Right before Eid-ul-Azha many people reported not being able to withdraw cash from ATMs and banks. Banks said they faced high demand and a severe liquidity crisis, which was exacerbated before Eid.
This liquidity crisis however has been brewing for the past two years.
Most banks in Bangladesh are increasingly reliant on the call money market and central bank borrowing due to a growing liquidity crisis. This liquidity crisis has been going on for the past two years, with some Islamic banks being particularly affected for over a year.
The situation escalated with panic withdrawals following the Bangladesh Bank’s forced merger announcement. Additionally, the high value of the dollar has further strained banks’ finances.
Before Eid-ul-Azha, the crisis reached its peak, driving up demand for cash. As a result, the call money market saw a sharp increase in borrowing costs, with the overnight call money rate hitting 10% and an average interest rate of 9.39%. The short notice or 14-day interest rate rose to 12.55% in interbank transactions.
Banks were forced to borrow large amounts from the Bangladesh Bank, as they could not secure sufficient funds through the interbank money market, even at these high rates.
In the last five days before Eid banks borrowed Tk82,661 crore from Bangladesh Bank.
Central bank data shows, on June 9, several banks borrowed Tk13,413 crore, on June 10, Tk15,376 crore, on June 11, Tk13,484 crore, on June 12, Tk18,022 crore and on June 13, the last working day before Eid, Tk22,406 crore from central banks under Bangladesh Bank repo, assured liquidity support facility (ALSF) and Islamic banks liquidity facility (IBLF).
However, Bangladesh Bank offers loans in terms of 1, 7, 14 and 28 days. The interest rate on this loan goes up to 8.75%.
Because of the ongoing liquidity crisis, Bangladesh Bank stated that one commercial bank cannot borrow from the central bank to lead to another commercial bank. This was done to prevent banks from profiting unethically.
According to Bangladesh Bank's recent report, on average banks are borrowing Tk20,000-25,000 crore daily.
Md Mezbaul Haque, executive director of Bangladesh Bank, said: “Bangladesh Bank has implemented a contractionary monetary policy to control inflation, which has increased all interest rates. Additionally, Bangladesh Bank is using various tools to decrease the amount of money in circulation.”
“We are decreasing money supply as part of inflation control measures, leading to some liquidity crisis in banks.”
“However, to prevent the crisis from becoming severe, we are providing assistance through Bangladesh Bank repo, assured liquidity support facility, standing lending facility (SLF) and special liquidity support (SLS) for Shariah-based banks. Once inflation is under control and we exit the contractionary policy, the liquidity crisis in banks will subside."
Dr Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh said: “On one hand, there is talk of a contractionary monetary policy, yet on the other hand, banks are being given repo facilities. Lending under a contractionary monetary policy is completely contradictory. Which was why inflation control was ineffective,” he added.
Central bank data shows that, despite efforts to reduce the money supply, there have been instances where the money flow has increased.
In October 2023, money supply dropped to Tk273,037 crore but in November 2023, it increased by Tk1,474 crore to Tk274,511 crore. In March 2024, it was Tk291,189 crore.
This indicates that between November and March, Bangladesh Bank injected Tk18,152 crore into the market.
Regarding this crisis, Bankers said during Eid, the demand for cash usually increases. It intensified more during Eid-ul-Azha. Because almost all the buying of sacrificial animals is done with cash.
Employees will generally withdraw their salary and bonus to buy animals. Businesses and other customers also withdraw cash. The remittance receiver also withdraws their money to buy animals.
As a result, the demand to withdraw money was much higher this time. Because of this, the liquidity crisis happened.
Syed Mahbubur Rahman, Managing Director & CEO of Mutual Trust Bank PLC said: “Some banks are in a liquidity crunch. Again, due to Eid, cash withdrawals increased a lot. Especially before Eid-ul-Azha, mobile financial service (MFS) agents withdraw a lot of money from banks. On the other hand, debt collection has also become very slow. This is why this problem happened.”
“But I think now it has passed,” he added.
Economists believe that the economic impact of Eid-ul-Azha in Bangladesh has surpassed Tk100,000 crore.
Earlier AHM Shafiquzzaman, director general of the Directorate of National Consumer Rights Protection, said: “Considering various factors, the Eid-ul-Azha economy has now exceeded Tk100,000 crore. The Tk75,000 crore estimate is based on old data from Bangladesh Bank.
“Factors like buying livestock, the spice market, butchers and animal feed are also part of that economy. People also buy new clothes, albeit less frequently.”