Bangladesh Bank has warned that full-fledged Islamic banks and fourth-generation private commercial banks are facing mounting financial stress as soaring default loans and worsening liquidity shortages push the two segments into the highest-risk category within the country’s banking sector.

According to the central bank’s latest Banking Sector Update, the non-performing loan (NPL) ratio of full-fledged Islamic banks climbed to 58.4% at the end of March 2026, nearly doubling from 29.2% a year earlier.

The report also showed that the NPL ratio of the country’s nine fourth-generation private commercial banks, which began operations in 2013, rose to 52.2% from 44.4% over the same period.

Bangladesh Bank attributed the deteriorating financial health of these banks to excessive lending and weak credit risk management, which have also intensified liquidity pressures.

At the end of March 2026, the advance-to-deposit ratio (ADR) of full-fledged Islamic banks stood at 120.3%, while the average ADR of fourth-generation banks reached 101.6%. Several banks recorded ADRs above 100%, indicating that loans exceeded customer deposits.

By comparison, the banking sector’s overall ADR was 82.7%, reflecting a relatively healthier liquidity position.

The central bank said Islamic banks have long struggled with structural weaknesses, rapid loan expansion, and limited liquidity management capacity. It added that the sharp rise in default loans points to weak credit management, inadequate governance, and growing operational risks.

Last year, amid a severe liquidity crisis and alleged loan irregularities involving the S. Alam Group and businessman Nazrul Islam Mazumder, five troubled Islamic banks—First Security Islami Bank, Global Islami Bank, Social Islami Bank, Union Bank, and EXIM Bank—were merged to form Combined Islami Bank PLC.

While liquidity conditions have improved in parts of the banking sector, Bangladesh Bank noted that slow deposit growth continues to keep Islamic and fourth-generation banks under significant pressure.

In contrast, second-generation private commercial banks reported an NPL ratio of 19.2%, while foreign commercial banks remained in a much stronger position with an NPL ratio of 6.3% and an ADR of 53.4%, indicating ample liquidity.

The central bank warned that rising default loans and excessive lending in Islamic and fourth-generation banks pose a significant threat to the stability of Bangladesh’s banking sector. It urged banks to strengthen risk management, reduce ADRs to prudent levels, and take immediate steps to contain bad loans to prevent broader financial instability and adverse impacts on economic growth.