The scene of Islamic banking, which also is known as Shariah-based banking or financial system in Bangladesh has undergone a significant transformation in recent years, marked by a substantial decline in excess liquidity. According to data from the Bangladesh Bank (BB), excess liquidity within Shariah-based banks plummeted by a staggering 66.97 percent over the past two years, a trend raising eyebrows across the financial sector.
As of December 2023, excess liquidity in the Islamic banking system dwindled to BDT 111.07 billion, starkly reduced from BDT 336.25 billion recorded just two years prior. The BB’s quarterly report on Islamic banking reveals a breakdown of this decline, with full-fledged Islamic banks, Islamic banking branches of conventional banks, and Islamic banking windows of conventional banks reporting excess liquidity figures of BDT 73.13 billion, BDT 10.24 billion, and BDT 27.70 billion respectively.
Experts attribute this downward trend to the limited utilization of support measures provided by the central bank. Ahsan H Mansur, Executive Director of Policy Research Institute, highlighted the decline in confidence among depositors, largely influenced by ownership changes within Islamic banks, many of which are owned by business groups. Mansur referenced instances of irregularities within these banks, leading to a wave of withdrawals by concerned clients, particularly following revelations of loans granted to non-existent entities.
The landscape of Islamic banking in Bangladesh is characterized by 10 full-fledged Islamic banks operating 1,670 branches, alongside 30 Islamic banking branches of 15 conventional banks and 624 Islamic banking windows of 16 conventional banks. Despite the challenges posed by declining excess liquidity, these institutions remain a vital component of the country’s financial system.
Salehuddin Ahmed, former governor of the Bangladesh Bank, underscored the population’s inclination towards Shariah-based transactions over interest-based ones. However, he emphasized the hurdles faced by Shariah-based banks due to various scams and irregularities, which have eroded public trust.
Excess liquidity, computed after maintaining the required statutory liquidity ratio (SLR) and cash reserve ratio (CRR), reflects the liquidity available to banks beyond regulatory requirements. Banks in Bangladesh are mandated to uphold a 4 percent CRR of total deposits in cash and a 13 percent SLR in non-cash form at the Bangladesh Bank.
While the decline in excess liquidity presents a formidable challenge, Bangladesh’s Islamic banks have demonstrated resilience amidst ongoing economic uncertainties. Despite the liquidity drop, these institutions experienced significant growth in both deposits and investments throughout the previous year.
Total deposits within the Islamic banking system reached BDT 4,434.03 billion by the end of December 2023, marking an increase of BDT 334.55 billion or 8.16 percent compared to the same quarter of 2022. Among Islamic banks, Islami Bank garnered the highest share of deposits, followed by First Security Islami Bank and EXIM Bank, showcasing their enduring appeal among depositors.
Different types of deposits within the Islamic banking system saw varied proportions, with Mudaraba Term Deposits (MTD) securing the highest position, followed by Mudaraba Savings Deposits (MSD).
On the investment front, total investments (loans & advances) of the Islamic banking system stood at BDT 4,449.74 billion at the end of December 2023. Islami Bank Bangladesh led in investment share, followed by First Security and EXIM Bank. Sector-wise, investments were primarily directed towards trade and commerce, large industry, CMSMEs (Cottage, micro, small and medium enterprises), construction, and services industry.
Despite facing obstacles, Shariah-based banks in Bangladesh remain pivotal in the nation’s financial arena. As they adapt to shifting market conditions and tackle issues of trust and transparency, their resilience underscores their lasting impact on Bangladesh’s financial trajectory. These institutions play a vital role in shaping the country’s economic future, demonstrating their enduring relevance amidst challenges.
