Bangladesh is nearing a significant economic transition: graduation from the United Nations’ Least Developed Country (LDC) category. For policymakers, it signals progress, but for banks and financial institutions, the path ahead is far more complex. Graduation brings new opportunities for global engagement, yet it also removes long-standing protections, raises compliance demands, and exposes the financial system to tougher global competition. The country has met UN thresholds in income, human assets, and reduced vulnerability, securing its place as a lower-middle-income economy. Still, leaving LDC status means losing advantages that helped key export industries grow and supported banking stability for decades.
Graduation will end the preferential market access that long supported Bangladesh’s export-driven growth. Under the European Union’s Everything but Arms initiative, most Bangladeshi exports currently enter the EU duty-free. Around 45 percent of total exports go to the EU, and about 95 percent of those enjoy zero-tariff entry. After graduation, these benefits will slowly fade. If Bangladesh cannot secure the EU’s GSP+ scheme after 2029, apparel exporters may face tariffs between 8 and 12 percent. Since garments make up more than four-fifths of exports, even a modest tariff shock can spread widely across the economy.
The impact could be serious. A WTO estimate suggests Bangladesh may face export losses of USD 5.3 billion, equal to roughly 14 percent of expected earnings without tariff changes. Falling orders, tighter margins, and shifting buyer preferences will appear quickly in banks’ portfolios. Banks fund the garment sector through working-capital loans, letters of credit, foreign-exchange services, and supply-chain financing. If inventories rise or buyers move to cheaper suppliers, banks face higher default risks, weaker collateral, and more pressure on trade-finance operations.
The pharmaceutical sector will also see major changes. Bangladesh currently benefits from exemptions under the WTO’s TRIPS agreement, allowing firms to produce patented medicines. This helped the industry expand at home and abroad. After graduation, these flexibilities will shrink. Firms will need to follow global patent rules, invest more in licensing and research, and meet stricter standards. Banks will have to assess more complex credit risks and finance costlier, slower projects in this shifting environment.
Financing from development partners will change as well. As an LDC, Bangladesh has received concessional loans from institutions such as the World Bank’s International Development Association (IDA). After graduation, access to these low-interest funds will decrease, replaced by market-rate loans with higher costs. This shift raises the government’s debt-servicing burden at a time of rising foreign-exchange pressure. When external borrowing becomes expensive, governments often turn to domestic banks, which can reduce credit available for businesses and tighten liquidity across the system.
Climate-related financing will also shrink. Bangladesh is among the world’s most climate-vulnerable nations, yet several grants and special financing windows available to LDCs will no longer apply. Without concessional climate funds, the country must rely more on domestic resources or commercial borrowing for adaptation projects. For banks, this means coping with higher government demand for long-term financing while still meeting private-sector credit needs.
Some temporary support remains. The EU will extend duty-free access until 2029 as part of its transition measures. The United Kingdom and several other partners may offer similar arrangements. Bangladesh is also negotiating continued IDA access and working with the IMF to support macroeconomic stability. These, however, are short-term protections. Once the transition ends, Bangladesh will face a more competitive global landscape, especially against countries like Vietnam with strong trade deals and cost advantages.
Experiences from other LDC graduates show the need for early reforms. Maldives managed tariff shocks after 2011 by diversifying tourism. Samoa and Vanuatu strengthened disaster-risk financing. Bhutan and Nepal highlighted the importance of timing and flexibility; Nepal even delayed graduation after an earthquake. Across cases, success depended on diversifying exports, improving institutions, and modernizing financial systems.
For Bangladesh’s banks, the implications may be far-reaching. Export-dependent borrowers under stress may seek restructuring, extended repayment terms, or larger working-capital loans. Banks heavily tied to garments face the highest risk of rising non-performing loans. Slower export earnings can weaken foreign-currency liquidity, tighten trade-finance conditions, and increase volatility in international transactions. Global partners will also expect higher compliance and more transparency.
Domestic issues add extra strain. The withdrawal of subsidies and incentives may affect smaller or weaker firms. Banks will need strong stress testing to identify vulnerable borrowers. If interest rate caps are lifted, banks gain more room to price loans based on risk, but many borrowers may struggle with higher costs. Fiscal and monetary tightening may help stabilize the economy but can also raise default risks. State-owned banks, already challenged by governance problems and slow loan recovery, will need deep reforms.
Funding costs for banks are likely to rise. Deposit rates may increase as institutions compete for savings. With lending rates limited, margins may narrow unless policies shift. Firms and banks may rely more on external commercial borrowing, but such loans carry exchange-rate and interest-rate risks. Currency fluctuations will affect repayment capacity, while global rate changes will shape refinancing costs. If reforms advance, foreign investment in Bangladesh’s financial sector may grow, bringing new capital and technology.
Bangladesh’s banking industry also faces internal problems that began long before LDC graduation. Non-performing loans remain high. Capital adequacy is uneven, governance gaps persist, and legal delays hinder recovery. Some weaker banks may require consolidation. Digital transformation is moving forward but remains uneven. Cybersecurity, data protection, and system connectivity require significant improvement. These challenges could make the transition period more difficult for the banking system.
To maintain stability, Bangladesh must push financial-sector reforms. Stronger supervision, better governance, recapitalizing or merging weak banks, and modernizing loan-recovery laws are essential. Securing EU GSP+ access and expanding trade agreements will help soften export shocks. Coordinated fiscal and monetary policy will be needed to manage inflation, rebuild reserves, and handle external risks.
Banks need to prepare well in advance. Stronger risk management, improved credit analysis, and closer monitoring of stressed sectors are vital. Asset-liability management must adapt to changes in interest rates and exchange rates. Diversifying lending into agriculture value chains, ICT, healthcare, pharmaceuticals, renewable energy, and sustainable infrastructure will help reduce overdependence on garments and support broader economic growth. Expanding SME financing and supply-chain finance can also drive long-term progress.
Technology and digitization will be central. Automated credit tools, digital platforms, and fintech partnerships can reduce costs and improve compliance. Investments in cybersecurity and data analytics will help banks manage risk and meet global expectations. Solid capital buffers, built through retained earnings or new investment, will be essential to absorb shocks.
If Bangladesh uses the transition period well, the banking system can become stronger, more resilient, and better aligned with global standards. LDC graduation will test banks, policymakers, and industries alike. With focused reforms and careful strategy, Bangladesh can turn the challenges of graduation into opportunities for sustainable growth and long-term financial stability.
