Bringing Islami Bank back on track

While Islamic finance is booming worldwide even in non-Muslim countries, the future of Islamic banking sectors in Bangladesh remains murky. Although there persists a debate whether the Islamic banks are really practicing Islamic teachings, Islamic finance has already emerged as an effective financial system for sustainable development. Since its inception, the Islamic banking sector has shown continuous growth as reflected in its increasing market share in terms of assets, financing, and deposits compared to the entire banking sector. As of December 2016, the central bank of Bangladesh reported that Islamic banks hold 20.79% of total deposits and 24.44% of total credit of the banking system of the country. As of June 2017, the average non-performing loans (NPLs) stood at 9.2% for all the banks, whereas Islamic banks’ NPLs was less than half (4.3%) compared to the average percentage. Among eight full-fledged Islamic banks operating in Bangladesh, Islami Bank Bangladesh Limited (IBBL) commands 90% of Islamic-banking assets and deposits. Despite being the first-generation bank, IBBL has competed with the current fourth generation private banks with great success. IBBL, the biggest private lender and a giant remittance receiver, was able to secure second position in Bangladesh and 1,337th position in the world in terms of assets in the later part of 2016, according to Orbis Bank Focus (former Bankscope). Islami bank is also the pioneer partner in financing the apparel industry, the country’s major export industry.

Among eight full-fledged Islamic banks operating in Bangladesh, Islami Bank Bangladesh Limited (IBBL) commands 90% of Islamic-banking assets and deposits

Unfortunately, after a substantial upset in ownership and management in January 2017, Islami Bank Bangladesh is experiencing liquidity crisis, low profitability, and rapid increase in loan disbursement. As a consequence, the bank’s biggest institutional investor, the Islamic Development Bank, has reduced its stake from 7.5% to 2.1%. It is evident that the liquidity ratio of IBBL declined from 26.66% to 19.11% in the third quarter of 2017 as compared to the third quarter of 2016. Similarly, the return on average assets (ROAA) decreased from 0.73% to 0.54%. The bank’s loan disbursement has jumped to Tk5,031 crore in the six months of 2017, as against Tk3,521cr in 2016, Tk2,695cr in 2015, and Tk2,263cr in 2014. Despite having low profitability and high loan disbursement, the bank’s overall deposit stock stood to Tk71,284.6cr as of June 2017. More recently, Islami bank has stopped investing in any project and Ibn Sina announced to withdraw their share from the bank. As a consequence, in the 12 months to June 2017, garment exports expanded by 1.7% year on year, the slowest pace in 15 years. If it continues, the bank will collapse in no time and the overall banking sector will be highly affected. Now it is time to investigate the reasons behind such instability of the bank. Is it government interventions or are there other reasons? Before it is too late, the government and the central bank should intervene one more time, give it another shot to protect the bank from becoming a new basic bank or farmer’s bank or become riddled with bank scams in the coming days. The government, the policy-makers, and the central bank should bear in mind that compromising the financial sector for ill motives will never allow a country to achieve sustainable economic growth. So far, Islami bank has no role in financing government projects. So, the government can engage the bank in financing government-based prospective and viable projects. Meanwhile, the government should closely monitor the bank to bring it back on track.

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Hasanul Banna, PhD, is Research Fellow, CPDS, Faculty of Economics and Administration, University of Malaya, Malaysia.