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Bangladesh's service sector saw a moderate rebound in the first quarter of FY26, although private sector credit growth to key service-related activities slowed notably during the same period, reflecting a cautious lending environment amid broader macroeconomic adjustments.
According to the latest provisional data, the service sector posted a 3.67 per cent growth in Q1 FY26, up from 2.51 per cent in Q4 FY25 and 2.96 per cent in Q1 FY25.
Most service sub-sectors recorded improved performance, signalling a gradual recovery in domestic demand and business activities.
However, financial and insurance activities, alongside real estate and professional, administrative and support services, failed to maintain momentum.
Despite the improved output growth, banks' advances to the private sector by economic purpose - which largely represent service-related activities - decelerated to 7.72 per cent in Q1FY26, down from 10.19 per cent in the corresponding quarter of the previous fiscal year, according to the central bank data.
Sectoral credit data show that consumer finance and trade and commerce experienced moderate growth, while credit to the transport sector contracted during the quarter under review.
Economists say the divergence between output growth and credit expansion suggests that service activities may be recovering on the back of internal adjustments, informal financing, or prior investments rather than fresh bank lending.
Dr Masrur Reaz, chairman of Policy Exchange Bangladesh, said the improvement in service sector growth reflects an early stabilisation in domestic economic activity following a period of macroeconomic stress.
"The service sector is largely demand-driven. The modest acceleration indicates that consumption and trade activities have started to gradually normalising," Dr Reaz said.
However, he cautioned that the slower credit growth signals continued tight liquidity conditions and cautious lending behaviour by banks.
"Banks are still operating under a relatively tight monetary stance and facing asset quality concerns. As a result, credit allocation has become more selective, particularly in segments perceived as riskier, such as transport and certain real estate-linked activities," he added.
Analysts note that the contraction in transport sector credit may be linked to subdued import activity, fuel cost pressures, and slower expansion in logistics investment.
Meanwhile, moderate growth in consumer finance and trade credit suggests that household consumption and wholesale-retail activities are gradually gaining traction, albeit at a restrained pace.
The weak performance of financial and insurance activities within the service sector also reflects ongoing structural challenges, including higher non-performing loans, capital adequacy pressures, and regulatory tightening.
Dr Reaz observed that for the service sector to sustain stronger growth, a balanced policy mix will be required.
"Monetary tightening was necessary to stabilise inflation and the external sector. But going forward, restoring private sector confidence and improving credit flow to productive service activities will be crucial," he said.
He further emphasised the need for improving the investment climate and strengthening financial sector governance to ensure that credit flows into efficient and growth-enhancing segments of the economy.
Economists believe that if inflationary pressures ease and financial sector reforms progress, credit growth may gradually align with the recovering service sector output in the coming quarters.
For now, the Q1FY26 data suggest a cautious but visible recovery in Bangladesh's service-led domestic economy, though the pace remains constrained by financial sector headwinds.
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