Bank credit tilts toward government as idle liquidity tops Tk 4 trillion: economists lash out at BIBEM conference

Credit flow in Bangladesh's banking sector is tilting ever more toward the government, leaving the private sector deprived of the loans it needs. At the same time, while one part of the banking sector suffers an acute liquidity crisis, the sector as a whole is piling up a huge volume of idle money. Economists blame political influence, weak governance and the control of influential business groups for this two-sided pressure, and say that restoring discipline to the banking system requires reducing those groups' monopolistic grip on the state and the economy, not just fixing loan management.

The issues came up on Thursday in the first session of the final day of a two-day conference titled 'Restructuring the banking sector to accelerate economic growth', organised by the Bangladesh Institute of Bank Management (BIBM) at Mirpur in the capital. Former Dhaka University economics professor Barkat-e-Khoda presented the keynote paper at the session. National Professor Mahbub Ullah took part in the discussion, and BIBM professor Shah Md Ahsan Habib delivered the welcome speech.

In his keynote, Professor Barkat-e-Khoda laid out the banking sector's contradictory situation. Some weak and Shariah-based banks face an acute liquidity crisis, he said, yet idle or excess liquidity across the whole banking sector has surpassed all records. According to the figures he presented, idle liquidity in the banking sector exceeded Tk 4 trillion by June 2026, 39 percent more than the previous year. In other words, some banks do not have enough money to meet customer demand, while a large part of the sector's money is not being invested as loans at all.

Barkat-e-Khoda identified three causes behind the abnormal level of defaulted loans: political influence and weak governance; lenient policies and repeated opportunities for loan rescheduling; and the slow pace of credit growth to the private sector.

He also pointed to money laundering, fake loans and financial irregularities behind the sector's losses. By his reckoning, around Tk 5 lakh crore has been embezzled through fake loans and corruption, and influential political and business groups have laundered another Tk 2.5 to 3 lakh crore abroad.

National Professor Mahbub Ullah said the banking sector's credit flow has become government-oriented. As banks pay less attention to lending to the private sector, industry and businesses are being deprived of needed financing, and in the long run the situation could increase debt pressure on the economy. He also voiced concern over the government's capacity to pay loan instalments and interest.

Mahbub Ullah claimed the country's banking sector has reached an extremely weak and fragile state, and that irregularities have eroded public trust in banks. If market rules had been fully followed, he said, many weak banks could not have survived this long; instead they have been kept running through various initiatives, and he expressed doubt about how effective those initiatives will be.

The economist also said the role of influential individuals in distributing state assets and benefits remains a major obstacle, even as the privatisation of banks and factories is discussed. Attributing the banking sector's condition mainly to the tendency to hand state benefits to a small number of influential businessmen and wealthy people, Mahbub Ullah said Bangladesh has turned into an exploitative state where influential groups, rather than ordinary people, receive the benefits — and that these groups rose by using state power.

The national professor added that a few banks are still well run, and others have the opportunity to learn from their experience. But solving the banking sector's fundamental problems requires changing the character of the state and its decision-making process. Reform of the banking sector cannot be confined to financial policy, he said; transparency and accountability in decision-making must also be ensured, and the interests of ordinary people must take priority over those of a few.

Discussants said defaulted loans, money laundering, irregularities and a crisis of trust in banks have made the situation more complicated. In their view, discipline cannot be restored to the banking sector through loan management alone unless the monopolistic control of influential groups is also reduced.