The Islamic banking sector in Bangladesh has witnessed remarkable growth over time. Currently, ten fully – fledged Islamic banks operate in the country. Some were established as Islamic banks from the start, while others made the transition from conventional banking models. Moreover, numerous conventional banks have expanded their services by offering Islamic banking through specialized windows or branches. This sector has played a crucial role in the nation’s economy, facilitating the flow of funds, generating employment opportunities, and investing in real – economic sectors, thus becoming an integral and systemically important part of Bangladesh’s economic framework.
However, in recent years, the Islamic banking sector has been grappling with severe governance challenges. Shariah compliance and overall governance have emerged as major concerns. The situation reached a critical juncture when the Bangladesh Bank, the country’s central bank, revealed that eight out of the ten Islamic banks were in a precarious financial state, facing a severe liquidity crisis. These banks also struggled with weak Shariah governance and insufficient corporate governance, particularly in their investment decision – making processes. In response, the Bangladesh Bank has implemented various initiatives to support these ailing banks. These include providing liquidity facilities and reforming their boards of directors. Despite these efforts, the banks continue to face financial hardships and a significant lack of public trust, with only slow progress being made in improving the situation.
Against this backdrop, the governor of the central bank has proposed a radical solution: merging all ten Islamic banks into just two. This proposal has sparked intense debate and raised a fundamental question: will this merger effectively address the deep – seated governance issues plaguing the industry? There are several critical aspects that need to be carefully considered before moving forward with such a decision.
Firstly, there are concerns regarding systemic risk and market concentration. Consolidating ten banks into two would lead to a highly concentrated banking industry. The two resulting banks would command a substantial market share, effectively becoming “too big to fail.” This could potentially increase systemic risk, unless robust governance measures are simultaneously strengthened to match the growth in size. Secondly, Shariah compliance and market competition could be negatively impacted. With fewer banks in the market, competition may be stifled, which could in turn compromise Shariah compliance. Depositors and investors who are drawn to Islamic banking due to their faith – based principles would have limited options if governance issues persist. Additionally, the employment and economic impact cannot be ignored. The ten existing Islamic banks contribute significantly to employment, both directly and indirectly. A merger could limit future job creation in the banking sector and pose a risk of layoffs among current employees.
Furthermore, governance standards are at stake. Weaker Islamic banks often have subpar governance cultures, which could potentially undermine the higher governance standards of stronger banks during a merger, leading to a dilution of overall quality. Complex Shariah governance issues also arise. Different banks have variations in their Islamic banking products and interpretations of Shariah laws. Combining all these products under two merged entities would exacerbate these challenges. Finally, public trust and the future growth of the sector are at risk. Over the past four decades, the Islamic banking sector has painstakingly built a foundation of public trust. Reducing the number of players to just two could send a negative signal about public trust and the industry’s overall efficiency.
While mergers can offer benefits such as economies of scale, enhanced oversight, and improved expertise, in the case of Bangladesh’s Islamic banks, the potential drawbacks of merging ten banks into two may far outweigh the advantages. It seems unlikely that this merger will resolve the existing governance issues. Instead, a more focused approach should be adopted. This could involve the central bank providing more dedicated supervision, mandating external Shariah audits, and creating provisions for expert Shariah scholars to join the Shariah boards of Islamic banks, all with the aim of improving Shariah governance.
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