Excess liquidity in the country's Shariah banks nosedived by 77% in March 2024 compared with that in December 2023, driven by a trust deficit.
According to Bangladesh Bank data, excess liquidity in Islamic banks dropped by Tk5,125 crore to Tk1,518 crore at the end of March 2024 compared with that of Tk6,643 crore in December 2023 and Tk7,767 crore at the end of September 2023.
This is according to data by Bangladesh Bank’s Quarterly Report on Islamic Banking in Bangladesh.
Excess liquidity refers to the amount of liquid assets that banks hold above and beyond what is required for their day-to-day operations and regulatory obligations.
Negative excess liquidity poses challenges for banks, making it difficult to meet immediate payment obligations, address customer withdrawals and settle transactions promptly, bankers said.
In Bangladesh, there are 10 full-fledged Islamic banks.
Only two banks — Shahjalal Islami Bank and Al-Arafah Islami Bank — managed to increase their excess liquidity substantially, while others saw a severe erosion of their liquidity in the reporting period.
The excess liquidity of five Shariah-based banks, which are allegedly controlled by the Chattogram-based S Alam Group, remained negative in March 2024.
The five banks are Islami Bank Bangladesh, Social Islami Bank, First Security Islami Bank, Global Islami Bank and Union Bank.
ICB Islamic Bank also faced a negative excess liquidity crisis.
These banks have been grappling with liquidity issues since November 2022, following a series of media reports on various scams and loan irregularities, particularly involving Islami Bank, which prompted mass withdrawals.
Media reports in January revealed that despite having no money in their current accounts with the Bangladesh Bank, these five banks are still conducting transactions, surviving solely on the central bank’s crucial support.
The total deposits in the Islamic banking system also plunged by Tk3,938 crore to Tk439,465 crore at the end of March 2024 compared with that at the end of December 2023.
The overall excess liquidity in the banking sector surged to Tk167,708 crore in March 2024 compared with that of Tk163,305 crore in December 2023.
Despite the crisis, the total loan disbursements by the Islamic banking system increased by Tk12,020 crore to Tk456,994 crore at the end of March 2024 compared with that at the end of December 2023.
To address the liquidity crisis in these Shariah-based banks, the Bangladesh Bank started providing special facilities, including Tk4,000 crore through the ‘Islamic Banks Liquidity Facility’ on December 5, 2022, and Tk8,000 crore to Islami Bank PLC alone on December 29.
On December 28, 2023, the central bank extended Tk22,000 crore to seven struggling commercial banks, including the five Shariah-based banks.