“The Islamic banking sector in Bangladesh is a major a part of the nation’s wider banking sector however continues to face liquidity challenges,” Fitch Rankings Inc mentioned
The Fitch Rankings brand is seen at their places of work at Canary Wharf monetary district in London,Britain, March 3, 2016. REUTERS/Reinhard Krause
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The Fitch Rankings brand is seen at their places of work at Canary Wharf monetary district in London,Britain, March 3, 2016. REUTERS/Reinhard Krause
The Islamic banking sector in Bangladesh continues to face liquidity challenges, US credit standing company Fitch Rankings Inc mentioned not too long ago.
“The Islamic banking sector in Bangladesh is a major a part of the nation’s wider banking sector however continues to face liquidity challenges,” Fitch Rankings mentioned on Tuesday (12 September).
“Nonetheless, liquidity is bettering, underpinned by central financial institution assist within the type of the Islamic Financial institution Liquidity Facility and Mudarabah Liquidity Help, and still-notable public demand for Islamic deposit merchandise,” it added.
In line with Fitch Rankings, Islamic banks held 25.3% of all home trade deposits at end-1H23, albeit down from 28.2% at end-1H22.
“Islamic banks confronted sizable buyer deposit outflows in 2022-1H23 and decrease liquidity buffers than typical banks amid studies of mortgage irregularities. Islamic banks’ extra liquidity – outlined as whole money reserves minus required reserves with the central financial institution – declined considerably by 66.6% yoy (BDT9.82 billion) at end-1H23,” it added.
“Nonetheless, extra liquidity has since improved with a 12.7% quarterly rise. In distinction, deposit progress is slowing. Islamic banks’ whole deposits grew by solely 3.8% yoy as of 1H23; a major fall from the 12% yoy progress of 1H22,” the ranking company mentioned.
It mentioned Islamic banks’ vulnerability to short-term liquidity challenges is demonstrated by the autumn within the liquidity protection ratio (LCR) to 87.7% at end-2022 (end-2021: 188.5%), under the regulatory requirement of 100%.
Typical banks had satisfactory liquidity profiles, with an trade common LCR of 154%.
Fitch Rankings mentioned Bangladesh had the eighth-largest Islamic banking market globally at end-2022, with whole belongings of Tk4,970.7 billion ($45.3 billion), forward of Indonesia, Bahrain, Pakistan, Egypt, Jordan and Oman, primarily based on knowledge from the Islamic Monetary Companies Board.
“The market share, primarily based on trade loans, is rising and reached 29.1% at end-1H23 (end-1H22: 28.5%),” it added.
It mentioned the trade has important untapped potential, as 62% of the Bangladeshi inhabitants doesn’t have an account at a monetary establishment – whether or not typical or Islamic – in response to 2021 World Financial institution knowledge.
“Bangladesh has the third-largest Muslim inhabitants globally, with sizable segments being sharia-sensitive,” Fitch Rankings mentioned.
“Many typical banks are growing their providing of Islamic merchandise, both via opening new Islamic branches or home windows, or by changing into full-fledged Islamic banks. That is pushed by buyer demand and extra lax prudential necessities. Islamic branches and home windows of typical banks are increasing, with an 8.2% share of Islamic banking deposits as of end-1H23 (1H22: 7.1%), with the remaining 91.8% held by full-fledged Islamic banks,” it added.
The ranking company additional mentioned: “Islamic banks in Bangladesh can obtain buyer deposits primarily based on both mudaraba (a profit-and-loss sharing contract) or wadiah (a safe-keeping contract). Mudaraba-based deposits accounted for greater than 85% of buyer deposits at Islamic banks at end-1H23.”
Fitch hasn’t noticed Islamic banks passing on losses or not paying income to depositors.
“Passing losses can enhance reputational danger and will result in buyer deposits outflows,” it added.
Fitch additionally expects Bangladesh Financial institution wouldn’t let depositors’ naked losses as this could shake investor confidence within the banking system. Financing primarily based on revenue and loss (mudaraba and musharaka) was lower than 1% of whole financing.
Inexperienced financing accounted for 3.7% (Tk157.18 billion, or $1.4 billion) of all financing offered by Islamic banks at end-1H23, it mentioned.
“The Islamic finance trade in Bangladesh continues to face key structural impediments. These embrace a scarcity of sukuk and different sharia-compliant funding choices, gaps in human capital growth, a scarcity of unified shariah rulings, and an Islamic finance regulatory framework that requires an replace. On the whole, the banking sector’s steadiness sheets, governance and regulatory high quality are weak. The central financial institution has taken steps to enhance governance at public-sector banks, together with the appointment of observers to financial institution boards, however progress has been sluggish,” Fitch Rankings mentioned.
“The sukuk market is nascent, with excellent volumes of Tk180 billion ($1.6 billion) as of end-1H23. The takaful sector accounted for 14% of Bangladesh’s insurance coverage market as of end-2022, forward of Jordan (13%), Egypt (13%), the UAE (8%) and Tunisia (5%),” it additional added.
