Regulatory squeezes trigger foreign exit from BRAC Bank despite record profits

BRAC Bank, one of Bangladesh's most profitable commercial lenders and a preferred destination for foreign portfolio investment, is facing a sharp and sustained withdrawal of international capital despite record financial performance.

The bank has suffered five consecutive months of heavy foreign sell-offs. Analysts and industry insiders attribute the capital flight mainly to renewed regulatory intervention – particularly Bangladesh Bank's reintroduction of a 4% interest-rate spread cap – as well as geopolitical uncertainty and strategic portfolio rebalancing.

Dhaka Stock Exchange data show foreign ownership falling steadily from 36.72% in February 2026, when the bank's share price was rising strongly. Holdings declined to 36.48% in March after a Tk34 crore net sale, 36.22% in April after Tk40 crore was sold, and 35.89% in May following Tk50 crore in sales.

The retreat intensified in June, when foreign ownership fell to 34.69% after a Tk180 crore sell-off. By July, it had reached a multi-year low of 32.96%, with Tk250 crore worth of shares sold that month. Foreign institutional holdings now stand at Tk4,792 crore.

The aggressive divestment contrasts with BRAC Bank's earnings. Annual net profit rose from Tk404 crore in 2020 to Tk465 crore in 2021, Tk614 crore in 2022 and Tk827 crore in 2023, before surging to Tk1,431 crore in 2024 and a record Tk2,250 crore in 2025. In the first six months of 2026, the bank generated Tk1,423 crore, outperforming all other listed local peers.

Asif Khan, chairman of Edge Asset Management and former president of CFA Society Bangladesh, told The Business Standard that the initial foreign exit was triggered by broader geopolitical instability.

The Iran-US conflict raised concerns over energy security and Bangladesh's macroeconomic stability, prompting foreign capital to retreat from domestic equities, including BRAC Bank. Although easing tensions helped stabilise share prices, regulatory changes delivered another blow to investor sentiment, he said.

On 29 June, Bangladesh Bank directed all commercial banks to limit their weighted average lending-deposit spread to 4%, saying the measure would curb borrowing costs and stimulate industrial activity. The Banking Regulation and Policy Department said the sector-wide spread had widened to 5.72%, with several lenders charging 7-9%.

Bangladesh Bank had removed a similar 4% ceiling in November 2023 as part of market reforms following the abolition of the SMART (Six-Month Moving Average Rate of Treasury Bills) framework in May 2024. The return to a fixed ceiling has therefore raised concerns over a reversal of market-oriented reforms.

Its abrupt reinstatement has disappointed international institutional investors who favour market-based pricing. Khan said foreign portfolio managers view such controls as unwelcome regulatory interference and warned that artificially imposed rate ceilings can produce sub-optimal outcomes and undermine investor confidence.

The measure is particularly significant for BRAC Bank, the country's pioneer and market leader in SME financing. SME lending carries higher credit risks, operational overheads and monitoring costs than large corporate loans. Analysts warn that capping spreads could make lending to high-risk SME borrowers economically unviable, threatening the core business model of SME-focused lenders.

Although credit cards and consumer finance were exempted because of their elevated risk profiles, SME loans remain subject to the ceiling. Financial experts argue that SME portfolios should also be exempted to preserve credit flows to small businesses.

The IMF has reportedly advised Bangladesh Bank to remove the spread ceiling in favour of market-based pricing. Experts say restoring a market-based mechanism would also provide greater certainty for lenders and investors. Market participants expect foreign investor confidence and capital flows into leading banking stocks to recover if the central bank follows the recommendation and withdraws the mandate.