Bangladesh Bank's hike in policy rates to combat skyrocketing inflation has led to higher lending rates at banks, putting pressure on small, medium and large businesses.
Consequently, private sector credit growth hit a decade-low in 2025.
Businesses said that the ongoing unrest in the country has reduced demand for non-essential daily necessities.
Even during Ramadan, sales have not been satisfactory, they said. Ramadan is usually the time of the year when there is the highest business activity.
This has resulted in a significant decline in sales for most companies. Now the rise in interest rates on loans has put more pressure on them.
Moreover, many entrepreneurs are postponing plans for business expansion and new investments for the time being due to excessive spikes in interest rates.
Some have also raised concerns about controlling inflation by just raising interest rates.
Mohammad Hatem, President of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), said: “The ongoing unrest in the country has reduced demand for non-essential daily necessities. Many companies are operating at a loss, with production hindered by a severe gas shortage. In this situation, the increase in interest rates on loans has created additional pressure.”
“If this situation continues, businesses will only be able to service loan installments, leaving the principal amounts unpaid, and finally, loan defaults are likely to rise, and new employment opportunities will shrink,” he added.
Economists and bankers said this was a consequence of the central bank's tight monetary stance, as Bangladesh Bank had been hiking the policy rate to combat skyrocketing inflation for over two years, which has contributed to the rise in lending rates at banks.
However, Bangladesh Bank kept the policy rate unchanged at 10% for the January-June period of FY25.
High interest rate
According to Bangladesh Bank data, the weighted average interest rate on loans stood at 7.24% in January 2023.
By January 2024, it had increased to 9.75%, and by January 2025, the rate had surged further to 11.89%, reflecting a 4.65 percentage point rise over two years.
This hike—the rising cost of borrowing—creates serious concerns among entrepreneurs and business owners.
In April 2020, Bangladesh Bank capped bank loan interest rates at 9%.
However, economic disruptions caused by the Covid-19 pandemic and geopolitical conflicts prompted the central bank to introduce the six-month moving average rate of the treasury bill (Smart) rate in June 2023, linking loan interest rates to the six-month average yield of 182-day treasury bills.
Since its implementation, interest rates have consistently increased.
In May 2024, the regulator discontinued the Smart rate formula and reverted to a market-driven system, allowing banks to set lending rates based on customer relationships, loan demand, and the availability of funds.
Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), said: “The policy rate has to remain high due to the contractionary monetary policy, which impacts the lending rates. This is why demand for credit has been reduced. Due to the ongoing political uncertainty, we are now seeing a wait-and-watch approach regarding private sector investment.”
He predicts private sector credit demand may remain subdued until the elections.
The trend has contributed to a sharp decline in private sector credit growth, now at its lowest in a decade.
Private sector credit growth in January 2025 grew by only 7.15%, the lowest since at least 2015, according to Bangladesh Bank.
January's growth was 2.65 percentage points lower than the target of 9.80% that the central bank has set for the second half of FY25.
According to central bank data, loans to private firms grew only by 7.28% in December last year.
