Why do Islamic banks face huge liquidity challenges?

Five Shariah-based banks are still experiencing a liquidity crisis despite significant support from the central bank, which hit the overall surplus cash situation in the Islamic banking system in the July-September quarter.

The five Islami banks are — Islami Bank Bangladesh, Social Islami Bank, First Security Islami Bank, Union Bank, and Global Islami Bank.

At the end of September, Islami Bank Bangladesh’s liquidity shortfall stood at Tk 658 crore, Social Islami Bank’s Tk 1,059 crore, First Security Islami Bank’s Tk 826 crore, Union Bank’s Tk 483 crore, and Global Islami Bank’s shortfall amounted to Tk 465 crore, a Bangladesh Bank report said.

However, Shahjalal Islami Bank had Tk 2,526 crore excess liquidity in the September quarter.

The surplus was Tk 127 crore for Al-Arafah Islami Bank and Tk 1,178 crore for Exim Bank.

As per rules, banks have to keep a certain amount of deposit with the central bank every night in the form of CRR.

They also have to keep a minimum percentage of customers’ deposits in the form of liquid cash, gold or other securities overnight, which is known as SLR.

For Islamic banks, the minimum CRR requirement is 4 per cent of cash and the SLR requirement is 5.5 per cent of deposits.

If they fail to meet the targets, the BB imposes a penalty, which is 9 per cent and 8.5 per cent of the shortfall for the day. Amid the lingering deficit, the central bank has continued to provide liquidity support to the five banks.

Islamic banks were sitting on huge excess liquidity two to three years ago.

Now, the sector is going through challenges due to the massive loan irregularities at the five banks.

With bad loans, political interference in the largest Sariah bank, bad governance, and misappropriation before the central bank’s nose or nudge, the banking sector is undergoing the worst time.

How unaccountable governments spoil established institutions could be best exemplified by the nose dive of Islami Bank Bangladesh.