Liquidity in Shariah-based banks in Bangladesh is facing significant challenges, according to a report by Moody’s Investors Service. The liquidity stress is due to a decrease in deposit collection and the inability of these banks to effectively utilize central bank support. This liquidity shortfall is seen as a credit negative issue as it may lead to difficulties in meeting short-term obligations.
The central bank data reveals that the investment (loan)-to-deposit ratio for Islamic banks increased from 94 percent to 101 percent in June, indicating persistently tight liquidity conditions. Although all 10 full-fledged Islamic banks met regulatory liquidity requirements at the end of 2022, four of them did not have sufficient liquidity six months later.
The excess liquidity in the sector decreased by 66.59 percent year-on-year in June, primarily due to settlements of letters of credit for importers and increased demand for credit amid slow deposit growth. High inflation has also reduced households’ capacity to save, leading to a slowdown in deposit inflows. The inflation rate in Bangladesh rose to 9.7 percent in June 2023, making it unattractive for savers to park their funds in the banking sector, as the weighted average deposit rate remained in negative territory.
The central bank introduced two liquidity facilities in December 2022 and February 2023 to assist Shariah-based banks in addressing their fund crisis. However, these measures may not provide substantial relief because Islamic banks have limited assets available as collateral to access these facilities.
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