The declining credit growth for private companies in Bangladesh reflects the country's immediate economic challenges, including long-term risks to investment, employment and overall financial stability.

Private credit expansion has fallen to its lowest level in more than a decade against the backdrop of numerous economic challenges stemming from rising borrowing costs, political uncertainty and weakened investor confidence, according to an economic analyst.

This downtrend will lead to severe consequences if it is not reversed, he said.

Credit flow to private firms registered its lowest growth since at least 2015, achieving just 7.15 percent in January this year, as per Bangladesh Bank data.

The figure is 2.65 percentage points lower than the central bank's target of 9.80 percent for the second half of the ongoing fiscal year (FY). Lending to private firms had grown by only 7.28 percent in December last year.

These figures indicate a sharp contraction in the country's investment activity, which is a critical driver of economic expansion.

As such, economists, investors and various other stakeholders have raised concerns over this worrying trend.

Selim Raihan, executive director of the South Asian Network on Economic Modeling, warned that declining private sector credit growth is severely impacting investment.

He said investors remain hesitant to expand their businesses or seek bank loans due to ongoing political uncertainty.

"The regime change has not yet brought stability, discouraging long-term investment," Raihan added, citing that private companies have adopted a cautious approach in spending.

"Even the law-and-order situation remains fragile and chaotic."

Foreign direct investment has also plummeted, registering a decline of 71 percent year-on-year to hit $104.33 million in the July-September period of FY25 due to political unrest, labour agitation and economic challenges.

Raihan said the country's economic growth may slow if such uncertainties persist, causing job losses and stagnation in key industries.

He also said that if the existing concerns do not worsen, then private investment in the country will likely recover within 30 to 36 months.

Bangladesh faced three major economic shocks over the past four years, namely the Covid-19 pandemic, a foreign currency crunch resulting from geopolitical conflicts, and the domestic political transition.

Against this backdrop, Raihan assumes that if policy clarity is not swiftly ensured, investor confidence could remain low, potentially delaying the recovery until June 2027.

Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, expressed deep concerns over private credit growth plummeting to its lowest level in about a decade.

He emphasised that the decline is directly tied to rising capital costs and soaring interest rates.

With the borrowing rate currently at around 14 percent for industrial loans -- practically reaching up to 17 percent in some cases -- investors are finding it increasingly costly and risky to take on new debt.

"The business environment is in a stagnant state," he said.

Investors have become cautious considering high inflationary pressures and uncertainty surrounding potential political shifts.

Also, the cost of doing business has risen sharply due to high interest rates, further discouraging new investments, Rahman added.

Moreover, the slowdown in private credit growth is affecting jobs as well as the country's gross domestic product while the rise in public sector credit growth is increasing the country's debt pressure.

Citing that restoring investor confidence is crucial for economic stability and growth, Rahman said he believes reducing policy uncertainties could help in this regard.

Banks in the country may lower their interest rates if inflation is brought under control, thereby positively impacting investor sentiment.

"However, the recovery [of private investment] will depend on how well these challenges are managed in the coming months," he added.

Zaidi Sattar, chairman of the Policy Research Institute of Bangladesh, was optimistic about a recovery as the interim government is trying to address hurdles in various sectors. He linked the downturn in private credit growth to policy uncertainty and declining business confidence.

Sattar said political uncertainty has made investors hesitant and limited private sector lending.

Besides, banks are facing capital constraints and major business groups are scaling down their investments, with entrepreneurs reluctant to seek new loans until a more stable economic climate is reached.

But despite the slowdown in private credit, the garments industry has grown by 10 percent.

Bangladesh's annual export revenue of about $42-45 billion offers some stability for its economy, but inflation remains a concern even as consumer prices are expected to stabilise within six months.

However, Sattar predicted that the country's economic condition would improve within three to four months.

Asif Ibrahim, a former chairman of Business Initiative Leading Development, said state-owned and private commercial banks are primary sources of long-term financing for the private sector.

As such, the ongoing crisis in the banking sector is a key factor behind the slowdown in private credit growth.

Ibrahim also said a lack of access to affordable credit is further eroding investor confidence.

So, measures aimed at reforming the National Board of Revenue and improving the ease of doing business, among other initiatives, are crucial for restoring the confidence of both local and global investors.

The interim government has identified these issues as significant challenges, and it is hoped that swift actions will be taken to reverse the decline in private credit growth, he added.

Taskeen Ahmed, president of the Dhaka Chamber of Commerce and Industry, warned that declining private credit growth is a reflection of economic distress driven by low business confidence, high borrowing costs and political uncertainty.

Structural issues in the banking sector, including high lending rates and complex loan processes, are also hindering private credit growth.

To revive investment, he urged lowering lending rates, expanding credit guarantees and simplifying loan documentation.

However, he placed the most emphasis on ensuring good governance, opining that it is key to restoring financial stability and investor confidence.

"Bangladesh's declining private credit growth is a threat to the country's economic expansion as people and businesses are being cautious about investing amid the high borrowing costs and political uncertainty. Therefore, restoring stability, rebuilding investor confidence and ensuring policy clarity will be crucial for attracting more foreign investment," Ahmed said.

Stressing that the banking sector needs urgent reforms to boost credit growth, he said the coming months would be decisive as the absence of swift and appropriate measures may prolong the stagnation of local investment.

However, with strong governance leading certain strategic moves, Bangladesh could overcome these challenges and regain its economic momentum, he added.