The concept of Islamic banking was first put into practice in Egypt, an Arab nation. In the 1960s, several Islamic banks were established there, financing a specific class of capitalists who played a key role in shaping Egypt’s industrial sector.
By the 1970s and 1980s, Islamic banking had spread across the Muslim world. The core principle of this Shariah-based banking system was to prevent wealth from being concentrated in the hands of a few. To achieve this, Islamic banks extended their investments to marginalized communities. When Islami Bank Bangladesh was founded in 1983, it followed the same principle, helping create hundreds of thousands of new entrepreneurs. Many of them started small but later expanded into large conglomerates. However, the country’s largest Islamic bank has struggled to maintain its past success.
At present, not just Islami Bank Bangladesh PLC, but almost all Shariah-based banks in the country are in deep trouble. Due to poor governance, anonymous loans, and widespread financial irregularities, at least seven Islamic banks are in crisis. Unable to return depositors’ funds, these banks are now relying on loans from the central bank to stay afloat. Their lending (investment) activities have nearly come to a halt, and the process of fostering new entrepreneurs has stalled.
One of Islami Bank’s borrowers, Sirajus Salekin Chowdhury from Mohammadpur, Dhaka, shared his struggles with Bonik Barta. Explaining how he has been affected, he said, “We operate businesses in the agriculture and livestock sectors, and Islami Bank was our main investor. But for the past few years, we haven’t received any working capital. This has caused us financial losses. On top of that, wealthy economies in Europe, America, and Asia no longer accept LCs (letters of credit) from Islami Bank. Not being able to open LCs as needed has also hurt our business.”
Industry insiders say the downfall of Islamic banks has created a major crisis for domestic capital development. They see it as a direct result of financial irregularities and corruption over the past few years. Many businesses that were built with financing from these banks are now struggling due to a lack of working capital. Some factories have already shut down, and most Shariah-based banks lack the funds to make new investments. This has slowed down economic activity and blocked employment opportunities.
Besides Islami Bank Bangladesh, other Shariah-based banks in the country include Al-Arafah Islami Bank, Social Islami Bank, EXIM Bank, Shahjalal Islami Bank, First Security Islami Bank, Union Bank, Standard Bank, Global Islami Bank, and ICB Islamic Bank. Among them, six were controlled by S Alam Group, which had close ties with the ousted Prime Minister Sheikh Hasina. The only exceptions were Shahjalal Islami Bank, EXIM Bank, and Standard Bank. After the interim government took over, the boards of seven Shariah-based banks were dissolved by Bangladesh Bank.
According to central bank data, as of September last year, total deposits in Islamic banking stood at over BDT 4.36 trillion—about 25 percent of the country’s total banking sector deposits. At the same time, Islamic banks’ total lending (investment) amounted to BDT 4.70 trillion, accounting for 28 percent of all bank investments. This means the loan balance of these banks far exceeded their deposits.
Speaking to Bonik Barta, Islami Bank Bangladesh Chairman Obayed Ullah Al Masud reflected on the crisis. He said, “From its inception until 2016, Islami Bank operated properly. But after that, everything went wrong. One individual withdrew all the deposits collected from across the country, putting the bank in this dire situation.”
He further explained, “Thousands of industries in Bangladesh were built with financing from Islami Bank. But for the past few years, they haven’t received any working capital. Constructing a farm and buying cattle are project loans, but purchasing cattle feed requires working capital. If feed isn’t provided, the cattle will die—it’s as simple as that. Since taking charge, we have assured that once the crisis subsides, working capital will be restored. The initial shock has been managed, and we hope to resume Islami Bank’s investment activities in rural areas across the country.”
The liquidity crisis and stagnant investments in Islamic banks have had a direct impact on overall loan growth in the banking sector. In the first half of the current fiscal year (July-December 2024-25), the target for private sector loan growth was set at 9.8 percent. However, by the end of December, it had only reached 7.28 percent. This sluggish pace of lending to the private sector is still ongoing.
Beyond their core banking operations, offshore banking activities of Islamic banks have also come to a complete standstill. Over the past two years, most foreign banks have withdrawn their investments from the offshore units of these banks. Additionally, due to reputational concerns, many foreign banks are now refusing to issue Letters of Credit (LCs) for the country’s Shariah-based banks.
Anwar-ul Alam Chowdhury Parvez, President of the Bangladesh Chamber of Industries (BCI), told Bonik Barta, “Islamic banks generally have a greater capacity to lend compared to scheduled banks in proportion to their deposits. This allowed them to offer better benefits to customers. Now, if these banks collapse, their customers will bear the biggest losses. The downfall of Islamic banks has already created a crisis in domestic capital growth, and the situation could worsen. But ultimately, it is the customers who will suffer the most.”
He further emphasized that bank failures negatively affect the overall economy. “Looking at the current situation of Bangladesh’s Islamic banks, we could learn from other countries. In Vietnam and possibly Indonesia, asset management teams were formed to oversee troubled Islamic banks. A similar approach could be considered here,” he suggested.
Among Shariah-based banks, First Security Islami Bank, Union Bank, and Global Islami Bank were under the full control of S Alam Group. According to central bank data, more than 80 percent of these three banks’ total investments were taken by the group. A special audit has revealed that many of these loans were issued under fictitious names. After 2016, S Alam Group took control of Islami Bank Bangladesh and Social Islami Bank. The central bank’s audit found that S Alam Group withdrew nearly BDT 800 billion from Islami Bank under various names, while Social Islami Bank disbursed about BDT 100 billion to the group. Although S Alam Group had a stake in Al-Arafah Islami Bank, they were reportedly unable to secure anonymous loans from it.
Mohammad Abdul Mannan, Chairman of the newly restructured board of First Security Islami Bank, remarked, “Islamic banking is not just a procedural system; its purpose is far more important. However, most Shariah-based banks in this country were established either for business interests or outright exploitation. Many of the individuals who owned or managed these banks had no genuine understanding or commitment to Islamic banking. That’s why they had no ethical hesitation in misappropriating depositors’ funds.”
Reflecting on the past, he added, “Until January 5, 2017, Islami Bank maintained good governance, which helped it stay true to its founding principles. Under our leadership, millions of entrepreneurs emerged in this country. But when I was removed as MD and the board and management were reshuffled, the bank’s governance collapsed. What followed after that can hardly be called banking.”
Among Shariah-based banks, only Shahjalal Islami Bank managed to avoid unethical interference from the Sheikh Hasina government. As a result, it is currently in a better position than the other banks. Regarding this, the bank’s Managing Director, Mosleh Uddin Ahmed, told Bonik Barta, “Our sponsors were able to shield the bank from unethical interventions. While other Islamic banks are struggling with liquidity crises, we are not facing such issues. However, when the entire industry is under pressure, no bank can truly thrive. Despite our efforts, we haven’t been able to increase investments.”
Despite facing governance challenges in Bangladesh, Islamic banking remains one of the fastest-growing financial sectors globally. Compared to conventional banking, Shariah-based banking is expanding at nearly twice the rate. According to research by the Islamic Development Bank (IDB) and other international institutions, Shariah-based financial systems have grown at an annual rate of 17 percent since 2009. By the end of 2022, the total global assets in Islamic finance stood at $4.5 trillion. Projections suggest that by 2027, this figure will surpass $6.7 trillion.
Beyond Muslim-majority countries, Islamic finance products have gained significant traction in economic powerhouses such as the UK, China, and Hong Kong. Additionally, countries like Thailand and Sri Lanka have introduced separate laws specifically for Islamic banking.