Shariah-based banks see loan growth outpace deposits by ninefold in 6 months

Highlights:

• 10 Shariah-based banks' deposits rise by Tk2,808cr in Nov-April of FY24 while their loans surged by Tk25,790cr
• At April-end, total deposits of these banks stood at Tk3.83 lakh crore while total loans stood at Tk4.64 lakh crore
• Bank officials said deposits not growing due to reduced public confidence and inflation
• And, outstanding loan amount is increasing due to lack of instalment payments and added interest 

Shariah-compliant banks saw a more than ninefold increase in loan growth compared to their deposits from November 2023 to April 2024 of the last fiscal year. Officials attributed the decline in deposits to reduced public confidence and inflation.

According to central bank data, deposits in 10 Shariah-based banks increased by Tk2,808 crore over this period. In contrast, loans extended by these banks surged by Tk25,790 crore during the same timeframe.

As of the end of April this year, the total deposits of these banks amounted to Tk3.83 lakh crore, while total loans stood at Tk4.64 lakh crore.

The 10 Shariah-based Islamic banks are – Islami Bank, Al-Arafah Islami Bank, Social Islami Bank, Standard Bank, EXIM Bank, First Security Bank, Shahjalal Islami Bank, Union Bank, Global Bank and ICB Islamic Bank.

A managing director of an Islamic bank, who wished to remain anonymous, told TBS, "We are in a strong position regarding remittance income. Three Islamic banks collectively account for one-third of the total remittances into the country.

"However, we are not meeting our deposit targets. Deposit collection has declined since negative news about irregularities in loan disbursement by some Islamic banks was published in the media."

The official said, "Many customers have lost confidence in depositing money with us as they did before. But we are working to restore their trust."

When asked about the significant disparity between loan and deposit growths, he said, "We have not approved many fresh loans recently. However, we are not receiving regular instalments for many of our existing loans, which has caused our outstanding loan balance to increase."

The managing director also noted that if deposit growth were strong, there would be no concern about high loan growth.

Additionally, Islamic banking branches of conventional banks collected Tk4,507 crore in deposits and disbursed Tk3,325 crore in loans during the same period. In contrast, deposits and loans at the Islamic banking windows (also known as booths) inside conventional banks declined over the past six months.

"Many Islamic banks are currently facing a liquidity crisis. They are unable to properly maintain the Cash Reserve Ratio [CRR] and Statutory Liquidity Ratio [SLR]. As a result, the central bank has had to provide liquidity support to ensure these banks' transactions continue smoothly," said a senior central bank official.

The commercial and Islamic banks have to hold 4% of total deposits as CRR with the central bank. As well as, Islamic banks have to maintain 5.5% of deposits as SLR in the form of liquid cash, gold or other securities. 

It is basically the reserve requirement that banks are expected to keep before offering credit to customers. For conventional banks, the SLR ratio is 13%, according to the central bank.

Mentioning that many Islamic banks are currently unable to maintain the advance-to-deposit ratio (ADR) as required by regulations, the central bank official said, "These banks have already exceeded their lending limits, which is hindering their regular operations."

According to the central bank, conventional commercial banks are required to maintain an ADR of 87%, while Shariah-based banks must maintain 92%. This means that conventional banks can lend Tk87 and Shariah-based banks can lend Tk92 for every Tk100 in deposits.

Farman R Chowdhury, managing director of Al-Arafah Islami Bank, told TBS, "Many of our customers are withdrawing their deposits due to inflationary pressure, which is a major reason for the decline in deposits."

When asked why outstanding loans are increasing, he explained, "Banks charge interest [profit] quarterly. This added interest increases the outstanding loan balance. Additionally, banks are not receiving instalment payments regularly for many loans."