Weak Bond Market Intensifies Banking Sector Strain

Bangladesh’s banking sector is under mounting pressure, with rising non-performing loans (NPLs) exposing the vulnerabilities of a bank-centric financing system. As of September 2025, NPLs accounted for more than 35 per cent of total outstanding loans, highlighting deep-rooted structural weaknesses compounded by irregularities and corruption in loan approval and disbursement.

Historically, bank-dependent financing has been the cornerstone of the country’s economic model. While banks play a critical role, over-reliance on them can lead to systemic risks. Alternative financing sources, particularly bond markets, offer a proven solution globally, providing long-term, stable funding for governments and corporations alike.

In developed economies such as the United States, Japan, and the European Union, government and corporate bond markets are key indicators of economic stability. Similarly, developing nations like India, Malaysia, and Indonesia have cultivated robust local bond markets over the past two decades, which now serve as crucial financing channels for infrastructure projects and industrial growth.

If Bangladesh were to develop an effective bond market, both government and corporate entities could raise funds outside the banking system, reducing pressure on banks and lowering the risk of NPLs.

However, the local bond market remains constrained. At the end of September 2025, its size was approximately $30 billion, far smaller than neighbouring and peer countries. Multiple factors contribute to this limitation:

Addressing these constraints requires systemic reform. Simplifying the issuance process, enforcing regulations strictly to protect investor rights, and reforming pension and insurance sectors to cultivate long-term institutional investors are essential steps. Additionally, interest rates on government savings certificates should reflect market realities to encourage bond investment.

Despite these challenges, Bangladesh’s bond market holds considerable potential. Emerging concepts such as sukuk, green bonds, and social bonds could attract domestic and foreign capital. Developing a green or climate bond market aligned with global climate finance initiatives would further enhance investment opportunities.

For sustainable economic growth and reduced banking sector pressure, it is imperative that the next government, together with the central bank, prioritises bond market development. A robust, diversified financing ecosystem could unlock new horizons for infrastructure, industrialisation, and long-term investment in Bangladesh.