Bangladesh Banking Sector Sees Digital Surge Amidst Liquidity Challenges

Bangladesh’s banking sector is navigating a period of significant transformation, marked by a rapid acceleration in digital transactions and persistent liquidity pressures. Industry analysts and central bank data highlight a dual narrative: the sector is embracing technological innovation while grappling with traditional financial constraints.

According to the Bangladesh Bank, mobile financial services (MFS) and internet banking have seen a sharp rise in transaction volumes over the past year. The central bank’s latest quarterly report indicates that MFS transactions exceeded BDT 9.5 lakh crore in the first half of 2023, a year-on-year increase of over 25 percent. This growth is attributed to increased smartphone penetration, improved digital infrastructure, and a post-pandemic shift in consumer behavior. Banks such as bKash, Nagad, and Rocket have expanded their services, offering everything from bill payments to micro-loans, which has been particularly beneficial in rural areas where traditional banking access is limited.

However, this digital boom comes against a backdrop of liquidity strain. Several banks have reported a tightening of cash flow, driven by a slowdown in deposit growth and higher credit demand. The Bangladesh Bank has stepped in with measures to ease pressure, including reducing the cash reserve ratio (CRR) for banks to 3.5 percent from 4 percent in January 2024, freeing up around BDT 15,000 crore for lending. Additionally, the central bank has introduced a new repo facility to provide short-term liquidity to banks facing temporary shortages. Despite these steps, credit rating agencies have warned that non-performing loans (NPLs) remain a concern, with the sector’s NPL ratio hovering around 8.5 percent as of March 2024.

The government is also pushing for consolidation in the banking sector. Finance Minister AHM Mustafa Kamal recently stated that the number of banks in Bangladesh, currently at 61, is too high for the economy’s size. He suggested that merging weaker banks with stronger ones could improve overall stability. Talks of a merger between two state-owned banks—Sonali Bank and Janata Bank—have resurfaced, though no formal decision has been made. Private sector banks like BRAC Bank and Dutch-Bangla Bank are exploring partnerships to enhance their digital offerings and customer reach.

On the international front, Bangladesh’s banking sector is increasingly interconnected with global finance. Remittance inflows, a key source of foreign exchange, have remained steady, with over $20 billion received in 2023. However, the war in Ukraine and rising commodity prices have put pressure on the taka, leading to a depreciation of about 10 percent against the US dollar over the past 18 months. The Bangladesh Bank has intervened in the forex market, selling dollars to stabilize the currency, but this has reduced foreign exchange reserves to around $30 billion, down from $48 billion in 2021.

Looking ahead, experts predict that digital banking will continue to grow, with the Bangladesh Bank planning to issue licenses for three new digital-only banks by the end of 2024. These banks will operate without physical branches, aiming to serve the unbanked population, which is estimated at 50 percent of adults. However, cybersecurity remains a challenge. In 2023, the sector reported over 2,000 cyber incidents, including phishing attacks and system breaches, prompting the central bank to mandate stricter security protocols for all banks.

In summary, Bangladesh’s banking sector is at a crossroads. Digital innovation offers a pathway to financial inclusion, but legacy issues like liquidity and NPLs require careful management. The central bank’s proactive stance and government consolidation efforts are likely to shape the sector’s trajectory in the coming years, with a focus on stability and modernisation.