Rising Interest in Islamic Banking: Current Trends and Future Outlook

Islamic banks operating under Shariah principles have become a focal point for many, attracting significant public interest. During the tenure of the previous government, these banks faced targeted incidents of financial misappropriation within the banking sector, which led to a significant erosion of customer trust over the years. Observing the robust performance of these Islamic banks, several conventional banks have since adopted Shariah-based management practices.

Liquidity Challenges and Deposit Growth

In recent years, the banking sector has grappled with liquidity challenges. Although Islamic banks witnessed a decline in deposits towards the end of 2023 and the beginning of 2024, a recovery trend began in March. By May, most key performance indicators for Islamic banks showed an upward trajectory. According to the latest update from Bangladesh Bank, deposits in Islamic banks, branches, and windows reached 4,28,802 crore BDT in May 2024, compared to 4,24,601 crore BDT in April, marking an increase of 4,201 crore BDT. This growth includes 3,830 crore BDT in fully Islamic banks, with Islamic banking branches of conventional banks seeing a rise of 42 crore BDT, and Islamic windows gaining 330 crore BDT.

Investment Expansion Amid Liquidity Issues

Investments in Islamic banking also saw a significant increase. In May 2024, total investments amounted to 5,04,113 crore BDT, up from 4,98,098 crore BDT in April. This growth of 6,015 crore BDT includes a rise of 5,587 crore BDT in fully Islamic banks. By May, investments in these banks stood at 4,69,583 crore BDT, compared to 4,63,996 crore BDT in April. Investments in Islamic banking branches grew by 143 crore BDT, while Islamic windows saw a rise of 285 crore BDT. However, despite these robust investment figures, Islamic banks continue to struggle with liquidity issues, as they face challenges in recovering the invested amounts. Some banks even had to resort to borrowing from the central bank for the first time in recent history, which experts believe could have been avoided if the funds were returned on schedule.

Increased Remittance Inflows

The flow of remittances through Islamic banking channels has also seen a notable increase. In May 2024, expatriates sent 10,634 crore BDT through Islamic banks, up from 8,986 crore BDT in April. This represents a month-on-month increase of 1,684 crore BDT, with 10,585 crore BDT flowing into fully Islamic banks, and the remainder being directed through the Islamic banking branches and windows of conventional banks.

Growth in Export Earnings and Import Payments

Export earnings through Islamic banking also experienced growth, increasing by 441 crore BDT within a month. In May 2024, export earnings through Islamic banks reached 8,089 crore BDT, up from 7,648 crore BDT in April. Of this, 7,348 crore BDT was processed through fully Islamic banks, with 562 crore BDT through Islamic banking branches and 179 crore BDT through Islamic windows.

Similarly, import payments via Islamic banking increased to 13,622 crore BDT in May 2024, up from 13,227 crore BDT in April, representing an increase of 295 crore BDT. The bulk of this increase came from Shariah-based Islamic banks, which saw a rise of 121 crore BDT, while Islamic banking branches of conventional banks recorded a 498 crore BDT increase. However, Islamic banking windows in conventional banks experienced a decline of 223 crore BDT in import payments.

Reforms in the Banking Sector and Strategic Moves

Following recent political changes, the government has initiated several reforms in the banking sector. Among these reforms, the central bank has taken steps to rescue several banks, including Islami Bank Bangladesh, which, along with other institutions, had come under the control of influential banking figures like S. Alam. The board of Islami Bank has since been restructured, with five independent directors appointed. Among them, Md. Obaid Ullah Al Masud, former managing director of Sonali and Rupali Bank, has been appointed as the new chairman of the board. The boards of Social Islami Bank, Global Islami Bank, and Shariah-based Exim Bank, under the leadership of Nazrul Islam Mazumder, have also been restructured. These initiatives are expected to further strengthen the position of Islamic banks in the financial sector.