Islamic banking, once considered the dominant force in Bangladesh's deposit market, are increasingly losing customers to conventional banks as depositors prioritise higher returns, financial security and institutional stability over religious considerations.
For years, Islamic banks and Islamic banking attracted a large share of middle-class savers and expatriate Bangladeshis through their Shariah-compliant banking model, interest-free operations and comparatively strong customer service. Their steady growth allowed them to emerge as some of the country's strongest deposit collectors.
But that dominance has weakened sharply over the last two years as private conventional banks intensified competition by offering significantly higher interest rates on fixed deposits, DPS and savings schemes at a time when liquidity shortages have deepened across the banking sector.
Recent financial data show that several conventional banks are now offering around 9 to 10 per cent interest on one-year fixed deposits, with some institutions offering even higher returns for corporate or large deposits. Analysts say the widening gap in returns is prompting many depositors to gradually shift funds away from Islamic banking.
Among the major conventional lenders, BRAC Bank is offering around 9.5 per cent interest on one-year FDRs, while Dutch-Bangla Bank PLC offers nearly 9.75 per cent and Mutual Trust Bank PLC around 10 per cent. City Bank PLC and Eastern Bank PLC are offering approximately 9.25 per cent.
In contrast, most Islamic banks remain within the 8 to 9 per cent range on one-year Mudaraba deposits. Islami Bank Bangladesh PLC is offering around 9 per cent, while Islamic banking operations of Prime Bank and EXIM Bank are providing returns between 8 and 9 per cent. Some schemes under IFIC Bank's Islamic banking wing are offering considerably lower returns.
Economist Mazadul Haque said Islamic banking operates under structural limitations that make it difficult to compete aggressively with conventional banks in terms of returns.
"Islamic banking is not aggressive. They cannot generate profit the way conventional banks do. Conventional banks earn guaranteed income through interest-based lending, which increases their earnings cycle," he said.
Banking experts explained that Islamic banks distribute profits through Mudaraba or profit-sharing arrangements instead of paying fixed interest. As a result, returns for depositors depend directly on the actual income generated from Shariah-compliant investments. When investment earnings decline, deposit profits also fall.
Analysts say Islamic banks also tend to avoid high-risk sectors and invest in relatively safer businesses to maintain Shariah compliance. While this approach offers greater stability and lower exposure to speculative risks, it often limits profitability compared with conventional banks that can pursue more aggressive lending strategies.
Liquidity stress has further worsened the situation for several Islamic banks. Over the last few years, a number of institutions have faced severe liquidity shortages amid governance failures, irregular lending and declining public confidence.
Islami Banking analyst Sakhawat Hossain said the crisis deepened after financial controversies linked to the Islamic banks owned by S Alam Group.
"Due to unlimited corruption linked with the Group, deposits in some Islamic banks have almost dried up. Many banks are now struggling even to meet daily operational expenses," he said.
Industry insiders say operational costs are also comparatively higher for Islamic banks because they require separate Shariah boards, compliance systems, audits and specialised contractual structures. These additional costs reduce the amount of distributable profit available for depositors.
Another major challenge is the limited scale of Islamic banking divisions operating within conventional banks. Since many function as relatively small wings inside larger interest-based institutions, their opportunities for Shariah-compliant investment remain restricted.
Despite mounting pressure, Islamic banking officials insist that the sector should not be evaluated solely on the basis of profit rates.
A senior official of a leading Islamic bank said the core objective of Islamic banking is to establish a fair and interest-free financial system rather than maximise financial returns.
"We do Shariah-based banking. Although competition in the market is increasing, we have policy limitations. Still, we are trying to provide maximum benefits to customers," the official said.
However, analysts believe customer behaviour is changing rapidly as economic uncertainty grows and liquidity concerns intensify across the banking sector.
A former official of Bangladesh Bank said Islamic banks historically relied heavily on customers' religious sentiment, but depositors are now becoming increasingly pragmatic.
"But now customers are also comparing returns and financial strength. Competition has become much tougher," he said.
Experts say depositors, particularly those aged between 40 and 60, are now prioritising stable monthly income, financial security and institutional credibility over purely religious preferences. The rising cost of living and inflationary pressure have also made higher deposit returns more attractive for middle-income savers relying on interest or profit income.
The tightening monetary policy adopted by Bangladesh Bank has further intensified competition for deposits. As policy rates increased and liquidity shortages deepened, banks began offering increasingly attractive returns to secure stable funds.
A treasury head of a private bank said deposit retention has become one of the sector's biggest challenges.
"Banks facing liquidity pressure are forced to offer higher interest rates to attract customers," he said.
Trust issues are also playing an increasingly important role in shaping depositor behaviour. Reports of delayed cheque clearances, restrictions on cash withdrawals and deteriorating customer service at some Islamic banks have fuelled concerns among clients.
Mohammad Nasir Uddin, a retired government employee from Mirpur, said he recently transferred part of his savings from an Islamic bank to a conventional bank after becoming worried about uncertainty in the sector.
"Now the most important thing is whether the money is safe and return is good" he said.
Banking analysts warned that unless Islamic banks ensure more return, restore transparency, strengthen governance and rebuild public confidence, they may continue losing deposits despite maintaining strong religious appeal among a large section of Muslim customers.
