While Islamic banking is expanding despite the governance problems of some lenders led by the controversial S Alam Group, Bangladesh Bank Governor Ahsan H Mansur recently signalled that the government may create two Islamic banks by merging all existing ones.

He also stated that the country's Islamic banking sector would be completely restructured as most of the existing Islamic banks are currently in trouble.

Mansur shared the plan as the interim government has already approved the Bank Resolution Ordinance, 2025, with weak banks likely to merge or have their problems resolved under the ordinance.

Shariah-based banking has been gaining popularity in Bangladesh – even more so than conventional banking – but the sector faced an image crisis after S Alam Group took over several Islamic banks one after another.

In recent years, Standard Bank and Global Islami Bank converted from conventional to Islamic banking due to its growing popularity. Many conventional banks remain interested in converting to Islamic banks even though they already offer Islamic banking services through dedicated branches or windows.

Currently, there are 10 full-fledged Islamic banks in the country: Islami Bank Bangladesh, Al-Arafah Islami Bank, Social Islami Bank, Standard Bank, EXIM Bank, First Security Islami Bank, Shahjalal Islami Bank, Union Bank, Global Islami Bank, and ICB Islamic Bank.

At the end of last year, the total deposits of these 10 banks stood at Tk 385,250 crore while their total investments stood at Tk 486,500 crore.

Following the political changeover on August 5 last year, the central bank removed the family members of S Alam Group owner Mohammed Saiful Alam from six full-fledged Islamic banks that were under the control of the Chattogram-based business tycoon.

Most of these six banks, which suffered from massive irregularities, are now recovering financially. Among them, Islami Bank Bangladesh and Social Islami Bank are seeing a quick recovery from their liquidity crises.

In the Islamic banking sector, Shahjalal Islami Bank is in good financial health while the condition of Al-Arafah Islami Bank and Standard Bank is not bad either despite some lingering governance issues.

However, the chief executives of at least three Islamic banks told The Daily Star that merging all 10 Islamic banks to create two large institutions is not considered realistic.

They said two or three Islamic banks could be merged considering their financial health, and that the central bank governor's remarks caused concern among depositors.

Mustafa K Mujeri, executive director of the Institute for Inclusive Finance and Development (InM), said that bringing good governance and improving financial health are more important than reducing the number of banks.

He said that if the number of banks comes down without ensuring good governance, then the outcome will amount to nothing.

"The interim government and central bank should take initiatives to remove the existing problems of the banking sector and run it in the right direction, but we have not seen any visible improvement till now," said Mujeri, also the former chief economist of Bangladesh Bank.

He pointed out that problems in the Islamic banking sector are related to governance issues, which would not be solved if the government created two large Islamic banks by merging existing ones.

"Now the weak banks will have to strengthen instead of reducing the number because just reducing the number is not the solution," he said.

Mohammed Nurul Amin, independent director and chairman of Global Islami Bank, said that weak Islamic banks should be strengthened first and only then can they be merged. Otherwise, it will not bring any positive outcome.

"Now those types of banks will have to survive, then the government can merge them under the Bank Resolution Ordinance," he added.

The majority of Islamic banks are now undergoing asset quality reviews by global audit firms as part of the central bank's reform agenda. Following these reviews, some banks may be merged, as per industry insiders.