Two private banks -- Standard and NRB Global -- is set to become full-fledged Shariah-based lenders as they step back from the crowded landscape of traditional banking.
This will take the total number of Islamic banks operating in the country to 10.
The decision came in yesterday’s meeting of the Bangladesh Bank board, said its spokesperson and executive director Md Serajul Islam.
“We are shifting towards Shariah-based lending from a place of ethics and deep belief,” said Khondoker Rashed Maqsood, managing director and chief executive officer of Standard Bank, which has been attempting to pivot to Islamic banking from 2009.
Transforming into a full-fledged Shariah bank would be challenging.
“Doing banking stocking to Islamic principles will be difficult, but we want to do it,” Maqsood added.
Shariah-based banking is progressively seeming attractive to regular banks given their lower statutory liquidity ratio and higher loan-deposit ceiling of 90 per cent. SLR is the reserve requirement that banks are required to maintain in the form of cash, gold reserves, central bank-approved securities before providing credit to the customers.
Islamic banks have to keep SLR of 5.5 per cent of their deposits, whereas for regular banks it is at least 13 per cent, as per regulations. To get in on the action, many regular banks opened Shariah-based services, such as Saadiq by Standard Chartered.
The other eight Islamic banks are: ICB Islamic, Islami, Shahjalal Islami, Sonali, First Security Islami, Exim, Al-Arafah Islami and Social Islami.
As of December 2018, all Islamic financial institutions combined had a deposit base of Tk 237,366 crore. Full-fledged Islamic banks accounted for 95 per cent of that amount.
Shariah-based banks’ net profit margin declined to 2.2 per cent in 2018 from 3 per cent a year earlier at a time when the banking sector’s rose, according to a study titled ‘Islamic Banking Operation of Banks-2018’.
Among other key financial indicators, the return on asset of the Islamic banks came down to 0.56 per cent in 2018 from 0.7 per cent a year earlier. The return on equity fell to 10.7 per cent from 13.1 per cent during the period, the study showed.
On the other hand, default loans increased to 4.79 per cent from 4.2 per cent in 2017, weakening the health of Islamic banks.
The Islamic banks seemed to have been involved in aggressive lending as their loans-deposit ratio climbed to 90.8 per cent in 2018 -- which is beyond the authorised limit -- from 87.8 per cent the previous year.
Of the eight full-fledged Islamic banks five had given out loans in breach of the ceiling.
Though the overall banking sector was going through a tight liquidity situation then, the market share of the Islamic banks improved to 8.54 per cent in 2018 from 7.47 per cent in 2017 in terms of excess liquidity.
However, Shariah-based banks saw a sharp fall in excess liquidity in the third quarter of 2018 because of aggressive investment to the point of violating the ceiling set by the central bank.