Why cheaper money is failing to unlock investment

Over the last couple of years, businesses have raised concerns over high interest rates on loans and urged the Bangladesh Bank (BB) to cut its policy rates to reduce the cost of funds.

The central bank cut its policy rate by 0.5 percentage points to 9.5 percent, effective from August.

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Offering the rationale for the cut, BB said tight monetary policy, in place since the first half of fiscal year 2023-24, was doing more harm than good to Bangladesh’s economic recovery while controlling prices.

The impact of the policy rate cut is yet to become clearly visible. However, overall interest rates had begun to decline months before the move.

Data show the weighted average interest rates on deposits and advances rose to 6.42 percent and 12.16 percent respectively in September 2025, the highest levels in at least three years.

Since then, interest rates have gradually fallen. In July, the weighted average deposit and lending rates were 6.21 percent and 11.81 percent respectively.

Yields on treasury bills and bonds, as well as call money rates, also declined in June 2026 from a year earlier, reflecting easing liquidity in the banking sector, the key source of finance in Bangladesh.

Nevertheless, the private sector appears to remain indifferent.

Credit growth to the private sector has remained sluggish, growing by 4.47 percent in June this year, the lowest in 33 years. In July, credit growth picked up slightly to 4.62 percent, still well below BB’s target of 6.8 percent by December this year.

But why is the private sector not borrowing money?

Taskeen Ahmed, president of the Dhaka Chamber of Commerce and Industry (DCCI), said falling interest rates alone cannot revive private-sector borrowing without restoring investor confidence and operational viability.

“The reason behind lower interest rates is to encourage borrowing, but businesses will invest only when they see sufficient demand, stable conditions, and a reasonable return on investment,” he said.

Taskeen, who has been vocal about bringing down the high cost of borrowing, said cheaper credit looks attractive on paper, but entrepreneurs cannot commit capital when high operating costs and weak consumer demand are squeezing profit margins.

“In addition to this, persistent gas and electricity shortages continue to idle factory capacity, while banking sector turmoil, high NPLs, political transition anxieties, and global geopolitical conflicts have severely shaken business sentiment. As a consequence, businesses have shifted into cash-preservation mode,” he said.

Asif Ibrahim, vice-chairman of Newage Group and treasury chief of a private bank, echoed the view.

Beyond interest rates, he said, businesses are concerned about energy shortages, geopolitical turmoil, rising fuel costs and the risk of supply-chain disruptions.

“Many businesses are reluctant to take fresh loans because they are uncertain about future demand, energy supplies and the overall economic outlook. Businesses are not confident that they will be able to generate enough returns from new investment to cover the cost of borrowing,” he said.

At the same time, banks are becoming more cautious about extending fresh credit as non-performing loans rise and vulnerabilities in the financial sector deepen.

The decline in interest rates may itself partly reflect subdued credit demand, according to Ashikur Rahman, principal economist at the Policy Research Institute of Bangladesh. When businesses are reluctant to borrow, banks have less incentive to compete aggressively for deposits.

“Falling interest rates should therefore not automatically be interpreted as evidence of improving economic conditions. Although lower rates can ease financing costs for existing borrowers, persistently weak investment risks slowing job creation, productivity growth and economic recovery,” said the economist.

“Cheaper loans cannot compensate for uncertainty about reliable energy supplies, market access and future returns. This is fundamentally a problem of business confidence and structural weaknesses in the investment climate,” he added.

Reviving investment requires reliable energy, greater political and policy predictability, and credible reforms to improve the business environment, not simply cheaper credit, he said.

Deen Islam, professor of economics at Dhaka University, said the bigger concern is what the low credit growth says about investment sentiment.

“If businesses continue to hold back, lower interest rates by themselves will not generate much new investment. Weak borrowing will eventually mean slower expansion of productive capacity, fewer new jobs and weaker productivity growth,” he said.

So, he said, the policy challenge is not simply to make credit cheaper. Businesses also need to feel confident that demand will recover, energy will be available, the exchange rate and regulatory environment will be reasonably predictable, and the banking system will remain stable.

“In that sense, the current situation seems to be less about the price of money and more about whether firms believe that investing now will actually pay off,” added the professor.

Birupaksha Paul, professor of economics at the State University of New York at Cortland, said businesses are reluctant to borrow because borrowing costs remain high while economic growth is weak, making new investment less attractive.

He said many mills and factories are also concerned about political exclusion, which is undermining business and investment confidence.

Unlike the ruling BNP’s previous terms in office in 1991 and 2001, when businesses had greater clarity about the political environment, the current government’s political strategy appears less clear, he added.

Without greater political inclusivity and clarity, he said, businesses are unlikely to regain the confidence needed to increase investment.

DCCI’s Taskeen, meanwhile, said the biggest concern is that delayed investment can weaken productive capacity, reducing future exports and job creation. In addition to cheaper loans, sustained reductions in business costs are needed.

“We believe the bigger challenge over the next one to two years will be how to sustain the private-sector investments already in the country, rather than attracting new investment,” he said.

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank PLC, said private sector credit demand has weakened as weaker exports, high inflation and an energy crisis continue to constrain businesses.

Speaking at a discussion titled “Business and Beyond” at The Daily Star on September 10, he said Bangladesh was facing a “double whammy” from global and domestic economic shocks.

Global disruptions, including tariff impositions, the Covid-19 pandemic, the Ukraine war and the Middle East crisis, have hurt exports, particularly to the US and European markets, he said.

He said inflation, although easing from double-digit levels, remained high at around 8.26 percent and had reduced consumers’ purchasing power. As a result, many manufacturing plants that once operated at 80 percent capacity were now running at 40 percent or even 30 percent.

“This naturally has an impact. So, the demand for credit lines has also declined,” he said.

Mahbub identified the energy crisis as a bigger constraint on investment than borrowing costs.