Islamic Banks Face Widening Confidence Challenge

Financial and governance problems that have affected several Islamic banks in Bangladesh over an extended period are now becoming increasingly visible across the country’s entire Shariah-based banking industry. Fresh data for the first quarter of 2026 indicate that Islamic banks experienced a decline in deposits while also recording weaker performances in export earnings, import settlements and inward remittance collection. Despite these setbacks, the sector continues to occupy a significant position within Bangladesh’s overall banking system, reflecting its long-term importance to the national economy.

According to the latest quarterly report published by Bangladesh Bank, total deposits held by the Islamic banking sector stood at Tk 479,935 crore at the end of March 2026. This represented a decline of Tk 1,256 crore compared with December 2025, marking the first notable quarterly contraction after a prolonged period of growth. On an annual basis, however, deposits remained 8.35 per cent higher than in March 2025, suggesting that the industry’s underlying customer base has remained relatively resilient despite recent pressures.

Banking analysts attribute the deterioration primarily to governance concerns surrounding several Islamic banks. Controversies involving boards of directors, allegations of undue interference in management, rising levels of non-performing loans, deterioration in asset quality and sustained deposit withdrawals have collectively weakened customer confidence. As uncertainty spread among depositors, the effects extended beyond savings accounts to foreign trade transactions and remittance inflows.

Even amid these challenges, Islamic banking continues to play a substantial role in Bangladesh’s financial sector. At the end of March, Islamic banks accounted for 23.62 per cent of all deposits in the country’s banking industry. Their share of total loans and investments stood at approximately 29.9 per cent.

Total investment and financing by Islamic banks reached Tk 526,889 crore during the first quarter, an increase of Tk 1,818 crore from the previous quarter. However, investment growth failed to keep pace with deposit movements, causing the investment-to-deposit ratio (IDR) to decline from 0.94 to 0.90. This suggests that banks have adopted a comparatively cautious lending and investment strategy while navigating liquidity pressures.

Liquidity conditions also showed signs of strain. Excess liquidity fell to Tk 19,204 crore by the end of March, compared with Tk 19,392 crore a year earlier—a reduction of Tk 188 crore. Although the decline was relatively modest, it indicates that liquidity pressure has not yet eased completely.

Bangladesh Bank noted that deposit withdrawals at certain Islamic banks, coupled with rising defaulted loans and the limited availability of Shariah-compliant short-term liquidity management instruments, have complicated the operating environment. To stabilise the situation, the central bank has extended emergency liquidity support to several institutions. It is also working to introduce an Islamic interbank money market, a long-discussed reform expected to improve liquidity management among Shariah-based banks by enabling more efficient short-term funding between institutions.

The slowdown was equally evident in external trade and remittance activities. Export proceeds handled through Islamic banks totalled Tk 30,321 crore during the January-March period, representing a decline of 3.84 per cent compared with the previous quarter. Import settlements fell even more sharply, dropping 11.51 per cent to Tk 41,596 crore. Meanwhile, remittance collection decreased by 9.18 per cent to Tk 25,011 crore.

Despite the decline, Islamic banks continued to channel a significant share of overseas remittances into Bangladesh, accounting for 20.54 per cent of total remittance inflows during the quarter. This underlines the continued importance of the sector in supporting foreign exchange earnings, particularly among expatriate Bangladeshis who have traditionally favoured Islamic banking services.

Sectoral investment data reveal that large industries remained the largest recipients of Islamic bank financing, accounting for 39.97 per cent of total investment. The trade sector ranked second with a 33.12 per cent share. By comparison, agriculture, fisheries and forestry collectively accounted for only 1.82 per cent, while cottage, micro, small and medium enterprises (CMSMEs) received 7.43 per cent.

Agricultural financing, however, emerged as one of the brighter areas during the quarter. Investment in agriculture increased to Tk 17,980 crore, approximately Tk 2,640 crore higher than in the previous quarter. Achievement against the sector’s financing target improved to 93.37 per cent, indicating stronger lending activity in rural and agricultural segments.

Other priority financing programmes also continued to expand. Green finance reached Tk 19,772 crore by the end of March, financing for women entrepreneurs rose to Tk 5,571 crore, while Islamic microfinance increased to Tk 7,655 crore. These figures suggest that, despite broader financial challenges, banks continued to support sectors aligned with sustainable development and financial inclusion.

Bangladesh’s Islamic banking network also remains extensive. The country currently has 10 full-fledged Islamic banks operating through 1,700 branches. In addition, 17 conventional banks run 49 Islamic branches, while 21 conventional banks operate 976 Islamic banking windows. Altogether, Bangladesh now has 1,749 Islamic banking service outlets.

Employment within the sector reached 48,935 at the end of March. Although this represented an increase from the previous quarter, the workforce remained 3,296 lower than during the same period in 2025, reflecting restructuring and operational adjustments undertaken by several institutions.

Economist M. Helal Ahmed believes governance shortcomings, liquidity constraints and weakening confidence have prompted many customers and businesses to shift their financial transactions to other banks. In his view, this migration has contributed directly to lower export earnings and remittance flows handled by Islamic banks. He argues that rebuilding public confidence will require credible and competent boards of directors, greater transparency regarding banks’ financial positions and professional management free from political influence.

Bangladesh Bank Executive Director and spokesperson Arif Hossain Khan offered a more measured assessment, saying that quarterly fluctuations in deposits are not unusual within the banking sector. He stressed that a single quarter’s figures should not be interpreted as evidence of a long-term trend. Nevertheless, he confirmed that the central bank is maintaining close oversight of governance standards, accountability, asset quality and liquidity across the Islamic banking industry while continuing to implement structural reforms aimed at strengthening the sector’s long-term stability.