Excess liquidity in Bangladesh’s banking sector declined by 10 per cent, or Tk 20,500 crore, in July and August amid widespread unrests and a deepening crisis of confidence in the banking system.
Bangladesh Bank data showed that excess liquidity dropped to Tk 1,75,337 crore in August, down from Tk 1,95,824 crore in June. It was Tk 1,78,713 crore in July.
Experts said that the excess liquidity declined sharply in July-August amid the nationwide student protests that began on July 1, eventually sparking a broader civil uprising against the autocratic rule of Awami League government.
Depositors, already withdrawing funds due to soaring inflation and widespread irregularities in banks under the Awami League regime, intensified withdrawals as the government then imposed restrictions during the protests, they said.
The student-led movement culminated in the ousting of the Awami League government on August 5, but the crisis of confidence somewhat persisted even after the political shift.
Excess liquidity had previously fallen to Tk 1.41 lakh crore in November 2023 but gradually increased in the following months.
Of the surplus liquidity in the banking sector, more than 80 per cent was in the form of securities, including treasury bills and treasury bonds.
Banks were facing a severe liquidity crunch due to a combination of factors, including high defaulted loans, large-scale dollar sales by the central bank, low deposit growth, and increased cash being held outside the banking system.
Bankers also said that the clients’ trust in the banking sector eroded amid massive loan scandals and irregularities in several banks during the now ousted Awami League regime.
Additionally, several banks—particularly Shariah-based and some conventional ones— were struggling to return deposits to customers, exacerbating the crisis and triggering further panic among depositors, they said.
The instability of the dollar in the financial market led the Bangladesh Bank to sell large amounts of dollars, draining equivalent local currency from the banking system and further straining liquidity, they said.
The interbank borrowing from the call money market surged as banks sought to cover liquidity shortfalls.
Rising living costs also contributed to the liquidity crisis, as inflation remained high.
Fixed-income and low-income households, in particular, were struggling to cope with rising commodity prices, resulting in more withdrawals and less money being deposited into banks.
Consequently, the volume of cash circulating outside the banking system soared to Tk 2.93 lakh crore in August.
