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The global banking sector is walking a tightrope between liquidity abundance and lending paralysis. While central banks have pumped trillions into the system since 2008, a disturbing paradox emerges: banks are drowning in cash yet starving economies of credit. From Dhaka to Wall Street, this credit constipation threatens to derail economic growth just when the world needs it most.

The NPL Timebomb Ticking in Emerging Markets

Bangladesh’s banking sector presents a textbook case of political lending gone rogue. Non-performing loans (NPLs) exploded by 20.7% in 2023, reaching Tk 145,633 crores – with state-owned banks holding nearly half these toxic assets. Here’s the kicker: these aren’t ordinary bad loans. The World Bank’s autopsy reveals these are “zombie loans” to politically connected entities, often extended while creditworthy businesses get shown the door.
The mechanics are depressingly simple: bank owners treat deposits as personal piggy banks, funding their own ventures with zero-risk assessment. When these ventures inevitably fail (surprise!), the public bears the loss through bailouts. This crony capitalism creates a double whammy – it starves legitimate businesses of capital while breeding systemic risk that could trigger broader financial contagion.

The Liquidity Mirage: Why Banks Aren’t Lending

Globally, banks sit on $8 trillion in excess reserves according to BIS data, yet lending growth remains anemic. The 2008 crisis left permanent scars:

In Bangladesh, Islamic banks face particular strain. Their profit-sharing model becomes unworkable when depositors panic-withdraw funds during liquidity crunches. Unlike conventional banks that can temporarily suspend withdrawals, Shariah-compliant institutions must maintain constant liquidity – an impossible standard during crises.

The Domino Effect on Economic Growth

When credit arteries clog, economic growth has a heart attack. Bangladesh’s GDP growth slowed to 5.8% in 2023 from pre-pandemic 7+% levels, with the banking sector’s dysfunction accounting for at least 1.5 percentage points of the decline according to IMF estimates.
The contagion spreads through:
– Supply Chain Chokeholds: Textile factories can’t get letters of credit to import cotton
– Employment Freeze: SMEs account for 80% of jobs but get just 20% of loans
– Investment Paralysis: Foreign direct investment flees when local banks can’t facilitate transactions
UN Secretary-General António Guterres isn’t wrong about needing financial architecture reform – current systems protect global north banks while leaving emerging markets to drown in their own bad debt.

Breaking the Cycle

The solutions aren’t rocket science, just politically inconvenient:

The bitter truth? Banks have become the problem rather than the solution to economic growth. Until they’re forced to choose between being utilities serving the real economy or glorified hedge funds protecting oligarchs, this credit crunch will persist. The next crisis won’t come from Lehman-style collapses, but from thousands of small businesses suffocated by lack of financing – and the social unrest that follows.
Bangladesh’s Tk 145,633 crore NPL disaster isn’t an outlier – it’s the canary in the global banking coal mine. When politically-connected borrowers get priority over creditworthy businesses, everyone eventually loses. Except maybe the loan sharks – they’re doing booming business these days.
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