Private sector credit growth in Bangladesh sharply declined in September, reaching a three-year low amid turmoil in the banking sector and broader economic challenges.

Data from Bangladesh Bank indicated that credit growth fell to 9.2 per cent in September, down from 9.86 per cent in August, 10.13 per cent in July, and 9.84 per cent in June.

This decline represents the lowest level since September 2021, when growth was at 8.77 per cent.

Bank officials attributed the downturn to a stagnant business environment, exacerbated by political upheaval and widespread disruptions across the country.

Protests, curfews, and internet blackouts, following a student-led mass uprising in July, disrupted operations and heightened economic uncertainty. The movement culminated in the ousting of Sheikh Hasina from the country on 5 August.

As a result, businesses adopted a cautious ‘wait-and-see’ approach, reducing credit demand, bankers reported.

Additionally, persistent inflation, rising lending rates, and weak loan recovery further weighed on credit growth.

The banking sector’s liquidity crisis has worsened due to significant loan scandals and irregularities during the Awami League regime, bankers added.

Fears of losing deposits have prompted many to withdraw funds, causing cash outside banks to surge to Tk 2.92 lakh crore in August from Tk 2.50 lakh crore in the same month in 2023.

Furthermore, banks’ capacity for loan disbursement has diminished due to high levels of defaulted loans, client withdrawals, and ongoing economic challenges, they said.

Many banks are now experiencing cash shortages and have sought support from the central bank and larger institutions to meet daily cash requirements.

According to Bangladesh Bank data, deposits (excluding interbank and government deposits) declined to Tk 17,31,260 crore in August, down from Tk 17,34,026 crore in July and Tk 17,42,224 crore in June.

Economic challenges such as high inflation, foreign exchange volatility, a dollar shortage, and an energy crisis have further dampened business activity, making companies hesitant to take on new bank loans.

The central bank’s contractionary monetary policy has also weighed heavily on private sector credit growth. The Bangladesh Bank raised the policy rate to 10 per cent to curb inflation by increasing the cost of borrowing.

A dollar shortage in the country has curtailed business operations and dampened credit demand, with the exchange rate rising from Tk 90 to Tk 120 against the US dollar over the past couple of years.