Islamic banks’ excess liquidity drops 88% amid deposit concerns

Excessive liquidity held by 10 Islamic banks in the country declined by about 88% to Tk2,493 crore at the end of June this year as compared to the same period a year ago, suggesting that these banks are attracting fewer deposits in relation to their investments.

Nonetheless, the volume of excess liquidity in these banks saw an upsurge of about Tk500 crore in the April-June period of this year compared to the previous March quarter. 

Meanwhile, when considering the Islamic windows of commercial banks, data from the Bangladesh Bank has revealed a year-on-year decrease of 67% in excess liquidity within the Islamic banking industry.

Sources familiar with this matter informed The Business Standard that the excess liquidity situation in Islamic banks has seen minimal improvement over the past two months.

Overall, the entire banking sector has witnessed a notable reduction in excess liquidity over the past year. According to central bank data, excess liquidity in the country's banks decreased by 18% to Tk1.66 lakh crore at the end of June this year compared to Tk2.03 lakh crore a year ago.

Excess liquidity is calculated after maintaining the required Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR). Banks are obligated to maintain 4% CRR of total deposits in cash form and 13% SLR in non-cash form with the Bangladesh Bank.

A senior official of the central bank explained that a bank's excess liquidity depends on its deposit collection and loan disbursement. Excess liquidity decreases when a bank receives fewer deposits and disburses more loans or investments.

According to a report from the central bank, deposits in Islamic banks increased by approximately Tk15,700 crore in the past year as of June, while these banks disbursed loans or investments exceeding Tk39,000 crore. 

Bankers assert that this disparity is a major factor contributing to the reduction in excess liquidity.

Sector insiders said that negative news reports in various media outlets about Islamic banks have led to a decrease in deposits since last December. In contrast, the banks did not reduce lending during this period, resulting in a rapid decline in excess liquidity. 

Some of these banks have been facing penalties from the central bank for failing to maintain adequate CRR and SLR for the past few months.

Anis A Khan, former chairman of the Association of Bankers, Bangladesh (ABB), told TBS that deposit growth in the country's Islamic banks has been slow due to an erosion of confidence among the public in these banks, which is the main reason for the decline in excess liquidity in these banks.

Zafar Alam, managing director and CEO of Social Islami Bank, told TBS that Islamic banks are making efforts to rebuild customer confidence and increase excess liquidity. 

He noted that few customers are coming to their bank to encash checks or withdraw deposits, and in the last 6-7 months, they have opened around 4 lakh new bank accounts. He expressed optimism about gradually overcoming the crisis.

Unlike deposits, remittance inflows through the Islamic banks witnessed substantial growth over the past year.

According to the data from the central bank, the growth of incoming remittances through Islamic banks was 42% at the end of the June quarter. Banks received remittances of Tk22,192 crore in the June quarter, up from Tk15,717 crore in the same quarter of 2022.

Industry stakeholders said a major part of this growth is due to the rise in the price of the dollar. During April-June last year, the dollar was Tk86.45-93.45. The dollar price for remittances rose nearly 20% to Tk107-108.50 in the June quarter of this year. Apart from this, some banks collected remittance dollars at higher prices than the price fixed by ABB and Bafeda, contributing to the rise in their remittance income.

Zafar Alam of Social Islamic Bank told TBS that his bank has taken many steps to increase remittance receipts. 

"We have held promotional meetings with remitters in many countries including the United Arab Emirates, Singapore, and Malaysia. Besides, we are giving the opportunity to the remitters to get transport facilities inside Dhaka or treatment at a hospital under the bank at a low cost."

A senior official of another Islamic bank admitted to collecting remittances at higher rates and told TBS, "Everything is not always in our hands. In the current situation, importers are facing trouble opening letters of credit (LCs) due to a shortage of dollars. Sometimes they pressure us to manage dollars by collecting remittances at a higher rate. In these cases, considering the long-term relationship, we have to collect dollars and pay them at a higher price."