Islamic banks’ liquidity vulnerability in focus


LIQUIDITY in Shariah-based banks in Bangladesh remains tight due to a dip in deposit collection and the banks’ inability to make the most of the central bank support to overcome the situation.

US-based global ratings agency Moody’s Investors Service on Thursday published the latest data from Bangladesh Bank showing that liquidity stress for the sector is persisting.

The liquidity shortfalls are credit-negative as many Islamic banks could face difficulty meeting short-term obligations.

The system-wide investment (loan)-deposit ratio of Islamic banks stood at 101 per cent in June this year, up from 94 per cent a year earlier.

Such a high ratio means that liquidity continues to be tight after shrinking substantially.

The liquidity situation at the Shariah-compliant banks worsened in recent times after enjoying a sound liquidity base year after year.

At the end of 2022, all 10 full-fledged Islamic banks met regulatory liquidity requirements, but six months later, four of them did not have sufficient liquidity to meet the minimum cash reserve and statutory liquidity ratios.


While the other six remained in compliance as of the end of June 2023, their excess liquidity levels were modest.

Bangladesh’s inflation rate rose to 9.7 per cent in June 2023 from 7.6 per cent a year earlier. This means the banks’ efforts aimed at recovering from the liquidity crisis by reversing the trend of deposits may not yield the expected outcome in the coming days since savers’ capacity to park funds has continued to be under strain.

Besides, a near double-digit inflation rate has kept the weighted average deposit rate, which stands at less than 5 percent, in the negative territory, making parking funds in the entire banking sector unattractive for many savers.

The deposit growth in the Islamic banking segment plummeted to nearly 2 per cent in June this year from 11 per cent in the same month last year.

The state-sponsored looters simply looted the Islamic banks, despite several regulatory bodies such as Bangladesh Bank, Supreme Court, Finance Ministry, Financial Intelligence, and many more in the last decade.

The government is supportive in action in lowering the Moody’s rating; otherwise, it brought all perpetrators under the legal system.