Slump in Deposit Expansion Below 8% Predicted Again
In a recent development, Bangladesh's deposit growth has remained subdued, with a 7.73% increase in May 2025 to Tk18.32 lakh crore, marking the lowest growth this year. This trend, despite a record inflow of remittances and rising public confidence, is attributed to a combination of political instability, banking sector weaknesses, and other economic factors.
Since October 2023, the currency held outside banks has consistently risen, primarily due to inflationary pressures and the celebration of Eid in early June, leading to increased expenses. By August 2024, deposit growth had fallen to an 18-month low of 7.02%.
The ongoing political uncertainty is creating a cautious environment that discourages deposit growth and broader economic activity. Many banks are facing liquidity constraints and rising non-performing loans, which undermines depositor confidence and limits their ability to extend credit effectively.
Increasing amounts of bad debt reduce banks' profitability and make them less attractive to depositors and investors. High interest rates on government securities also draw funds away from the banking sector, as banks and investors prefer safer, more liquid instruments.
Stagnant income and job growth, despite inflation easing, reduce the public’s capacity to save and deposit money into banks. Cash hoarding outside the banking system, due to distrust in banks, inflation concerns, and high spending needs during periods like Eid, further contributes to the low deposit growth.
The economy’s overall weakness, including limited business growth and high unemployment, suppresses deposit accumulation in banks. Uneven bank performance, with only a handful of banks experiencing growth, further limits sector-wide deposit growth.
Even though the banking sector is seeing some reforms and occasional upticks in deposit growth, these improvements remain fragile and insufficient to reverse the overall subdued trend without addressing the underlying economic and political challenges comprehensively.
An increase in currency held outside banks can be detrimental to the economy, as it reduces the velocity of money circulation and dampens money creation. A significant return of this money to banks would improve their liquidity positions and boost the volume of loanable funds.
Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, noted that a large portion of transactions for sacrificial animals during Eid-ul-Adha are conducted in cash. People are breaking their deposits to cover expenses, according to Rahman. Reduced economic activity in the country is impeding job creation, which in turn impacts deposit growth.
In a positive note, the central bank's measures, including the reconstitution of bank boards, providing liquidity support, and preventing anonymous loan issues, have largely prevented the conditions of weaker banks from deteriorating further. However, significant improvements are yet to be seen across all banks.
The inflation rate dropped below 9% for the first time in 27 months in June, reaching 8.48%. Despite this, the deputy managing director of a leading private bank explained that the inflation rate remains significantly high, leading to increased expenses for people.
In conclusion, the low deposit growth in Bangladesh's banking sector is a result of political instability, banking sector weaknesses, unattractive returns on deposits compared to government securities, stagnant income growth, cash hoarding due to distrust, and an overall weak economy that suppresses saving and investment activity. Addressing these challenges comprehensively is crucial to reversing the current trend and stimulating growth in the sector.
In light of the ongoing political turmoil, the finance industry, particularly banking and insurance sectors, are being adversely affected due to deposit growth being stagnant. The cautious environment, coupled with liquidity constraints and rising non-performing loans, has further undermined depositor confidence, limiting the sector's ability to extend credit effectively.
Moreover, the increased cash hoarding outside the banking system, driven by distrust, inflation concerns, and high spending needs, is also contributing to the subdued deposit growth within the sector, impacting the broader finance market.
