Rising risks at 4th-gen, Islamic banks
Bangladesh’s banking sector is facing growing financial stability concerns as full-fledged Islamic banks and fourth-generation private commercial banks grapple with soaring default loans and mounting liquidity pressures, according to the latest Banking Sector Update released by Bangladesh Bank.
The report shows that both categories have emerged as the weakest segments of the banking industry, burdened by exceptionally high non-performing loans (NPLs), aggressive lending and deteriorating liquidity positions.
The central bank warned that, without prompt corrective measures, these vulnerabilities could pose broader systemic risks to the country’s financial sector and economic growth.
The NPL ratio of full-fledged Islamic banks surged to 58.4 per cent in March 2026, nearly doubling from 29.2 per cent a year earlier.
Fourth-generation private commercial banks—the nine lenders established in 2013—recorded the second-highest NPL ratio at 52.2 per cent, up from 44.4 per cent in March 2025
According to Bangladesh Bank, both groups are experiencing severe liquidity stress, driven by rapid credit expansion and elevated credit risk.
Full-fledged Islamic banks remained particularly exposed, with their Advances-to-Deposit Ratio (ADR) rising to 120.3 per cent in March 2026.
The average ADR of fourth-generation banks stood at 101.6 per cent, with several institutions recording ratios exceeding 100 per cent.
The central bank said these elevated ADRs reflected aggressive lending by fourth-generation banks as they expanded their loan portfolios rapidly.
Both groups recorded ADRs well above the banking sector average of 82.7 per cent, raising concerns over their liquidity positions.
The report noted that Islamic banks have long faced structural challenges, including limited liquidity management instruments and rapid credit expansion.
Last year, the government merged five financially troubled Islamic banks—First Security Bank, Global Islami Bank, Social Islami Bank, Union Bank and EXIM Bank—to establish Sammilito Islami Bank PLC, following acute liquidity shortages and alleged loan irregularities linked to the S Alam Group and Nazrul Islam Mazumder.
According to the report, the sharp rise in default loans among Islamic and fourth-generation banks points to weak credit discipline and possible shortcomings in corporate governance.
While the banking sector as a whole reduced its ADR to strengthen liquidity buffers, these two groups remained highly leveraged despite relatively sluggish deposit growth.
Other banking segments recorded comparatively stronger performance.
Second-generation private commercial banks maintained an NPL ratio of 19.2 per cent, while foreign commercial banks remained the strongest performers, reporting an NPL ratio of 6.3 per cent and an ADR of 53.4 per cent, allowing them to maintain comfortable liquidity buffers.
Bangladesh Bank warned that the combination of aggressive lending, rising bad loans and liquidity pressures at Islamic and fourth-generation banks poses a significant threat to the stability of the banking system.
The central bank stressed the need for urgent measures to reduce non-performing loans and bring ADRs back to prudent levels, cautioning that failure to address the weaknesses could evolve into wider systemic risks with adverse implications for financial stability and economic growth.
