What brought Islami Bank back to crisis?
Islami Bank’s renewed turmoil is not primarily a balance-sheet problem but a crisis of confidence. The rapid outflow of deposits underscores how governance disputes and uncertainty over control can destabilise even a recovering institution, offering a stark reminder that trust remains the most valuable asset in banking
The latest crisis at Islami Bank Bangladesh PLC is both surprising and troubling. Only a few months ago, the bank appeared to be slowly, though, moving in the right direction. After years of controversy surrounding ownership, governance failures and allegations of politically driven lending, confidence was gradually returning.
Deposits were growing again, liquidity pressures had eased, and fears of a bank run had largely subsided. Yet within a span of weeks, the country's largest Shariah-based bank has once again found itself dependent on emergency liquidity support from Bangladesh Bank, while its board has been dissolved and regulatory control heightened.
The immediate temptation is to view the episode as another case of financial weakness emerging from years of accumulated problems. However, that interpretation misses the central issue. Islami Bank's latest turmoil is not fundamentally a story of deteriorating asset quality or a sudden slide in its financial position. It is, above all, a crisis of confidence.
Banking is unlike most other businesses. A manufacturing company can continue operating despite criticism or uncertainty. A bank cannot. The banking business rests on trust. Depositors keep their money in a bank because they believe it will be safe and accessible whenever needed. Once that confidence weakens, even a fundamentally solvent institution can face severe liquidity pressure.
This appears to be precisely what happened at Islami Bank.
According to reports, nearly Tk9,300 crore in net deposits left the bank between June 1 and June 14. Such a large withdrawal cannot be explained by balance-sheet changes occurring over a few days. Rather, it reflects a sudden shift in depositor sentiment. Customers who had regained confidence in the institution once again became uncertain about its future.
The roots of that uncertainty lie in governance.
The leadership changes that followed the resignation of Chairman M Zubaidur Rahman reopened questions that many believed had already been settled. The appointment of former deputy governor Md Khurshid Alam as chairman and the resignation of Managing Director Omar Faruk Khan created a fresh power struggle at the top of the bank. What followed was an increasingly public dispute involving competing groups, protests and demands regarding who should lead the bank.
Banking is unlike most other businesses. A manufacturing company can continue operating despite criticism or uncertainty. A bank cannot. The banking business rests on trust. Depositors keep their money in a bank because they believe it will be safe and accessible whenever needed. Once that confidence weakens, even a fundamentally solvent institution can face severe liquidity pressure.
For ordinary depositors, such developments send a deeply negative signal. Most depositors do not analyse financial statements or capital adequacy ratios. They observe events and draw conclusions. When they see uncertainty surrounding leadership and control, they naturally become concerned about the safety of their savings.
The problem was compounded by broader questions regarding the future ownership and governance structure of the bank. Since the removal of the controversial influence associated with the S Alam Group, many depositors had believed that Islami Bank was entering a period of institutional normalisation. Confidence slowly returned because customers felt the bank would be managed under a more transparent and accountable framework.
However, recent developments appear to have revived fears that competing interests were once again attempting to influence the bank's direction. Whether these perceptions were entirely justified is less important than the fact that they existed. In banking, perception often becomes reality. Once rumours and uncertainty begin to circulate, depositors tend to act first and seek explanations later.
The role of the Bangladesh Bank also deserves careful examination. As the regulator, the central bank is responsible not only for maintaining financial stability but also for preserving public confidence in the banking system. The decision to provide emergency liquidity support and dissolve the board may have been necessary to prevent a wider panic. Early indications suggest that withdrawal pressure has already eased following these interventions.
Yet emergency support should not be mistaken for a solution. Liquidity assistance can address immediate funding shortages, but it cannot rebuild confidence on its own. Confidence returns only when stakeholders believe that governance is stable, leadership is credible and institutional decisions are free from undue influence.
This episode should therefore be viewed as a warning for the entire banking sector. Bangladesh's financial system is already burdened by record levels of non-performing loans, weak credit growth and lingering concerns about governance standards. In such an environment, confidence becomes an especially valuable asset. Once lost, it is expensive and time-consuming to restore.
The fundamental lesson from Islami Bank's latest crisis is that banking institutions cannot become battlegrounds for competing political, ideological or vested interests. Governance uncertainty carries real economic costs. The bank had been showing signs of recovery. Depositors were returning and confidence was improving. Unfortunately, a series of avoidable developments reversed much of that progress within days.
Rebuilding trust in the banking sector remains one of Bangladesh's most important economic challenges. Islami Bank's experience demonstrates once again that while financial capital can be injected overnight, confidence cannot. It must be earned patiently, protected carefully and never taken for granted. The political regime has to take very careful cognisance of it.
Mamun Rashid is a banker and economic analyst.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
