faster dispute resolution for distressed assets, and credible fiscal stimulus through infrastructure spending are prerequisites for reviving private investment. Until those structural constraints are addressed, Bangladesh's banks will continue sitting on cheap money that no one is willing to borrow.