Deposits at Islamic banking accounts have continued to decline because of a confidence crisis among the savers, as some shariah-based banks are now facing liquidity crunch because of massive loan irregularities.

Total deposits in Islamic banks and the Islamic banking branches of conventional banks reduced by Tk 8,495 crore or 2 percent from December to hit Tk 413,969 crore in January, Bangladesh Bank data showed.

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Cash crunch lingers at crisis hit Islamic Banks

Fully-fledged 10 Islamic banks have been the main loser here, as deposits in such banks fell by Tk 8,832 crore in January while the amount rose by Tk 2,153 crore in the Islamic banking branches of conventional banks, as per BB data.

However, despite being hit by a falling trend in deposits and the liquidity crisis, the Islamic banks lent Tk 4,869 crore in the first month of 2024.

Some Islamic banks are largely involved in loan irregularities, which have deteriorated their corporate governance, Mohammed Nurul Amin, former chairman of the Association of Bankers Bangladesh (ABB), told The Daily Star.

Now-a-days, people are investing more in treasury bills and bonds compared to banks thanks to high interest rates, which, according to him, is another reason for the fall in deposits at Islamic banking accounts.

The overall Islamic banking sector is suffering from an image crisis due to the vulnerable situation of four to five Islamic banks, a senior official of the Bangladesh Bank told The Daily Star seeking anonymity.

In Bangladesh, Islamic banks were sitting on huge excess liquidity only two to three years ago.

Now, the sector is going through challenges due to the massive loan irregularities in six Islamic banks: Islami Bank Bangladesh, Social Islami Bank, First Security Islami Bank, Union Bank, Global Islami Bank and ICB Islamic Bank.

These six have been facing shortfalls in cash reserve ratio (CRR) and statutory liquidity ratio (SLR) for a long time along with being hit by a deficit at their current accounts with the central bank.

An official of the ICB Islamic bank said his bank is now struggling to clear staff salary due to a severe liquidity shortage.

As per the rules, banks have to keep a certain amount of deposit with the central bank every night in the form of CRR.

They also have to keep a minimum percentage of customers' deposits in the form of liquid cash, gold or other securities overnight, which is known as SLR.

Bangladesh Bank Executive Director and Spokesperson Md Mezbaul Haque recently said the banking regulator is now extending liquidity support to the six Islamic lenders for the interest of the banking sector.

When contacted, Zafar Alam, managing director of Social Islami Bank, said the condition of his bank is gradually improving.

Deposits in Islamic banking accounts have decreased due to the ongoing stress in the overall banking sector, he said.