Islamic Banks Face Confidence and Liquidity Test

Bangladesh’s Islamic banking sector continues to play a pivotal role in the country’s financial system, yet fresh data for the first quarter of 2026 suggest that the industry is facing mounting pressure from liquidity constraints, governance concerns and weakening depositor confidence. While the sector has maintained long-term growth and still commands a significant share of the country’s banking market, recent quarterly figures indicate that several key performance indicators have moved in an unfavourable direction.

According to the latest quarterly report from Bangladesh Bank, total deposits held by Islamic banks stood at Tk479,935 crore at the end of March 2026. This represents a decline of Tk1,256 crore compared with the end of December 2025. Despite the quarterly fall, deposits remained 8.35 per cent higher than the level recorded a year earlier, suggesting that the sector’s longer-term expansion remains intact even as short-term confidence has weakened.

Banking industry observers attribute the recent decline largely to governance-related issues at several Islamic banks. Controversies surrounding changes to boards of directors, concerns over management practices, rising volumes of non-performing loans and increased pressure on asset quality have reportedly prompted many customers to transfer their deposits to other financial institutions. The resulting liquidity squeeze has not only affected domestic banking operations but has also had consequences for international trade finance and foreign exchange transactions.

Bangladesh Bank’s data show that Islamic banks currently account for 23.62 per cent of total deposits across the country’s banking system. They are also responsible for approximately 29.9 per cent of total loans and investments. By the end of March, total financing and investment by Islamic banks had reached Tk526,889 crore, an increase of Tk1,818 crore from the previous quarter.

The slower pace of deposit growth compared with investment expansion has, however, affected key liquidity indicators. The investment-to-deposit ratio fell from 0.94 to 0.90 during the quarter, while excess liquidity declined to Tk19,204 crore from Tk19,392 crore a year earlier, a reduction of Tk188 crore. Although the fall is relatively modest, it indicates that liquidity pressures have not yet fully eased.

Bangladesh Bank has acknowledged that some Islamic banks required emergency liquidity support following increased deposit withdrawals, higher levels of defaulted loans and limitations in Shariah-compliant short-term liquidity management instruments. To strengthen the resilience of the sector, the central bank has also initiated measures to establish an Islamic interbank money market, allowing Shariah-based banks to manage liquidity more efficiently through interbank transactions.

The effects of these challenges have also been reflected in Bangladesh’s external trade. Export earnings processed through Islamic banks totalled Tk30,321 crore during the January-March quarter, down 3.84 per cent from the previous quarter. Import settlements declined by 11.51 per cent to Tk41,596 crore, while inward remittances handled by Islamic banks fell by 9.18 per cent to Tk25,011 crore.

Despite this decline, Islamic banks continued to play an important role in overseas remittance inflows. They channelled 20.54 per cent of the country’s total remittances during the quarter, underlining the continued reliance of a substantial number of expatriate Bangladeshis and their families on Shariah-compliant banking services.

Key Indicators of Bangladesh’s Islamic Banking Sector

Sectoral investment data reveal that large industries remained the biggest recipients of Islamic bank financing, accounting for 39.97 per cent of total investment. The trading sector ranked second with a 33.12 per cent share. Agriculture, fisheries and forestry together received only 1.82 per cent of total investment, while cottage, micro, small and medium enterprises accounted for 7.43 per cent.

Agricultural financing nevertheless showed encouraging progress. Investment in the sector increased to Tk17,980 crore by the end of March, representing an increase of around Tk2,640 crore compared with the previous quarter. Achievement against the agricultural lending target improved to 93.37 per cent.

Other specialised financing segments also continued to expand. Green finance reached Tk19,772 crore, financing for women entrepreneurs rose to Tk5,571 crore, and Islamic microfinance increased to Tk7,655 crore, reflecting continued efforts to diversify Shariah-based financial services beyond conventional commercial lending.

Bangladesh’s Islamic banking network remains extensive. The country now has 10 full-fledged Islamic banks operating through 1,700 branches. In addition, 17 conventional banks operate 49 Islamic branches, while 21 banks run 976 Islamic banking windows. Altogether, the country has 1,749 Islamic banking service outlets.

Employment within the sector reached 48,935 people by the end of March. Although this represented an increase from the previous quarter, the workforce remained 3,296 lower than the corresponding period in 2025, indicating that banks are continuing to adjust their staffing levels amid financial and operational challenges.

Economist M Helal Ahmed believes that weaknesses in corporate governance, persistent liquidity shortages and declining confidence in management have encouraged many depositors and businesses to move their banking relationships elsewhere. He argues that rebuilding public trust will require credible boards of directors, greater financial transparency, stronger control over non-performing loans and professional bank management free from political influence.

Bangladesh Bank Executive Director and spokesperson Arif Hossain Khan has urged caution in interpreting a single quarter’s figures. He said some fluctuation in deposits between quarters is a normal feature of banking operations and should not be viewed as evidence of a broader structural deterioration. At the same time, he emphasised that the central bank continues to closely monitor governance standards, accountability, asset quality and liquidity conditions across the Islamic banking sector while advancing regulatory reforms and supervisory measures aimed at restoring public confidence and ensuring long-term financial stability.