Why businesses hesitate to borrow

The continued weakness in private-sector credit growth is more than a banking-sector concern. It reflects a deeper problem facing Bangladesh’s economy: businesses are reluctant to borrow because they see limited opportunities to invest, expand or maintain operations. Private-sector credit is an important indicator of economic dynamism. Businesses borrow to finance working capital, import raw materials, purchase machinery or invest in new projects. When demand remains subdued, it suggests businesses are either unwilling or unable to take those steps.

The weakness in credit demand reflects the prolonged economic challenges businesses have faced since 2022. The economy first dealt with Covid-19, followed by the Russia-Ukraine war, energy and commodity-price disruptions, pressure on foreign-exchange reserves, a sharp depreciation of the taka and rising import costs. The subsequent compression of imports, driven largely by limited foreign exchange, made it increasingly difficult for businesses to import raw materials and capital machinery. Many are still dealing with these effects.

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Bangladesh needs to bring inflation down, improve energy security, ensure predictable access to foreign exchange and imports, strengthen law and order, and rebuild investor confidence.

For a company struggling with higher input costs, weaker demand and uncertainty, taking on additional debt can be risky. A loan makes sense only when there is confidence it can generate sufficient returns to service the debt. That confidence is missing in many parts of the private sector. Inflation is one of the biggest reasons. Although it has moderated somewhat, it remains elevated. Persistent price increases have eroded household purchasing power and weakened consumer demand. For businesses, weaker demand means lower sales and capacity utilisation.

As factories and service enterprises cut output, their need for working capital and trade finance also declines. This creates a difficult feedback loop. Consumers spend less, businesses produce less and have less reason to borrow. Banks may have money to lend, but companies do not see enough profitable opportunities to deploy it. The problem becomes more acute when borrowing costs are high. When interest rates are high and demand is uncertain, many companies will postpone expansion rather than take on additional financial obligations.

The energy crisis is another major deterrent. Energy shortages have been persistent, and recent disruptions have made the situation particularly difficult for energy-intensive industries. Some gas-dependent sectors have seen production fall by 30 to 50 percent. Borrowing to expand capacity makes little sense if existing capacity cannot be operated reliably. If a factory cannot receive adequate gas or electricity, additional investment may simply create idle capacity. This is why weak credit demand should not automatically be interpreted as a sign that banks are unwilling to lend. There is a demand-side problem as well.

Investor confidence has also deteriorated amid prolonged economic and political uncertainty. Businesses have faced uncertainty over the macroeconomic environment, exchange rates, imports, law and order, and the broader political transition since 2024. Investment decisions are particularly sensitive to uncertainty because they involve long-term commitments. A company can postpone buying a machine or opening a factory, and preserve cash rather than borrow. In an uncertain environment, waiting becomes a rational business strategy. The challenge, therefore, is not simply to push banks to increase lending. Bangladesh needs to restore the conditions under which businesses actually want to borrow. That means bringing inflation down sustainably, improving energy security, ensuring predictable access to foreign exchange and imports, strengthening law and order, and rebuilding investor confidence.

Banks have an important role to play, but credit cannot substitute for confidence. If businesses do not see sufficient demand, reliable energy supplies and a predictable economic environment, cheaper or more abundant credit alone will not generate a sustained investment cycle. The weakness in private-sector credit is thus best understood as a symptom rather than the disease. Until businesses regain confidence that additional investment can produce additional returns, they are likely to remain cautious about taking on new debt.

The writer is the chairman and CEO of Policy Exchange of Bangladesh