Islamic banks hold higher asset risks in Bangladesh

Shariah banks progressing fast in Bangladesh, Says Shahjalal Islami Bank MD

Staff Correspondent: The US-based credit rating agency Moody’s in their recent report stated that Islamic banks in Bangladesh have higher asset risks than conventional private banks because they have rapidly increased corporate exposure. They also mentioned that the loss buffers of Islamic banks were lower compared with those of conventional banks and also more vulnerable to a deterioration of asset quality.
The report came at a time when the market shares of Islamic banks, both in terms of assets and liabilities, are growing steadily, and banking activities are increasing compared to conventional banks of the country, this was stated by veteran banker and Managing Director of Shahjalal Islami Bank M. Shahidul Islam with media.
He said that Bangladesh Bank’s latest financial stability report reveals a contrasting picture. It says, “Islamic banks showed better performance compared to their conventional peers in terms of both classified-investment-to-total-investment ratio, and net-classified-investment-to-total-investment ratio in the year 2020, he added.
Shahidul Islam said, Islamic banking in Bangladesh has seen significant expansion and strong market demand. With its ‘equity-based and interest-free’ banking concept, the Shariah-based banking system is gaining popularity. The rating agency also agreed that as more traditional banks convert to Islamic banks, demand for shariah-based financing will continue to rise, he added.
The Shahjalal Islami Bank Managing Director said: Our bank’s financial health and other performance ratios, like those of other Islamic banks, do not reflect what the Moody’s report claims about heightened asset risks. We have a comprehensive business strategy that considers all economic elements as well as the country’s future business forecast, as well as our financial strength. We have a capital plan that is based on Bangladesh Bank policy, and we keep more capital on hand than is required.
“We have given special emphasis to the reduction of NPL. Again, we have a very stringent policy on investment and every proposal has been carefully analyzed before being approved by the competent authority. Furthermore, post investment monitoring of the accounts is in place”, the MD added.
Shahidul Islam said, since 2021, considering the uncertainty in business, we have decided to go slowly and cautiously to ensure good asset quality. We have also decided to diversify our business and want to see positive growth in the SME and retail segments. The management has given emphasis to supporting export-oriented and labor-intensive industries to support the country’s economic development, he also told.
Shahidul Islam opined that the Capital Adequacy Ratio (CAR) of our bank is 13.94 percent. CAR will reach 16 percent after issuing a perpetual bond of Tk. 500 crore. In the meantime, Tk 375 crore has been subscribed for the bond offered. We have invested 59 percent of our funds in the corporate segment. Our 36 percent investment has been made in the SME sector, while 5% has been invested in the consumer sector. Regarding investment exposure, we have taken the decision to maintain 50 percent of investible funds for the corporate segment, while the remaining 50 percent will be invested in all other segments.
He added: Our classified investment stands at 3.58 percent. We have strengthened our recovery department and put our best effort into reducing non-performing assets to an acceptable standard. The contribution of ShahjalalIslami Bank in facilitating export business is more than 5% of the total export sector of the country.
The Managing Director said: We have adopted a new strategy to improve our SME business. Now the investment officers physically visit the premises of the prospective customers and show the actual condition of the business through a video call. As such, the actual condition and investment requirements of the SME client could be assessed easily. At the moment, we are receiving 30-40 such investment proposals daily. The concerned officers are processing the files on a priority basis and giving quick disposals.
The Moody’s report mentioned that funding costs are higher for Islamic banks than for their conventional peers because of their greater reliance on costlier term deposits. However, ShahjalalIslami Bank has reduced high-cost deposits remarkably over the last 3 years. Earlier, our deposit mix was dominated by 78 percent high costs which has been reduced to 57 percent. Now our cost of funds is 3.37 percent.
Only a few private commercial banks have such low-cost funds. This deposit mix has a positive impact on the bank’s profitability. Besides, as per the report, Islamic banks as a whole have a lower leverage ratio, which is 4.2 percent in December 2020, while in the case of our bank, it is 5.29 percent against the BB set parameter of a minimum 3 percent. It indicates that ShahjalalIslami Bank is in better position and ahead in the industry in capitalization. It is also mentioned here that the bank also disbursed huge funds under stimulus packages set by Bangladesh Bank in CMSME to boost the economy.
Shahidul Islam said, “we are fortunate to have on our Board of Directors some of the country’s most prominent industrialists and businessmen. Furthermore, three well-known professionals are independent directors of the Board of Directors and play very important roles. The Board honors true professionalism, and management is free from any nepotism and influence.”