Islamic Banks Face Confidence Crisis Amid Deposit Decline

Bangladesh’s Islamic banking sector has come under renewed pressure as instability affecting several Shariah-based banks has begun to weigh on deposits, foreign trade transactions and remittance inflows. During the first quarter of 2026, the sector recorded declines in deposits, export earnings, import settlements and inward remittances, reflecting weakening customer confidence despite its continued importance within the country’s financial system.

According to banking industry officials, prolonged governance concerns, undue interference in bank management, mounting non-performing loans and sustained deposit withdrawals have significantly eroded public trust in several Islamic banks. Those challenges are now becoming increasingly visible in financial indicators released by Bangladesh Bank.

The central bank’s latest quarterly report shows that total deposits held by the Islamic banking system stood at Tk 479,935 crore at the end of March 2026, down by Tk 1,256 crore from the end of December 2025. On a year-on-year basis, however, deposits still recorded growth of 8.35 per cent, indicating that the sector remains considerably larger than it was a year earlier despite recent setbacks.

Islamic banks continue to play a substantial role in Bangladesh’s banking industry. They currently account for 23.62 per cent of the country’s total banking deposits and nearly 30 per cent of outstanding loans and investments, underscoring their systemic importance.

Total investment and financing by Islamic banks increased to Tk 526,889 crore by the end of March, representing a quarterly rise of Tk 1,818 crore. The sector now accounts for 29.9 per cent of total banking sector credit.

Despite the increase in financing, liquidity indicators have weakened. Bangladesh Bank reported that the Investment-to-Deposit Ratio (IDR) declined to 0.90 at the end of March from 0.94 three months earlier. Excess liquidity also fell to Tk 19,204 crore, compared with Tk 19,392 crore during the corresponding period a year earlier, representing a reduction of Tk 188 crore. The figures suggest that liquidity pressures remain despite emergency support measures.

The central bank attributed the strain to heavy deposit withdrawals from several Islamic banks, rising volumes of defaulted and weak assets, and structural limitations in Shariah-compliant short-term liquidity management. To ease the pressure, Bangladesh Bank has provided emergency liquidity assistance to a number of Islamic banks while also working to establish an Islamic interbank money market, a move expected to strengthen liquidity management across the sector in the future.

Foreign trade activities conducted through Islamic banks also weakened during the January-March period. Export proceeds handled by the sector amounted to Tk 30,321 crore, marking a decline of 3.84 per cent compared with the previous quarter. Import settlements dropped even more sharply, falling 11.51 per cent to Tk 41,596 crore.

Remittance inflows through Islamic banks also declined during the quarter. The banks collected Tk 25,011 crore in expatriate earnings, down 9.18 per cent from the previous quarter. Even so, Islamic banks continued to channel 20.54 per cent of Bangladesh’s total remittance inflows, highlighting their enduring significance for overseas income transfers.

Sectoral investment data indicate that large industries remained the biggest recipients of Islamic bank financing, accounting for 39.97 per cent of total investments. The trading sector followed with a 33.12 per cent share. By contrast, agriculture, fisheries and forestry together received only 1.82 per cent of total financing, while Cottage, Micro, Small and Medium Enterprises (CMSMEs) accounted for 7.43 per cent.

Agricultural financing, however, recorded notable progress during the quarter. Investment in agriculture rose to Tk 17,980 crore by the end of March, an increase of approximately Tk 2,640 crore from the previous quarter. Achievement against the sector’s financing target improved to 93.37 per cent.

Growth also continued in several priority financing segments. Green finance expanded to Tk 19,772 crore, financing for women entrepreneurs reached Tk 5,571 crore, while Islamic microfinance increased to Tk 7,655 crore, reflecting continued efforts to support sustainable development and financial inclusion despite broader sectoral challenges.

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

Employment in the sector reached 48,935 people by the end of March. Even so, total staffing was 3,296 lower than the corresponding period in 2025, indicating continued operational adjustments within the industry.

Bangladesh Bank believes that restoring public confidence will require stronger corporate governance, greater accountability and improved asset quality management. The regulator has also encouraged Islamic banks to expand services in rural areas, increase financing for agriculture and small businesses, and place greater emphasis on genuine profit-and-loss sharing (PLS)-based investment models that align more closely with Shariah principles.

Economist M Helal Ahmed, Research Fellow at Change Initiative, said the decline in deposits, remittances and foreign trade reflects a broader loss of confidence among customers and businesses. He argued that governance weaknesses and liquidity concerns have prompted many depositors and exporters to shift their banking relationships elsewhere in search of greater stability and more efficient international transaction services.

Ahmed also said he believes Shariah-based banks have suffered significant damage over the past decade and a half. In his view, rebuilding confidence will require credible and effective boards of directors, greater transparency regarding financial conditions, liquidity and governance standards, and the establishment of professional bank management free from political influence.

Responding to concerns, Bangladesh Bank spokesperson and Executive Director Arif Hossain Khan said fluctuations in quarterly deposit figures are common across the banking sector and should not be viewed as unusual. He stressed that variations in deposits occur regularly from one reporting period to another and do not, by themselves, indicate a systemic crisis.