A New Reality in Islamic Banking in Bangladesh: Changing Customer

Following the political transition in 2024, Bangladesh’s banking sector experienced a severe crisis of confidence.

The situation was particularly acute among several Shariah-based banks, where governance failures, irregularities, liquidity shortages and concerns over the recovery of depositors’ funds triggered panic withdrawals. Several bank chairmen and directors also left the country, further weakening public confidence.

Yet an important transformation has emerged from this crisis: customers are not abandoning Islamic banking—they are changing institutions. Many depositors who withdrew funds from vulnerable Islamic banks moved to relatively stronger conventional banks but continued to choose Islamic banking branches or windows. This suggests that demand for Shariah-compliant financial services remains strong. What has changed is the customer’s expectation: Shariah compliance must now be accompanied by good governance, transparency, liquidity and deposit security.

Deposits Declining at Full-Fledged Islamic Banks

According to Bangladesh Bank data, deposits in full-fledged Islamic banks remained around Tk 4 lakh crore through much of 2024 and 2025 but declined to approximately Tk 3.9 lakh crore by June 2026. Deposit growth also turned negative, reaching around minus 1.07 percent in June 2026.

The decline coincided with revelations of large-scale irregularities, weak investment quality, governance problems and liquidity pressures. These developments demonstrate that depositor confidence depends not only on the Shariah identity of a bank but also on the quality of its management and financial discipline.

At the same time, Islamic banking branches and windows of conventional banks experienced remarkable growth. Deposits in these channels increased from around Tk 37,000 crore in March 2024 to approximately Tk 78,000 crore by June 2026, more than doubling in just over two years.

The message is clear: the market for Islamic banking remains resilient, but customers are becoming more selective about where they place their money.

Four Decades of Islamic Banking

Islamic banking in Bangladesh began in 1983 with the establishment of Islami Bank Bangladesh, supported by the Islamic Development Bank. Over the following four decades, institutions such as Al-Arafah Islami Bank, Social Islami Bank and Shahjalal Islami Bank entered the sector, while EXIM Bank and First Security Bank converted from conventional to Islamic banking. Union Bank, Global Islami Bank and Standard Bank subsequently joined the full-fledged Islamic banking segment.

Between 2016 and 2026, Islamic banking deposits increased approximately two and a half times, while investments grew nearly fourfold. This expansion demonstrates strong public demand, but rapid investment growth also highlights the importance of due diligence, asset-quality assessment, risk management and corporate governance.

Islamic Banking: Philosophy Versus Practice

The fundamental philosophy of Islamic banking goes beyond simply avoiding interest. It encompasses justice, transparency, risk-sharing, asset-based financing, ethical investment, Shariah compliance and social welfare.

In principle, financing should be linked to genuine economic activity, with banks acting as responsible financial partners rather than merely providers of funds. Mudarabah and Musharakah embody risk- and profit-sharing principles, while Murabaha provides an important asset-based financing mechanism.

However, questions remain about how closely some practices reflect this underlying philosophy. When Murabaha transactions are executed in ways that leave the bank with minimal genuine asset risk, the structure can resemble conventional debt financing in economic substance.

Therefore, the future of Islamic banking cannot be judged simply by whether transactions are labelled “interest-free.” The more fundamental question is whether the ethical, economic and social objectives of Shariah are reflected in actual banking practices.

The Cost of Weak Governance

Irregularities that surfaced during the 2010s and intensified in later years significantly damaged confidence in parts of the Islamic banking sector. Bangladesh Bank appointed observers to several banks in 2022 amid concerns over governance and investment irregularities.

Deposit growth, which exceeded 20 percent in 2021, fell below 3 percent in 2022. At the same time, surplus liquidity declined sharply between the end of 2022 and early 2024.

These developments demonstrate that a banking crisis is rarely just a liquidity problem. It is ultimately linked to investment quality, governance, management capacity, regulatory oversight and public confidence.

Sammilito Islami Bank: A Major Test of Reconstruction

The formation of Sammilito Islami Bank PLC through the merger of First Security Islami Bank, Social Islami Bank, Union Bank, Global Islami Bank and EXIM Bank represents one of the most significant restructuring initiatives in Bangladesh’s banking sector.

Established under the Bank Resolution framework, the bank began with paid-up capital of Tk 35,000 crore, including Tk 20,000 crore from the state and Tk 15,000 crore attributed to depositors.

However, the merger itself is only the beginning. The real challenge lies in recovering non-performing investments, investigating irregularities, valuing assets properly, integrating operations and technology, managing human resources and rebuilding customer confidence.

The bank has reportedly initiated thousands of legal recovery cases and is pursuing recovery through exit policies and Alternative Dispute Resolution (ADR). Forensic investigations into past irregularities and asset misappropriation are also part of the restructuring process.

The ultimate objective must be to transform restructuring into recovery and recovery into sustainable confidence.

A New Opportunity for Conventional Banks

The crisis has simultaneously created a growing market for Islamic banking within conventional institutions. Currently, 17 conventional commercial banks operate 49 Islamic banking branches, while 12 banks operate 632 Islamic banking windows.

NCC Bank, for example, has announced plans to convert 20 conventional branches into full-fledged Islamic branches. Other conventional banks have also sought approval to introduce Islamic banking services.

This growing competition can benefit customers if banks compete on more than deposit mobilisation. The real competition should be based on Shariah compliance, service quality, transparency, technology, risk management, governance and customer protection.

What Do Customers Really Want?

The most important lesson from recent developments is straightforward:

Customers want Islamic banking—but they do not want weak banks.

They want Shariah-compliant products alongside secure deposits. They want profits with transparent accounts. They want Islamic values together with modern technology and efficient service. They expect religious principles to be supported by strong governance and accountability.

Therefore, the Islamic banking sector of tomorrow cannot succeed by being merely “Shariah-compliant.” It must also be well governed, transparent, financially secure, technologically capable and competitive.

The current crisis should not be viewed as the end of Islamic banking in Bangladesh. Rather, it offers an opportunity to reassess the sector and rebuild it on stronger foundations.

The future leaders of Islamic finance will be institutions that can combine Shariah, sound governance, financial discipline, transparency and genuine economic value creation.

Ultimately, Islamic banking in Bangladesh is not merely fighting to survive a crisis. It has an opportunity to build a more credible, just and sustainable financial system.

The greatest capital for Islamic banking in this new era will not be money—it will be the trust of the customer.

About Author: Md. Khairul Hasan, CSAA is an Islamic Banker and Financial Sector Analyst