For years, Bangladesh’s banking sector has been caught between two national imperatives: expanding financial inclusion to fuel grassroots economic growth, and managing rising credit risks that threaten the stability of the system itself.
This tension has become sharper in recent times, as growing volumes of non-performing loans (NPLs), weak governance in several institutions, and a general decline in public confidence force banks to retreat into caution.
The result is a paradox: Bangladesh needs more credit, especially for small and medium enterprises (SMEs) and rural borrowers, but banks—fearful of future defaults—have become more risk averse than ever.
The consequence is a kind of credit gridlock. While policymakers continue to champion inclusive finance, many banks now prefer lending only to low-risk, high-collateral clients, often leaving the country’s missing middle—entrepreneurs, cottage industries, and rural businesses—on the margins of the formal credit system.
This tension sits at the heart of Bangladesh’s financial inclusion challenge.
The inclusion mandate
Over the last decade, Bangladesh has made impressive gains toward bringing more citizens into the formal financial ecosystem.
Mobile financial services (MFS), agent banking, school banking, and simplified account-opening rules have helped millions access basic banking services.
Yet these gains have not translated into meaningful access to productive credit—the kind that expands businesses, generates jobs, and moves households into higher income brackets.
A shopkeeper in Narayanganj can easily open a mobile account today, but getting a Tk5 lakh loan to expand his inventory remains difficult.
A woman running a tailoring business in Rangpur can deposit her savings at a local agent booth, but she may still struggle to qualify for a formal SME loan without a land deed or other collateral.
This disconnect underlines the core challenge: inclusion is no longer just about access to accounts, but access to capital.
Banks, however, find themselves facing growing liquidity pressures, governance concerns, and reputational risks, making them increasingly selective about whom they lend to.
As a result, financial inclusion and prudent risk management often pull in opposite directions.
Rising bad loans
The story of Bangladesh’s NPL crisis is by now a familiar one. Irregular rescheduling, connected lending, political interference, and weak monitoring have contributed to a persistent rise in bad loans.
Banks have absorbed losses, investors have lost confidence, and honest borrowers have suffered from tighter credit conditions.
This background has created a ripple effect: even when SMEs maintain good repayment histories, banks remain hesitant to lend to small borrowers because of the stigma associated with the sector’s overall risk profile.
With high NPLs on their books and limited recovery prospects, banks face pressure from auditors, the central bank, and their own boards to prioritize safety over expansion.
Unfortunately, this defensive posture limits credit to exactly the types of borrowers Bangladesh needs to support—SMEs that employ 80% of the non-agricultural workforce and contribute about a quarter of GDP.
Collateral: The silent barrier
Most SMEs in Bangladesh operate informally. They rent rather than own property, maintain incomplete financial records, and rely on trust-based supply chains rather than formal contracts.
These features, while normal for emerging markets, translate into higher perceived risk for banks.
Collateral has therefore become the single most significant determinant of loan approval. Without land, buildings, or cash security, an SME borrower faces steep hurdles.
Governance lapses in some banks have made this even worse.
When influential clients default on hundred-crore loans with little consequence, banks respond by tightening rules for small borrowers—the only group they can strictly enforce policies on.
This creates a double standard: those with connections access credit easily, while those without land deeds are pushed out.
This systemic bias undermines inclusive growth and distorts the purpose of formal banking. Instead of functioning as engines of economic development, banks risk becoming safe deposit boxes for savings rather than catalytic institutions for investment.
What must change
The challenge now is not to choose between inclusion and risk management, but to redesign lending practices so that the two priorities reinforce each other.
That means moving beyond the collateral-only mindset and adopting smarter lending frameworks used successfully in other developing countries.
One key solution lies in strengthening credit information systems. Bangladesh Bank’s Credit Information Bureau (CIB) has improved significantly, but coverage is still limited for cottage, micro, and small businesses.
A more comprehensive, real-time database—capturing payment histories, digital transactions, utility bills, supplier records, and mobile money flows—could dramatically reduce information asymmetry and help banks assess borrowers more accurately.
Another vital tool is cash-flow–based lending. Instead of relying solely on collateral, banks can evaluate a business by analyzing its transactions, seasonal sales patterns, and projected earnings.
This approach is already used by several fintech-led micro lenders and has shown strong repayment performance. If mainstream banks adopt similar mechanisms, thousands of SMEs could qualify for credit without traditional security.
Technology as equalizer
Agent banking and digital onboarding have proven that technology can dramatically reduce costs and extend services to remote areas.
Similar digital innovations can also reduce risk in SME lending.
Digital invoicing, supply-chain financing platforms, e-KYC, and automated credit scoring can help banks verify business activity and approve loans quickly while maintaining safeguards.
For example, a small trader in Chittagong who receives digital payments from wholesalers could use his transaction data to qualify for an unsecured, short-term credit line.
A garments subcontractor in Gazipur could access invoice-backed financing using digital supply-chain platforms.
Such models reduce the reliance on collateral and shift assessment criteria toward actual economic behaviour.
Confident lending
The final dimension of the inclusion-risk balancing act is governance. No amount of digital innovation or smart lending design can compensate for weak supervision, regulatory forbearance, or persistent political influence.
If large borrowers continue to default with impunity, banks will continue to retreat from small borrowers regardless of reform rhetoric.
Stricter enforcement of loan classification rules, greater accountability for willful defaulters, and improved board governance are essential to restore faith in the system.
Only when the overall lending environment becomes more transparent will banks regain the confidence to extend credit to underserved groups.
The road ahead
Bangladesh’s economic ambitions depend heavily on a banking sector capable of allocating credit where it is most productive. SMEs, rural entrepreneurs, women-led businesses, and emerging industries need affordable financing to scale.
But banks, constrained by legacy risks, governance weaknesses, and liquidity pressures, remain cautious.
The challenge is not insurmountable. With stronger governance, better data, digital lending tools, and a shift toward cash-flow–based evaluation, Bangladesh can build a more inclusive yet risk-smart banking system.
The tension between financial inclusion and prudent lending does not need to be a zero-sum battle. With the right reforms, both goals can coexist—and even reinforce each other.
For now, the sector stands at an inflection point. A system that builds confidence through accountability and innovation will unlock new opportunities for millions.
A system that remains risk-averse and opaque, however, will struggle to support the next phase of Bangladesh’s economic journey.
