In 2022, conventional banks in Bangladesh experienced slower profit growth compared to Sharia-based banks, primarily due to the lower interest rate environment. Financial reports indicate that the combined profits of 41 conventional banks, including state-run and foreign lenders, declined by 19% YoY to Tk 7,020 crore, while the profits of 10 Shariah-based banks surged by 26% to Tk 2,432 crore. The drop in conventional bank profits was primarily driven by National Bank, which incurred a loss of Tk 3,260 crore in 2022.
However, excluding this loss, conventional bank profits would have increased by 17%. The lower cost of funds for Shariah-based banks, coupled with the perception that they are interest-neutral, contributed to their higher profits. The interest rate cap of 9% imposed by the Bangladesh Bank since April 2020 has been advantageous for shariah-compliant banks, whose products and services are not based on interest rates. In contrast, traditional banks have faced challenges due to the narrowing of the spread caused by the interest rate ceiling. Despite facing liquidity constraints, shariah-based banks still managed to increase their profits, surprising industry experts. While Islamic banks operate based on deal-based investments rather than fixed interest rates, conventional banks have seen their net interest income shrink.
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