Profits without lending

Bank profits usually surge when businesses borrow, invest, and expand. In Bangladesh in 2025, however, several leading banks posted record profits even as private sector credit growth fell to nearly 6%, a decade low, exposing weak investment appetite and sluggish economic momentum.

This divergence is conspicuous and troubling indeed. Bangladesh Bank data evidence that credit expansion has slowed sharply from double-digit growth just a year earlier, where, post-inflation adjustment, real credit growth has effectively turned negative.

Many of the large businesses are borrowing less, not more. Most of the MSMEs are starving for funds, whereas banks have less appetite for lending to them. And yet, banks are thriving.

BRAC Bank PLC achieved a record-breaking consolidated net profit of Tk2,250.94 crore in 2025, marking a 57% year-on-year growth. Similarly, Eastern Bank PLC and Prime Bank PLC reported strong earnings of Tk900 crore +, continuing their upward earnings trend.

Across the sector, profitability has remained resilient despite the core function of lending having slowed. This is not just a paradox. It is a signal that the banking sector is becoming increasingly detached from the real economy, which in the medium to longer term is not a good sign.

If we try to deep dive a bit into the explanation of that, we primarily see a structural shift in their income sources. The primary driver is the rise of "risk-free banking." With weakening private sector credit demand, banks have redirected funds into government securities.

Treasury bills and bonds have been offering relatively attractive yields with minimal risk, making them a preferred destination for channelling the excess liquidity. In effect, banks are earning more without taking on the risks associated with private sector lending.

Secondly, margin expansion in a tight monetary environment. Due to policy reasons, interest rates pushed upward and drove the lending rates to be adjusted faster than deposit costs.

This widened spreads significantly and boosted earnings even without much of a loan growth for many. Thirdly, the growing importance of non-funded income. Trade finance, remittances, and fee-based services have become increasingly important.

These income streams are less sensitive to domestic investment cycles and have helped stabilise profitability.

We must bear in mind that trade finance has not been a strong driver in this sphere, given the reduced volume compared to before and was replenished mostly by the significantly higher wage remittance flow, which has been distributed all around the country but not ploughed back to the demand in the same sphere who in turn remained dependent on the conventional money lenders/MFIs bearing much higher cost of finance.

Finally, the displacing effect.

Government borrowing from the banking system has surged during this period, continuing from the past few years. With limited private sector appetite and increased risk perception, banks have found it easier and safer to lend to the public sector.

While banks report strong earnings, the broader economy is signalling a different reality. The long wait to have an elected political government was just over in February, when all were just getting out of hibernation, and then came the totally unexpected Middle East crisis.

Private investment, hence, remains subdued.

Businesses are delaying expansion amid high borrowing costs, inflationary pressure, energy constraints, and policy uncertainty.

Small and medium enterprises, which are the key drivers of employment, face both weak demand and tighter credit conditions. The outcome is a slow drift toward a low-investment, low-growth equilibrium.

This disconnect has not gone unnoticed.

Observers, including the International Monetary Fund, have repeatedly emphasised the need for stronger financial intermediation and improved credit allocation in Bangladesh.

Policymakers themselves have acknowledged concerns over weak private sector activity and capital constraints. At its core, the issue is very simple: Banks are performing well financially but not fulfilling their primary economic role.

Prima facie, profitable banks may appear to signal resilience. But when profitability is decoupled from lending, it raises deeper concerns.

Private investment is being supplanted, as banks prefer government securities over the starved private sector.

Job creation slows down, particularly in the SME-driven sector, and the economic growth weakens while capital formation remains constrained.

Fiscal dependence increases, with the government relying more heavily on the banking channel for financing. In effect, the banking sector tends to become profitable in isolation, rather than acting as a catalyst for growth.

Noteworthy here is that it is not merely a cyclical slowdown. The continuation of weak credit alongside strong bank earnings suggests a structural imbalance.

On one side, businesses lack the confidence to invest. On the other hand, banks lack the incentive to lend when safer, high-yield alternatives exist.

If left unattended as it has been for a few years now, this dynamic could entrench a system where financial resources are systematically diverted away from productive sectors.

Addressing this inequality warrants a coordinated response that may include the following suggestions:

To begin with, restoring business confidence must come first. Without macroeconomic stability and policy predictability, credit demand will remain weak. We expect that to remain as top most priority for the new government and its relevant authorities.

This should be followed by recalibrated credit incentives.

Banks should be encouraged through policy and regulatory measures to lend to productive sectors such as manufacturing, SMEs, and exports.

Thirdly, government borrowing must be rationalised. Reducing reliance on bank financing will ease crowding-out pressures and free up liquidity for private investment.

Alongside the above, transparency in banking must improve. Accurate recognition of asset quality and stricter provisioning will ensure that profitability reflects genuine performance.

Finally, capital markets need to deepen. For ages, it's been known to all that a stronger bond and equity market can reduce overdependence on banks and improve capital allocation.

The key question is no longer whether banks are profitable. It is whether their profitability is aligned with Bangladesh's development priorities.

A banking sector that thrives without financing businesses may appear stable in the short term. But over time, that disconnect will carry very high economic costs.

We do not just need profitable banks; we require banks that lend and lend where it matters.

The writer is a banking sector analyst.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.