Forced Merger of Five Shariah Banks in Bangladesh Faces Daunting Challenges

Bangladesh Bank’s plan to merge five struggling Islamic Shariah-based banks into a single state-owned entity is being hailed as a bold move to stabilise the country’s banking sector. However, experts warn that the initiative faces immense challenges and could take years before yielding meaningful results.

The five banks—First Security Islami Bank, Union Bank, Global Islami Bank, Social Islami Bank, and Exim Bank—are in deep crisis, with non-performing loans (NPLs) reaching a staggering Tk1,47,000 crore, or 77 percent of their total loans. Union Bank tops the list, with an almost complete default ratio of 98 percent.

Depositors’ funds are effectively frozen, and the banks are relying heavily on massive support from the central bank to remain afloat.

“The biggest challenges are recovering stolen assets, securing skilled management, and ensuring political interference does not derail the process,” said Dr Zahid Hussain, former lead economist at the World Bank’s Dhaka office. He added that forged documents and the smuggling of assets abroad further complicate recovery efforts.

Forced mergers in Bangladesh also differ significantly from international norms. Dr Fahmida Khatun, Executive Director of the Centre for Policy Dialogue, explained: “Globally, weak banks merge with stronger banks after thorough audits. A forced merger risks worsening the crisis, although it may protect depositors’ money.”

The merger process is expected to be costly. Bangladesh Bank estimates the expense at Tk35,000 crore, with Tk25,000 crore coming from the national budget and Tk10,000 crore from the Deposit Insurance Trust Fund. Legal amendments are required to allow the use of public funds for this purpose.

S&P Global Ratings has warned that structural problems will continue to pressure Bangladesh’s banking sector until at least 2026. Persistent issues include high credit risk, fragmented operations, executive failures, and weak lending standards.

The merger is also facing resistance from some banks, particularly Exim Bank and Social Islami Bank, whose directors and shareholders have petitioned to be excluded. Concerns over potential branch closures and job losses persist, though Bangladesh Bank has promised new rural branches and local reinvestment of deposits to minimise layoffs.

With capital shortfalls, soaring bad loans, and political sensitivities, the path to a successful merger is fraught with obstacles. Experts say it may take several years before the new bank stabilises, leaving depositors, employees, and the broader financial system in a state of uncertainty.

Latest data from Bangladesh Bank underscores the dire situation. Combined deposits of the five banks fell to Tk1,36,546 crore in May, down from roughly Tk1,59,000 crore a year ago, while total loans surged to Tk1,95,413 crore.

The most alarming aspect is the skyrocketing default ratios. Non-performing loans now total Tk1,47,000 crore, or 77 percent of total loans. Union Bank’s NPL stands at nearly 98 percent, followed by First Security at 96 percent, Global Islami Bank at 95 percent, Social Islami Bank at 62 percent, and Exim Bank at 48 percent.

A substantial portion of customer deposits is effectively stuck in defaults, leaving the banks struggling to repay depositors. They have received thousands of crores of taka in special assistance from the central bank and face a massive provision shortfall of Tk74,501 crore.