Shariah-based banks saw a sharp fall in excess liquidity in the third quarter of last year because of aggressive investment to the point of violating the ceiling set by the central bank.
Between the months of July and September the excess liquidity of the Islamic banking industry shrank 19.54 percent to Tk 5,202 crore from the previous three months, according to data from the Bangladesh Bank.
The loan-deposit ratio surged to 97 percent during the quarter, which is way above the authorised limit of 90 percent.
Of the eight full-fledged Islamic banks five had lent breaching the ceiling.
The eight banks are Islami Bank Bangladesh, Exim, First Security, Al-Arafah, ICB Islamic, Social Islami, Shahjalal Islami and Union bank.
Save for Islami Bank Bangladesh, Al-Arafah and ICB Islamic, all lent above and beyond their loan-deposit ratio ceiling.
“Over-investment ate up the excess liquidity,” said Mohammed Haider Ali Miah, managing director of Exim Bank, a full-fledged Shariah-based lender.
Banks have now put the brakes on their lending after the central bank asked them to bring down their loan-deposit ratio to 89 percent from March. Islamic banks have never faced liquidity shortage, according to Miah.
“Rather, we faced excess liquidity as we cannot invest in government treasury bills and bonds.”
However, introducing an Islamic bond could be an alternative in future.
The Islamic banks' credit base expanded 14 percent year-on-year to Tk 220,343 crore in the third quarter of 2018 against its deposit base of Tk 227,814 crore, which grew 11.67 percent.
Their share of excess liquidity accounted for 6.45 percent of the banking sector's total surplus funds during the quarter.
As of September 2018, Islami Bank Bangladesh holds the largest share of deposits amongst the Shariah-based lenders: of 35.31 percent. The bank saw a 27.5 percent fall in excess liquidity to Tk 947 crore during the quarter, according to central bank data.
Apart from the eight full-fledged Islamic banks, there are 19 Islamic banking branches of nine conventional banks and 25 Islamic banking windows of seven conventional banks.