Governor defends liquidity support to cash-strapped Islamic banks

The Bangladesh Bank is providing liquidity support to cash-strapped Islamic banks as per the power of the governor, said central bank chief Abdur Rouf Talukder.

When it is not possible to extend support to crisis-hit lenders in any way, liquidity facility is given as a "lender of last resort", he told reporters at a media briefing organised to unveil the Monetary Policy Statement (MPS) for the second half of the current fiscal year.

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Cash crunch lingers at crisis hit Islamic Banks

"The governor is empowered by the Bangladesh Bank Order to provide the liquidity support, so we provided it."

Banks typically turn to their lender of last resort – the central bank -- when they can't get the funding they need for their daily business.

The BB support comes after the current accounts of Islami Bank Bangladesh, Social Islami Bank, First Security Islami Bank, Union Bank and Global Islami Bank continue to face deficits due to a huge liquidity crisis.

Talukder said the Islamic banks have some structural problems and they don't have enough securities to borrow money like conventional banks.

Not only Islamic banks but also conventional banks are borrowing from the central bank because there is tight liquidity in the banking sector. Banks are buying US dollars from the BB using the local currency to settle import bills and other foreign transactions.

Throughout the first half of FY24, the banking sector encountered a situation of tightened excess cash reserves due to commercial banks' purchases of the dollars from the BB to satisfy heightened demand for foreign currency and increased investments in Treasury bills and bonds driven by attractive high-return opportunities.