Islamic banks sanctioning loans in excess of deposits

Syful Islam The country's Islamic banks are facing a gap between their assets and liabilities as they disburse more money in the form of loans than what they could collect as deposits in recent months. This has been revealed in a recent policy paper, prepared by the Bangladesh Bank (BB). Besides, most Islamic banks are now depending on inter-bank deposits for expansion of business, which is widening their asset-liability mismatch, according to the central bank paper that has been prepared on the overall economic situation of seven shariah-based banks. The position paper will be submitted for discussion at the meeting of the parliamentary standing committee on the ministry of finance today (Sunday). The paper, prepared by the off-site supervision department of the central bank, reveals that three such Islamic banks out of a total of such have been sanctioning new loans in excess of the amount of their deposit collection. Statistics show that Social Islami Bank had a deposit growth of 38.97 per cent until October this year over that of December last year, but its loan sanctions shot up by a 45.92 per cent growth during this period. During the same time, the growth rates of First Security Islami Bank's deposit collection and loan sanctions stood at 23.90 per cent and 31.44 per cent respectively. Shahjalal Islami Bank's deposit collection during the same time witnessed a 23.85 per cent growth rate, while its loan sanctions expanded by 24.47 per cent growth during the same period. All these figures are noted in the position paper that is likely to be discussed at today's (Sunday's) meeting of the parliamentary standing committee on the ministry of finance. The paper notes that Islamic banks like EXIM, First Security, Shahjalal Islami and ICB Islamic Bank have become dependent on inter-bank deposit for meeting the needs for their credit expansion. The sanctioning of fresh loans by ICB Islamic Bank is not declining in accordance with the reduction of its deposit collection rate, the paper notes. However, the BB report stated that the deposit growth rate of Islami Bank and the Al-Arafah Islami Bank was moderately stable during the period under mention. It said the rate of deposit and credit growth of the Islamic banks came down within the limit of their credit deposit rate (CDR) in June 2011, following the directive issued earlier by the central bank, but the trend has turned otherwise in the subsequent months until October this year. The BB's paper mentioned that most investment-related activities of the Islamic banks are concentrated in apparel and textile sector. Of them, Islami Bank, Shahjalal Bank and First Security Bank have the highest amount of investment in the sector. The Islami Bank has 214.59 per cent, Shahjalal Bank has 168.64 per cent and First Security Bank has 198.01 per cent of their total capital invested in the apparel and textile sector. This can be risky for loan management, the BB noted in its report. According to its paper, the volume of newly classified loans of the Islamic banks stood at Tk 5.38 billion in 2010. During the January-June 2011 period, an additional amount of 'investment' to the tune of Tk 2.787 billion has become classified. "Classified loans of Al-Arafah Islami Bank, EXIM Bank, and Shahjalal Bank have increased during the period," it added. The paper noted that the situation of overall classified loans of the Islamic banks was still within the acceptable limit. But the classified loan of ICB Islamic Bank in June 2011 that stood at 60.82 per cent "is unusual". Due to the weak financial status, the ICB Islamic Bank has been listed as a 'problem bank' and its affairs are being monitored closely, it said, adding the Social Islami Bank has the highest classified amount of loans among the Islamic banks. The classified loans of Islami Bank has increased by Tk 295 million, Al-Arafah Islami Bank by Tk 149 million, Social Islami Bank by Tk 613 million, EXIM Bank by Tk 510 million, and Shahjalal Islami Bank by Tk 100 million in June 2011 over their respective corresponding amount in December 2010. The Social Islami Bank and Al-Arafah Islami Bank have been put under the 'early warning' list and their affairs are being closely monitored on a monthly basis. The country's seven banks operate as full-fledged Islamic banks while nine other banks operate as Islamic branches and yet nine more banks have Islamic banking windows.