Why cheaper credit is not enough to spur private investment

Sohel Parvez and Jagaran Chakma, in a report published in The Daily Star on September 19, asked why cheaper money is failing to unlock private investment in Bangladesh. It is the right question, and their reporting lays out the visible symptoms well: Bangladesh Bank’s half-point cut to 9.5 percent, softer lending rates, easier liquidity and yet private credit growth is stuck at 4.47 percent in June and 4.62 percent in July, nowhere near the central bank’s 6.8 percent target. I want to push past the symptoms to the mechanism, because the puzzle is not really why businesses aren’t borrowing. It’s why a policy lever that has worked, imperfectly but predictably, for decades has stopped working to a large extent.

Start with what the textbook sequence assumes: cut the policy rate, lending rates follow the trend, firms borrow more, investment rises, jobs follow. Every link in that chain is a behavioural response, not a mechanical one. A firm borrows only when the expected return on the investment, adjusted for risk, clears the financing cost by a comfortable margin. Lower the financing cost and you’ve moved one variable. You have not touched capacity utilisation, energy reliability, the exchange rate, or whether anyone believes the rules of the game will hold steady long enough to justify committing capital. The Daily Star piece notes that plants once running at 80 percent capacity are now down to 40, even 30 percent. A firm sitting on that much idle capacity has no use for a cheaper loan. The rate cut does not automatically open a new door.

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Besides, Bangladesh faces a two-sided credit problem: borrowers hesitate because expected returns are weak, while lenders hesitate because impaired balance sheets and repayment risks make private lending increasingly unattractive. There is also a lender side to this that gets less attention than it deserves. Banks carrying a pile of non-performing loans do not turn generous the moment the policy rate falls; if anything, they become more careful, because the easing itself is often a sign that something in the system needs propping up. So, you get liquidity sitting in the banking system without becoming credit, and a lending rate falling not because borrowing is picking up but because many are not asking for loans. This is not Keynes’s liquidity trap, as Bangladesh’s lending rates are nowhere near zero. I would call Bangladesh’s situation an investment-confidence trap: the price of money keeps falling, and the willingness to act on it does not rise to meet it.

Layer political uncertainty on top and the arithmetic gets worse before it gets better. Investment is a bet on the next several years, not the current quarter. Ashik Chowdhury of the Bangladesh Investment Development Authority has said investors keep citing the absence of policy continuity and political stability as their chief worry, and the IMF has made the same point about governance and transparency being prerequisites, not extras. What an investor is really pricing is the lending rate plus ordinary commercial risk plus a governance premium—a markup for not knowing whether today’s rules will survive the next transition. Cut the rate half a point while that governance premium rises by more, and the effective cost of capital has gone up even as the quoted rate has gone down. An entrepreneur who sits on cash under those conditions is not being timid. He is doing the arithmetic correctly.

The credit numbers themselves tell an awkward story. Public-sector credit grew 30.43 percent year on year through June 2026; during the same time private-sector credit grew 4.47 percent. Government borrowing to cover revenue shortfalls and debt service is not, on its own, a scandal. But when sovereign paper is the safer, easier place for a bank to park money, banks have little reason to go hunting for private borrowers who look riskier by the day. Thus, bank liquidity expands, but productive investment does not. The question worth asking is not how much credit the system is creating but where it is actually going.

The point is none of these factors sits still on its own axis. Treat investment as a matrix rather than a single dial: lending rates, demand, capacity, energy, bank health, public borrowing, and political risk each move, and each moves the others. Weak demand depresses expected profit, which depresses borrowing, which depresses banks’ appetite for competing on deposits, which pushes rates down further even as the underlying investment climate hasn’t improved at all. Falling rates can be a symptom of weak demand for credit as much as they can lead to a stronger demand for borrowing. Treat a falling lending rate as automatic good news, and you will misread the economy every time.

The way out therefore requires more than monetary easing. Banking reform must restore credible credit allocation; energy supply must allow existing capacity to operate; fiscal pressures must keep public borrowing from absorbing too much financial intermediation; and regulatory continuity must give investors some confidence that the rules governing an investment today will still govern it tomorrow. These are not substitutes for cheaper credit. They are the conditions that allow cheaper credit to work.

I am not arguing Bangladesh Bank should stop caring about the cost of credit; lower rates genuinely help existing borrowers and will matter more once the other constraints start to loosen. But a central bank cannot generate electricity, clean up bank balance sheets, or hand investors the political certainty they are actually pricing. Parvez and Chakma are right that cheaper money has failed to unlock investment. The fuller answer is that Bangladesh’s investment problem was never mainly a pricing problem. The interest rate is one input into a decision that depends on a great many things the central bank does not control, and firms are simply refusing to pretend otherwise.

Dr Abdullah A Dewan is professor emeritus of economics at Eastern Michigan University in the US, and former physicist and nuclear engineer at the Bangladesh Atomic Energy Commission. He can be reached at
aadeone@gmail.com.

Views expressed in this article are the author's own. 

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