Bangladesh’s Finance Sector Stabilises, Challenges Remain

Bangladesh’s financial sector ends 2025 at a critical juncture, marked by cautious stabilisation amid deep-rooted structural weaknesses. While policymakers note modest macroeconomic improvements and renewed discipline, restoring investor confidence, reviving private investment, and repairing the banking system remain major challenges.

The year was largely one of consolidation. Inflation stayed high for much of 2025, compelling authorities to maintain tight monetary policies. Point-to-point inflation stood at 8.29% in November, slightly up from 8.17% in October, while economic growth lagged earlier targets due to weak domestic demand and subdued private sector investment.

Non-performing loans remained a critical concern, hitting 34.6% of total credit by June, the highest since 2000. Persistent defaults, governance gaps, and weak credit appraisal continued to strain bank balance sheets.

To stabilise the sector, Bangladesh Bank merged five struggling Islamic banks into a new state-backed entity, Sammilito Islami Bank, while injecting capital and appointing administrators to protect depositors and restore confidence.

Private sector credit growth fell to a four-year low of 6.23% by October, reflecting high interest rates, political uncertainty, and investor hesitation. High lending costs and stricter collateral requirements discouraged borrowing and delayed investment, despite export growth.

Late-year signs of recovery emerged, with Letters of Credit (LCs) for capital machinery rising 23% in the first quarter of FY2025-26. Export-oriented sectors, particularly textiles, benefitted from improving foreign exchange stability, while remittances exceeded $30 billion in FY25, supporting the economy.

However, private investment remained subdued at 22.48% of GDP, the lowest in five years, highlighting waning confidence just as Bangladesh approaches LDC graduation. Capital markets remained volatile and failed to attract significant new investment.

Policy efforts focused on stronger bank supervision, improved loan classification, corporate governance, and public infrastructure spending. Yet analysts warn that excessive reliance on public spending could crowd out private investment and raise concerns about debt sustainability.

As 2025 closes, stabilisation has been achieved, but the hardest work lies ahead. Restoring trust in financial institutions, curbing defaults, and ensuring predictable policy implementation are essential for sustainable growth. Without decisive reforms, Bangladesh risks slow economic expansion, limited private investment, and challenges in absorbing its growing labour force.