Global banking rests on a single axiom: trust. Depositors must believe their money is safe and can be reclaimed when needed — a confidence that sustains the entire system. In Bangladesh, however, that trust has largely crumbled, and the disarray in the country’s Shariah-compliant banks has shaken the sector’s foundations.
A cascade of scandals, irregularities and shocks over recent years has forced the country’s Shariah banking segment into retreat. Central bank data show its share of total deposits has contracted from 27 percent four years ago to 23 percent in March. Its role in foreign trade and remittance flows has suffered a sharper blow: Shariah-based banks handled about 55 percent of all remittances in 2023 but command only 20 percent today. The stock and ratio of non-performing loans at these banks, meanwhile, are climbing.
Deposit balances in Bangladesh’s Shariah-compliant banking system have also begun to decline this year. At the end of December last year, deposits in such banks stood at BDT 4.81 trillion. The figure slipped to BDT 4.79 trillion by March — a reversal from the uninterrupted growth and expanding foreign trade the segment had posted since the 1980s, when Islamic banking was first introduced in the country.
Economists and sector observers say the loss of public confidence in Shariah-based banking will be hard to repair quickly. Most banks in the segment now face effective insolvency, with many of their clients searching for safe investment havens or deposit alternatives. Those who strictly observe Islamic precepts will not turn to interest-based banking. Experts warn that if many turn away from the banking system altogether, it could create a fresh economic crisis.
The Bangladesh Bank’s recent sukuk auction reflects this growing trend among customers for Shariah-compliant investment products. The central bank offered short-term, 273-day lease sukuk bonds for the first time. Bids exceeded the target by more than tenfold. Against a target of BDT 55 billion, purchase applications totalled BDT 566.07 billion.
Mohammad Muslim Chowdhury, a former finance secretary and comptroller and auditor general, views the rush into sukuk as evidence of enduring public trust in Shariah-compliant finance. He told Bonik Barta: “Despite paying higher interest, savings certificates aren’t attracting buyers. Yet investors are flocking to sukuk. That says a large segment of the population has faith in Shariah-based finance. There’s a huge consumer base for Islamic banking here. The distressed condition of the banks has shattered that confidence. In the current environment, the government and the central bank must act quickly to stabilise the Islamic banks. Otherwise, these customers will turn away from the banking system entirely, which would inflict an even greater shock on the economy and the financial sector.”
The practical application of Islamic banking originated in the Arab Republic of Egypt, where several Shariah-compliant lenders took shape in the 1960s. Their financing fostered the rise of a distinct capitalist class, whose investments subsequently built the foundations of Egypt’s industrial sector.
Islamic banking then spread across the Muslim world in the 1970s and 1980s. Bangladesh established its first Islamic bank in 1983. The institution helped create several hundred thousand new entrepreneurs — many starting on a very modest scale and later evolving into the country’s largest conglomerates. But the bank, now the nation’s largest, could not sustain that record of success.
Much like Islami Bank Bangladesh PLC, almost every Shariah-compliant bank in the country is now mired in multiple crises. Severe governance failures, anonymous lending and graft have crippled at least seven banks in the segment. Unable to repay depositors, they are surviving on central bank borrowing. Lending has virtually ceased, which has brought the entire pipeline for creating new entrepreneurs to a standstill.
The collapse of the Shariah-compliant banks has triggered a serious crisis for domestic capital formation, people familiar with the sector say. Enterprises that once grew on their financing no longer receive working capital. Many factories have already shut, starved of funds for daily operating costs. Most of these banks now have no resources left for fresh investment.
Alongside Islami Bank Bangladesh PLC, the country’s Shariah-compliant lenders include Al-Arafah Islami Bank, Social Islami Bank (SIBL), Exim Bank, Shahjalal Islami Bank, First Security Islami Bank, Union Bank, Standard Bank, Global Islami Bank and ICB Islamic Bank. Six of these were controlled by the S Alam Group, a conglomerate close to now-ousted prime minister Sheikh Hasina. Only Shahjalal Islami Bank, Exim Bank and Standard Bank remained outside its grip. After the former interim government that succeeded the Hasina-led government took office, Bangladesh Bank dissolved the boards of eight Shariah-compliant banks.
Central bank data at end-March showed Islamic banking deposits at BDT 4.79 trillion, equivalent to 23.62 percent of the sector total. Investments (loans) stood at BDT 5.26 trillion, or 29.10 percent. Outstanding credit far exceeds the deposit base. Most of these banks have virtually stopped lending over the past three years. Much of their loan portfolio has turned non-performing, leaving little or no recovery. As unpaid interest or profit continues to accrue, outstanding loan balances keep rising. Customers are simultaneously pulling out their deposits, even though most banks are now unable to repay them.
The S Alam Group exercised full control over First Security Islami Bank, Union Bank and Global Islami Bank. Central bank figures show the group took more than 80 percent of the total financing extended by these three lenders. Special audits traced the loans to a network of anonymous entities. After 2016, the group seized control of Islami Bank Bangladesh and Social Islami Bank. Central bank audits found the group extracted roughly BDT 800 billion from Islami Bank Bangladesh alone, under both real and fictitious names. It took another BDT 100 billion from Social Islami Bank.
The former interim government later moved to merge Exim Bank, First Security Islami Bank, Social Islami Bank, Union Bank and Global Islami Bank into a single entity — Sammilito Islami Bank. The new institution — yet to begin operations — has non-performing loans at BDT 1.65 trillion, equivalent to more than 84 percent of its total disbursed credit. The bank has effectively inherited the full burden of five Shariah-based banks crippled by irregularities and corruption.
Islami Bank Bangladesh had started to recover after a board reconstitution in the wake of the 2024 mass uprising. But fresh turbulence erupted recently over the appointment of its chairman and a further board restructuring, triggering more than BDT 150 billion in deposit withdrawals. To maintain liquidity, the country’s largest bank borrowed BDT 130 billion from the central bank.
Md Altaf Hossain, Islami Bank Bangladesh’s acting managing director, claimed the situation had stabilised. “Our transactions are back to normal now. Over the past week we’ve managed without central bank support. Many depositors who withdrew funds are now returning. Once Sammilito Islami Bank gets on its feet, the entire Shariah banking segment will turn around.”
Bangladesh Bank publishes a quarterly report on Islamic banking in the country. The March edition, released Wednesday, records 1,700 branches operated by the ten full-fledged Shariah banks. Another 17 conventional banks run 49 dedicated Islamic banking branches, while 21 lenders offer Shariah-compliant services through 976 Islamic windows. Some of the deposits withdrawn from Islami Bank Bangladesh and the five banks merged into the Sammilito Islami Bank have flowed into Islamic windows and dedicated Islamic banking branches operated by conventional banks. Yet the central bank report shows deposit balances in these windows also declined during the January to March period this year.
Professor M Kabir Hassan of the University of New Orleans, a regular commentator on Islamic finance in Bangladesh and abroad, told Bonik Barta: “The expansion of Shariah banking in Bangladesh was driven by the success of Islami Bank Bangladesh. Conventional banks converted into fully-fledged Islamic banks, but the conversion was in name only. Some entrepreneurs used the Shariah label purely for personal gains.”
Professor Hassan argues for preserving the Shariah-compliant banking system for the sake of the country’s economy. “A large segment of the population wants to remain within the Islamic banking framework,” he said. “It’s not possible to advance the economy while keeping these banks weak. The government and Bangladesh Bank must decide pragmatically. I believe the banks in this sector can recover.”
The domestic crisis obscures a broader reality: Islamic banking remains a growth story globally. Studies by the Islamic Development Bank and other international bodies show Shariah-compliant finance has grown at an annual rate of 17 percent since 2009. Global Islamic finance assets stood at $4.5 trillion at the end of 2022 and are projected to surpass $7.5 trillion by 2028. Islamic banking assets alone could reach $5.2 trillion. Beyond Muslim-majority countries, Islamic finance products have gained wide traction in markets such as the United Kingdom, China and Hong Kong. Thailand and Sri Lanka have also enacted dedicated legislation for Islamic banking.
Bangladesh Bank spokesperson and executive director Arif Hossain Khan said the central bank was doing everything it could to restore depositor confidence in the country’s Shariah-compliant banks. He told Bonik Barta: “A new chairman and managing director have been appointed at Sammilito Islami Bank. We are working to get it operational as quickly as possible. Islami Bank Bangladesh PLC has also begun to recover. We expect customer confidence in the Shariah banking system will strengthen further.”