Bangladesh’s readymade garments (RMG) sector, a cornerstone of its economy and global trade identity, has found itself in a paradox. On one hand, it has managed to secure a somewhat favourable US reciprocal tariff, which industry analysts believe could serve as a tailwind for export growth amid shifting sourcing patterns, especially from China and India.

On the other hand, the very backbone of the country’s apparel export ecosystem—its banking system—has been exhibiting severe structural failures, paralysing operations, and threatening future growth prospects.

Bangladesh apparel industry is reportedly facing a liquidity crunch due to banking failures at a time when shifting orders are expected to benefit the country.
The sector’s heavy reliance on back-to-back LCs has turned risky, as local banks struggled to honour or issue new LCs.
Exporters warned delayed payments and financing risks might hit Bangladesh’s image while also eroding its competitive gains.

With Western retailers increasingly seeking alternatives to Chinese suppliers amid geopolitical and cost considerations, Bangladesh has emerged as a key beneficiary. Reports of order diversions from China and even India were already fuelling optimism across the textile-exporting community.

However, just as factories began preparing to absorb the expected surge in orders, the sector was blindsided by a systemic banking failure—one that has reportedly affected production in around 400 garment manufacturing units recently.

The crisis is rooted in the sector’s heavy reliance on Letters of Credit (LCs) for procurement and production continuity.

Typically, in export-based business models, foreign buyers open LCs through internationally recognised banks, ensuring payment to the supplier upon shipment. Bangladeshi exporters, however, operate within a more constrained framework. They commonly utilise back-to-back LCs provided by local banks to finance the procurement of raw materials. These back-to-back LCs are settled once export proceeds are realised.

The model worked efficiently—until liquidity dried up.

Reports indicate banking problems escalated sharply during the COVID-19 pandemic period. Since then, a cascading series of alleged financial missteps, rising non-performing loans (NPLs), and widespread governance issues have only deepened the cracks, as per reports.

Exporters have complained that even when export dollars are repatriated into the country, banks have been delaying or withholding the disbursement of funds. This has not only hindered the settlement of back-to-back LCs but has also jeopardised the ability of factories to pay worker wages—a particularly sensitive issue in Bangladesh, where the RMG sector directly employs over four million people and indirectly supports the livelihoods of many more.

According to data from the central bank—Bangladesh Bank—non-performing loans in the country’s banking sector reportedly jumped by Taka 74,570 crore in the January–March 2025 quarter, pushing the cumulative figure beyond Taka 4.20 lakh crore.

Several financial institutions are reportedly teetering under the weight of these bad loans, many of which are the result of alleged politically backed fraudulent lending practices and regulatory inertia.

Among the most vulnerable are five Islamic banks, facing critical liquidity shortages.

Recognising the systemic risk, the Bangladesh Bank has now proposed a merger of these five crisis-hit Islamic banks into a single entity—‘United Islami Bank.’ With the approval of the interim government, the central bank has reportedly pledged a capital infusion of Taka 20,200 crore to stabilise the merged institution.

This restructuring, though vital, may take time to translate into functional liquidity relief for the export sector, especially given the urgent cash flow needs of factories already struggling to stay operational.

In the meantime, industry representatives have been lobbying hard for immediate intervention. A BGMEA delegation, led by its president, met with the governor of the Bangladesh Bank to raise urgent concerns about the banking bottleneck. During the meeting, the BGMEA highlighted the inability of multiple banks to release repatriated export proceeds or issue new LCs—both of which are essential for maintaining production cycles and meeting international shipment deadlines.

According to reports, the BGMEA president made it clear that these delays are not just hurting domestic business continuity but are also inflicting reputational damage on Bangladesh’s credibility in the global arena.

In an industry where timeliness and trust are paramount, any perception of systemic risk—particularly around payment and financing—can result in order migration to more stable sourcing destinations.

That a sector contributing about 85 per cent of the country’s export revenues and powering nearly four million direct jobs finds itself at the mercy of banking dysfunction signals a deep policy failure, feels many.

The government, aware of the criticality of the situation, started taking steps to provide liquidity support, if reports are to be believed.

On September 4, the BGMEA issued a statement confirming that Bangladesh Bank had released Taka 886 crore in export proceeds via two distressed banks—Exim Bank and Social Islami Bank Ltd (SIBL). The disbursement has reportedly enabled nearly 250 garment factories to pay workers’ wages and allowances for August and September.

While such temporary injections could provide some breathing space, such measures are far from being a sustainable solution.

Compounding the challenge is the psychological effect the crisis is having on foreign buyers and financial markets. Order volumes and investment flows, after all, are heavily influenced by perceptions of political and financial stability.

So, even if the US imposed a somewhat favourable 20 per cent tariff on Bangladeshi goods, effective from August 7, the banking turmoil could end up eroding those competitive gains. If international buyers begin to question the reliability quotient, especially due to financial transaction risks, the consequences could be long-lasting.

The scenario unfolding at a time when many global brands are actively diversifying their sourcing bases, Bangladesh has an open runway to seize a larger share of the global apparel export pie, but for the liquidity crisis, which many fear, could become a roadblock to capitalising on the opportunities on offer.

Fibre2Fashion News Desk (DR)