Islamic banks, once hailed as a fast-growing alternative to conventional finance, are facing a sharp erosion of public trust as depositors and overseas workers are moving their money elsewhere.
Fresh figures published by Bangladesh Bank on Wednesday show that deposits at Islamic lenders grew just 3.8 percent over the past year to Tk 4.54 lakh crore. Meanwhile, conventional banks expanded their base by 10.9 percent to Tk 15.68 lakh crore.
That divergence cut Shariah-based banks’ share of deposits to 22.5 percent, down from 23.6 percent a year earlier.
The central bank report directly linked the slowdown to mismanagement that came to light after last year’s regime change, noting that many customers “lost their trust in Islamic banks and thereby withdrew their deposits”.
The malaise runs deeper than savings as overseas workers’ remittances, a crucial source of foreign exchange, are flowing out of the sector.
In July, Islamic banks handled just $666 million in remittances, down from $764 million in late 2023, reducing their share to 27 percent from about 35 percent. On the other hand, conventional banks drew nearly thrice as much at $1.8 billion.
Export receipts tell a similar story as Islamic banks collected $771 million in July, up slightly from a year earlier, but still managed to secure less than a fifth of the total.
Imports were also dominated by conventional banks, which oversaw nearly four-fifths of the payments while Shariah-based lenders managed $1.18 billion, or about 21 percent.
On the balance sheet, Shariah banks continue to expand, but at a slower pace than their rivals. Their collective assets rose 11.1 percent over the year to Tk 9.29 lakh crore while that of conventional institutions advanced 16 percent to Tk 35.26 lakh crore.
Investments followed the same trend, with Islamic financing growing 10.4 percent to Tk 5.68 lakh crore compared to an increase of 11.5 percent at conventional banks.
The Shariah sector’s lending remains concentrated, with 43 percent tied to Bai-Murabaha contracts and more than a third funneled into trade and commerce, leaving lenders exposed to shocks among large conglomerates that dominate these industries.
Bai-Murabaha is a type of credit sale where a bank buys goods on behalf of a client and then sells them back at the original cost plus an agreed profit margin.
However, there are still bright spots. Islamic banks maintain a stronghold in rural finance through agent banking, holding 55 percent of the total deposits in that channel and growing faster than conventional competitors.
Yet, the overall picture is one of a sector under pressure.
Mohammad Abdul Mannan, former managing director of Islami Bank Bangladesh PLC, told TIMES of Bangladesh that Islamic banks built their reputation on Shariah principles and trust over decades.
“But today, entanglements with business conglomerates under political shelter have ruined the industry,” he said.
As a result, depositors and remitters alike are shifting their confidence – and money – to conventional lenders, Mannan added.
