Islamic Bank Deposits Continue to Grow Despite Ongoing Irregularities

Islamic Bank deposits in Bangladesh continue to exhibit resilience and growth, even as several major institutions grapple with financial scandals and irregularities. Despite these challenges, deposits in Islamic banks have notably increased, reflecting the growing demand for Shariah-compliant financial services in the country. This article delves deeper into the latest trends, figures, and underlying reasons driving this growth, and explores the broader significance of Islamic banking in Bangladesh.

Islamic Bank Deposits: A Remarkable Growth Despite Challenges

The most recent report from Bangladesh Bank paints an encouraging picture for Islamic banks. In June 2024, total deposits in Islamic banks rose by 2.71%, amounting to Tk 440,427 crore—a significant increase of Tk 11,625 crore from the previous month. This growth comes at a time when some of the leading Shariah-based banks in the country are under intense scrutiny for their involvement in financial scams.

What makes this growth particularly noteworthy is that it comes against the backdrop of serious allegations and liquidity issues faced by some banks, such as Islami Bank Bangladesh. The country’s largest Shariah-based bank, along with others, has been embroiled in a series of financial irregularities. Yet, despite these scandals, the increase in deposits suggests that the public’s confidence in Islamic banking remains relatively intact.

This resilience can be attributed to the ethical and religious principles on which Islamic banking is based. Islamic banks operate under Shariah law, which prohibits interest (riba) and speculative activities (gharar), offering customers a more ethical and stable form of banking. For many devout Muslims, these principles are a key reason why they continue to trust Islamic banks, even when some of these institutions face challenges.

Key Indicators Show Positive Trends

While deposits are one of the most visible signs of growth in Islamic banks, other key banking indicators have also shown positive trends. Investments in Islamic banking, for instance, saw a rise of 1.91% in June, reaching Tk 513,734 crore. This increase underscores the continued role that Islamic banks play in financing economic activities, from infrastructure projects to small and medium-sized enterprises (SMEs).

Islamic banking now accounts for nearly one-fourth of the total investments in Bangladesh’s banking industry. This demonstrates the significant role these institutions play in the broader financial ecosystem of the country. With conventional banks holding the majority share of total investments at Tk 1,549,119 crore, the fact that Islamic banks command such a large portion is a testament to the growing influence of Shariah-compliant banking.

In addition to investment growth, remittance inflows through Islamic banks have also shown a positive trend. According to the Bangladesh Bank report, remittances via Islamic banking channels increased to Tk 10,845 crore in June, up from Tk 10,634 crore in May. This rise indicates that more expatriates are choosing to transfer money through Islamic banks, which are seen as offering ethical and transparent services.

The Liquidity Crisis and Scandals

Despite these encouraging figures, the sector is not without its share of challenges. Some of the country’s major Islamic banks, including Islami Bank Bangladesh, have faced serious allegations of irregularities, primarily involving the S Alam Group, a Chattogram-based conglomerate. Between 2017 and June 2024, the S Alam Group and its associates allegedly secured Tk 95,331 crore in loans from six banks, with 79% of this amount coming from Islami Bank.

This large-scale withdrawal of loans has created a severe liquidity crisis for the affected banks, leading to concerns about their long-term viability. Although some depositors have withdrawn their funds due to these scandals, the broader Islamic banking sector continues to attract deposits, reflecting a degree of resilience.

This situation underscores the need for stronger regulatory oversight and governance in Islamic banking. While the sector’s growth has been remarkable, maintaining public confidence requires addressing these issues head-on. Strengthening internal controls and ensuring greater transparency will be key to safeguarding the long-term stability of Islamic banks in Bangladesh.

Why Do People Still Prefer Islamic Banks?

One of the primary reasons Islamic bank deposits continue to grow, despite the scandals, is the strong religious sentiment among customers. Many people, especially older or retired individuals, prefer to bank with Shariah-compliant institutions to avoid earning interest, which is prohibited in Islam. This religious sentiment is particularly strong in Bangladesh, a country where the majority of the population identifies as Muslim.

In a recent interview, Mohammad Ali, Managing Director of Pubali Bank, noted that many customers, especially retirees, choose Islamic banks because of their religious beliefs. “For these customers, it’s not just about financial returns, but about ensuring that their money is being handled by their faith,” he explained. This preference for Shariah-compliant banking has helped Islamic banks maintain a steady flow of deposits, even when some of these institutions face allegations of irregularities.

The Expansion of Islamic Banking Services

Islamic banking in Bangladesh is not confined to fully-fledged Shariah-based banks. Many conventional banks in the country also offer Islamic banking services through dedicated Islamic windows or branches. This hybrid model allows customers to access Shariah-compliant financial services without having to entirely shift away from conventional banking systems.

The expansion of Islamic banking services has contributed significantly to the sector’s overall growth. As of June 2024, the total assets of the Islamic banking sector amounted to Tk 853,397 crore, a 5.18% increase from the previous month. This rise highlights the growing importance of Islamic banking within Bangladesh’s financial landscape, where total banking assets stand at Tk 2,062,853 crore.

This growth is not just limited to deposits and investments. The number of branches and service points offering Islamic banking products is also expanding, making these services more accessible to a larger portion of the population. As Islamic banking continues to grow, it is likely to play an increasingly important role in driving financial inclusion, particularly among rural and underserved populations.

The Rise of Agent Banking in Islamic Finance

One of the most promising trends in Bangladesh’s Islamic banking sector is the rise of agent banking. This model allows banks to extend their services to remote or underserved areas through local agents, providing customers with access to basic banking services without the need to visit a physical branch.

In June 2024, the total outstanding agent banking deposits in Islamic banks rose by 3.44%, reaching Tk 21,334 crore. Over the past eight months, agent banking deposits have shown a clear upward trend, indicating that more customers are using these services for their savings and transactions.

The rise of agent banking is a crucial development for the future of Islamic finance in Bangladesh. By making banking services more accessible to rural populations, Islamic banks are helping to promote financial inclusion and increase savings rates. This trend is particularly important in a country where many people still lack access to formal banking services.

The Future of Islamic Banking in Bangladesh

Despite the challenges posed by financial scandals and irregularities, the Islamic banking sector in Bangladesh continues to grow at a remarkable pace. The increase in Islamic bank deposits, investments, and remittances demonstrates the strong demand for Shariah-compliant financial services. Moreover, the rise of agent banking and the expansion of Islamic banking services through conventional banks further underline the sector’s importance.

However, the long-term stability of the Islamic banking sector will depend on how effectively it addresses its governance and transparency issues. Strengthening regulatory oversight and improving internal controls will be crucial to maintaining public confidence in these institutions.

As Bangladesh continues to develop its financial sector, Islamic banking will undoubtedly play a central role. With its ethical foundations and growing popularity among religiously observant customers, Islamic banking offers a viable and sustainable alternative to conventional banking. By addressing its current challenges and building on its strengths, the sector is well-positioned to continue its growth in the years ahead.

In the context of a predominantly Muslim country, Islamic banks remain a key financial service provider, with deposits continuing to grow, proving that faith-based banking still has immense value in today’s global economy.