A glut of idle money and a concurrent investment holdup amid the pandemic hangover leave Bangladesh's Islamic banking sector in a quandary with excess liquidity in the vault, sources say.
They say the excess liquidity with the Shariah-based banks is growing by the day due mainly to lower demand for fresh investments because of the upset done by the Covid-19 pandemic.
Lack of investment opportunities like conventional banks has also pushed up surplus money in the Islamic banking sector, according to senior bankers.
Higher amounts of surplus funds are now eroding profitability of the Shariah-based financial intermediaries, they explained.
They also urged the policymakers to create investment opportunities only for the Islamic banks through introducing innovative financial products like Sukuk.
The Islamic banks are now allowed to invest their excess liquidity in the Bangladesh Government Islami Investment Bond (BGIIB).
Currently, two Islamic bonds - three-month BGIIB and six-month BGIIB - are in operation.
"But the returns on such investment are low," a senior official of a leading Islamic bank told the FE.
Evidently for religious taboos, the Islamic banks and non-banking financial institutions (NBFIs) cannot participate in treasury bills' auction and cannot buy any interest-bearing government bonds that involve receipt of interest.
Actually, the Shariah rules cannot permit payment or receipt of interest by any individual or institution.
The excess liquidity in the country's Islamic banking sector grew nearly 20 per cent in the second quarter (Q2) of the current calendar year amid the depressed demand for investment.
Surplus liquidity with the Islamic banking sector rose to Tk 363.65 billion as on June 30, 2021 from Tk 304.09 billion three months before, according to the central bank's latest statistics.
The excess liquidity of 10 Islamic banks, Islamic banking branches of conventional banks and Islamic banking windows of conventional banks stood at Tk 316.56 billion, Tk 21.00 billion and Tk 26.09 billion respectively.
"The Islamic banking sector has maintained a rising trend in excess liquidity in recent months following lower private-sector credit growth due to the ongoing Covid-19 pandemic," a senior official of the Bangladesh Bank (BB) told the FE while explaining the latest liquidity situation.
Meanwhile, all banks' excess liquidity hit an all-time high at Tk 2.32 trillion in June last following lower private-sector credit growth, caused by supply-chain disruptions amid the ongoing coronavirus pandemic, according to bankers and experts.
Expansionary monetary policy coupled with the implementation of government stimulus packages have also contributed to liquidity surging up in the banking system, they explained.
They also said higher inflow of inward remittances in the fiscal year (FY) 2020-21 has also pushed up the excess liquidity in the country's banking system.
At the end of June 2021, Bangladesh's 10 full-fledged Islamic banks had been operating with 1,569 branches out of total 10,788 of the whole banking sector.
Besides, 39 Islamic banking branches of eight conventional commercial banks and 194 Islamic banking windows of 13 conventional commercial banks are also providing Islamic financial services in Bangladesh, according to the latest report on Developments of Islamic Banking in Bangladesh, released by the central bank.
In Bangladesh, Islamic banking sector plays a significant role in mobilizing deposits and financing various economic activities.
Among different segments of Bangladesh's Islamic financial sector, Islamic banking sector dominates with more than 27-percent share of the entire banking sector, the report added.
"The other segments of Islamic financial sector such as Islamic capital market, Islamic insurance (Takaful) and microfinance sector may also flourish systematically if supportive policies are adopted and implemented," the BB says in the quarterly report.