When banks stop lending, nations stop growing

Ships are safest in the harbour, but that is not what they are meant for.

Similarly, banks are not meant to play it safe while the economy drifts. Yet, in recent months, headlines in Bangladesh have been dominated by news of record profits in the banking sector. Several financial institutions have reported impressive earnings, much of it derived from investments in government treasury instruments. At first glance, this might seem like a positive sign for the economy. But behind the numbers lies a growing disconnect between these profits and the actual needs of the country's economic engine.

Rather than focusing on lending to businesses, which is meant to be the main role of banks, many are parking their funds in government securities. The income of one particular bank from these securities more than doubled over the past year. Several other banks have also expanded their holdings in a similar manner. These investments are attractive because they offer presumably safe and steady returns. But by choosing this path, banks are diverting funds away from the vital arteries of the economy that could genuinely drive growth.

Banks exist to channel savings into productive ventures. When a bank lends money to a manufacturer, a small business owner, or an entrepreneur, it sets off a chain of activity. Factories produce more, jobs are created, salaries rise, and people spend more. This is how real growth happens. But when banks prioritise lending to the government, where they earn around 12 percent while paying depositors about 8 or 9 percent, they make money without taking much risk. This may be good for their balance sheets, but it does little for the broader economy.

We are already seeing the consequences of this shift. Entrepreneurs, especially those running small and medium enterprises, say that they are finding it increasingly difficult to get loans. Interest rates are high, lending conditions are stricter, and, in some cases, they are simply turned away. This is occurring at a time when Bangladesh is trying to recover from global economic shocks and a depreciating currency. Without access to credit, factories cannot expand, startups struggle to launch, and service businesses stagnate. The result is not just missed opportunities but also slower growth, fewer jobs, and a weaker private sector.

The deeper issue is that this behaviour is being rewarded. From the banks' perspective, it is logical. Why take a risk on a business that might falter when the government is offering safer returns? This creates a system where banks earn more by doing less. They are not incentivised to support businesses or encourage innovation. Instead, they are rewarded for keeping their money idle.

Over time, this leads to an economy that appears strong on paper but is hollow underneath. Banks report solid profits, but young jobseekers remain frustrated, small businesses feel neglected, and innovation slows. The economy begins to lose its dynamism.

There is still time to change course. The Bangladesh Bank, the Ministry of Finance, and other economic institutions need to intervene. There should be caps -- and for international banks, there are -- on how much banks can hold in government securities. Lending to the government should also be contingent upon proper due diligence. On the other hand, credit risk management must improve so that banks feel more confident in supporting businesses.

Banks must reassess their purpose. Making money is not inherently wrong but making it while the rest of the country struggles is. The goal should be to build, support, and create. By prioritising real impact over easy returns, banks can help lift the entire economy. This is especially important given Bangladesh's commitment to a private sector-led economy with a vast pool of SME entrepreneurs.

Bangladesh cannot afford to let its financial system remain stagnant. Banks must step out of the harbour and sail into deeper waters to help move the economy forward. Meanwhile, the government should exercise caution in borrowing large sums from banks at higher rates.

Mamun Rashid is an economic analyst and Chairman at Financial Excellence Ltd.