The country’s Islamic banks once had a large presence in the call money market for providing liquidity support to other banks, but now they are borrowing from the central bank as well as the call money market.
According to a recently published report, titled “Bangladesh Government Securities Report for FY23”, by the central bank, the Bangladesh Bank (BB) provided Tk 96,241 crore liquidity support in the last seven months (December-June) of the FY2022-23.
The report highlighted that in FY23, BB provided Tk 96,042 crore and Tk 199 crore through the Islamic Banks Liquidity Facility (IBLF) and Mudarabah Liquidity Support (MLS), respectively.
Earlier, the Islamic banks never fell into a liquidity crisis and never had to take any such support from the central bank. However, in 2022, along with the aforementioned two methods, BB also formed a special fund to provide liquidity support to the Shariah-based banks.
According to the BB report, to support liquidity management and strengthen the financial system, on December 5, 2022, BB introduced IBLF for Shariah-based banks. The tenure of IBLF is 14 days and underlying eligible securities are unencumbered Bangladesh Government Investment Sukuk.
Later, on February 5, 2023, BB introduced 7, 14 and 28 days collateralised MLS for the Islamic banks in Bangladesh.
A central bank official, requesting anonymity, told The Business Post that Islamic banks used to dominate the call money market earlier. But now all banks are in a liquidity crisis and demand has increased in the call money market. So, BB has to provide liquidity support to the banks.
Regarding the issue, Zahid Hussain, the former lead economist of World Bank’s Dhaka Office, said, “These Shariah-based banks have been suffering liquidity crisis since 2022 due to many irregularities in them. BB has failed to stabilise this problem in these banks as well."
He pointed out that the question should be raised as to why these banks are borrowing from the central bank. BB has to identify the key reason for the liquidity crisis of such banks, instead of supporting them.
At the end of FY2020-21, the excess liquidity position of the Islamic banks was at Tk 36,365 crore. But at the end of FY23, this amount declined to Tk 8,690 crore.
This excess liquidity position has been declining since then and stood at Tk 7,767 crore at the end of the first quarter (July-September) of FY2023-24.
In the case of full-fledged Islamic banks, this excess liquidity came down to only Tk 1,073 crore in July-September of FY24. This amount was Tk 31,655 crore at the end of FY21, which was the highest in recent years.
Another BB official said that the liquidity crisis in Islamic banks could be happening due to three reasons. First, many irregularities have taken place in these Shariah-based banks, like loans taken by many influential people have not been repaid.
Second, deposit withdrawals from these banks increased last year following multiple loan scams. Third, loan recovery by the banks has declined, said the official.
As a result, these banks have been suffering from a liquidity crisis for the last two years. Moreover, these banks failed to maintain the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) since 2022, said the official.
Meanwhile, liquidity support demand has increased, pushing the call money rate up to 9.57 per cent as of January 23. The rate has already crossed the SLF rate as well.
On January 22 alone, the central bank provided Tk 19,026.61 crore liquidity to the conventional and Shariah-based banks with an 8 to 9.5 per cent interest rate.
Asking not to be named, another senior official of BB told The Business Post that these banks are still getting loans from the regulator against the T-Bills for short terms.
