Hyman Minsky's Financial Instability Hypothesis explains why financial crises occur in cycles. The core idea is that 'stability itself creates instability.'
During long periods of economic prosperity, banks, investors, and borrowers grow overconfident and take on excessive risk.
Minsky described three stages of lending: Hedge Finance (safest — cash flow covers both interest and principal), Speculative Finance (cash flow only covers interest, requiring new loans for principal), and Ponzi Finance (riskiest — cash flow covers neither, requiring asset sales or new borrowing for both).
When Ponzi finance becomes widespread, the economy becomes fragile. A small adverse event can trigger a systemic collapse — the 'Minsky Moment.'
In Bangladesh, high rates of non-performing loans and risky lending practices in some cases align with Minsky's theoretical framework.