Global rating agency Moody’s Investors Service has said that the conversion of two conventional banks into Islamic banks in Bangladesh is credit positive for the Islamic banking sector of the country.
It said that the recent in-principle approvals of the Bangladesh Bank to Standard Bank Limited and NRB Global Bank Limited to convert them into Islamic banks were credit positive for Islamic banks because their enlarged network would spur more demand for Islamic financial services.
‘A bigger Islamic banking presence will raise awareness among the Muslim-majority population on financial products that are Shariah compliant. The subsequent rise in demand is likely to outweigh the increased competition, which will in turn drive growth and profitability of the sector,’ Moody’s said in a research note on Monday.
It said that once Standard Bank and NRB Global Bank were converted into Islamic banks, the market share of Islamic banking in Bangladesh in terms of financing would rise to 27 per cent from 25 per cent based on September 30, 2019 position.
The number of Islamic banks in Bangladesh would also increase to 10.
There could be potential for further inorganic expansion, now that the central bank appears to be more open towards conversion, it noted.
Conventional banks want to be converted because of the regulatory relief and appeal of Shariah-compliant banking in the country.
Moody’s, however, said that Islamic banks in Bangladesh were beset with similar challenges as their conventional peers.
Asset risks are growing for Islamic banks as they are for conventional banks because of structural weaknesses, such as the prevalence of poor corporate governance and risk management, as well as a heavy concentration of lending to large companies.
Despite having the appeal and regulatory relief, Islamic banks have not been as profitable as their conventional peers because of their focus on short-term, asset-backed facilities that have lower yields and holding of Islamic government securities, which earn lower returns.
Islamic banks are not allowed to hold conventional government bonds, which are available with longer tenors and higher yields and also marketable for trading gains. Islamic government bonds do not offer these advantages.
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