Dhaka, Dec. 10 -- When Rubel (pseudonym), a small supplier in Gazipur, went to a commercial bank last month to ask for a small loan, the credit officer shook his head. ''We aren't approving any new loan proposal until the bank manages its bad loans,'' the officer said. Rubel is not alone in this. Bangladesh's banking sector, in recent months, has sent the same message to thousands of entrepreneurs throughout the country. In a country where 85 per cent of business financing flows through banking channels, this message has far more serious consequences beyond Rubel's distress. The cost of this grim reality is already visible through shuttered factories, the agony of unpaid workers and the confusion of jittery depositors.

In the country's b...