Al-Arafah Islami Bank financial analysis: 17.5% NPI, BDT 53.9bn deferred provisions, sponsors back (Oct 2026)

Investment considerations: a deposit franchise that held, under a provision hole twice the size of equity

Al-Arafah Islami Bank PLC (AIBL) is a full-fledged Shariah bank set up in 1995 and listed on the DSE and CSE since 1998. It takes Mudaraba (profit-sharing) and Al-wadeeah (current) deposits and finances customers through Bai-Murabaha, Bai-Muazzal, hire purchase and Musharaka, under a Shariah Supervisory Committee [1 p.23]. It has 226 branches and two capital-market subsidiaries [1 p.23]. At December 2025 the group had BDT 486bn of deposits, BDT 498bn of investments (financing) and BDT 645bn of assets [1 p.12].

The bank was one of the S. Alam-linked banks whose boards Bangladesh Bank (BB) reconstituted after August 2024 [7] [8]. What the 2025 accounts show is the cost of that period being recognised: classified investments of BDT 88.5bn (17.5% of the book), a required provision of BDT 69.8bn against BDT 19.9bn held, and a BB permission to defer the whole BDT 53.9bn shortfall [1 p.2] [1 p.3]. The auditor states that, had the bank provided in full, the year's after-tax loss would have been BDT 53.1bn and CRAR would be negative [1 p.3]. In July 2026 BB returned the board to the founding sponsors [9] [11].

What drives returns to shareholders here is not the usual mix of growth and payout. Earnings quality is low: 2025 profit exists only because BDT 53.9bn of required provisions were deferred, and the auditor adds a further BDT 0.41bn of overstatement [1 p.3]. Cash conversion of booked income is fine, above 100% of investment income [16], but the non-performing part of the book books no income at all. Capital allocation is constrained by a CRAR below the minimum, so retained profit goes to capital, not to growth; and payout is zero for 2024-2025 and, for cash, ruled out by SPCD C06 from FY2026 [6 p.1]. The shareholder's outcome therefore depends on three things the filings let us track: how much of the BDT 88.5bn classified book the sponsors recover in cash, how fast BB requires the deferral to be booked, and whether new capital comes in and at what price.

The story: steady until 2023, then a governance shock that surfaced BDT 88bn of bad financing

For most of its history AIBL was a mid-sized, steadily profitable Islamic bank. Between 2019 and 2023 it earned BDT 2.1-2.6bn a year, ROE was 8-10%, classified investments stayed at 3.8-6.8% and it paid 10-15% cash dividends [5 p.18] [4 p.17]. Growth was funded by Mudaraba deposits; investments grew faster than deposits, and the bank's own IDR measure rose from 86.9% (2020) to 91.6% (2024), close to the 92% cap [4 p.17].

The board was linked to the S. Alam group. After the change of government in August 2024, BB reconstituted the AIBL board on 3 September 2024, together with other S. Alam-controlled banks [7] [8]. Asset quality then broke: classified investments rose from BDT 30.9bn (6.76%) at end-2023 to BDT 74.1bn (15.14%) at end-2024 [4 p.39], and to BDT 88.5bn at end-2025 [1 p.45]. Rescheduled investments rose from BDT 37.4bn to BDT 61.9bn during 2024 [4 p.38].

In July 2026 BB reconstituted the board again, this time with representatives of the founding sponsors. The board went from five to 19 members, and the five independent directors stayed; Bangladesh Bank's order was reported on 15 July [9] [10] [11]. Prothom Alo reported that effective control passed to the Chattogram-based KDS Group, and that two KDS nominees could not take their seats because of the Bank Company Act limit on directors from one family or group [12]. The share price rose 7.45% on the news [13].

AIBL was not one of the five Islamic banks merged into Sammilito Islami Bank in December 2025, where shareholders were written to zero, and we found no T2 report of a merger or resolution plan for AIBL. The return of the board to sponsors, which BB tied to improved finances [9], points the other way. The resolution tools remain available to BB as long as the capital shortfall persists.

For context, the Islamic banking segment split sharply after 2024. Five listed Islamic banks were merged into Sammilito Islami Bank in December 2025 with their shareholders written to zero, Islami Bank Bangladesh is under a BB administrator, and only a handful operate normally. AIBL sits between the two groups: its deposit base held and its accounts show a profit, but its provision and capital gaps are of the same kind that preceded the resolutions elsewhere. The difference so far is that BB chose forbearance and a sponsor return rather than a merger [9] [1 p.3].

Asset quality: NPI 17.5% and a BDT 53.9bn deferred shortfall that exceeds equity

At December 2025 classified investments were BDT 88.5bn: sub-standard BDT 6.9bn, doubtful BDT 9.9bn and bad/loss BDT 71.7bn, on gross investments of BDT 504.6bn, a ratio of 17.54% [1 p.45] [16]. BB's letter puts the NPI ratio at 17.16% on its own basis [1 p.2]. The auditor notes that classified investments rose by BDT 19.7bn during 2025 counting the BDT 5.2bn written off [1 p.3]. The mix worsened: bad/loss was 74% of NPI in 2024 and 81% in 2025 [16], which is why the required provision is so large.

BB inspectors and the external auditor set the required provision at BDT 69.8bn; the bank holds BDT 19.9bn, so BDT 50.0bn is unprovided [1 p.46]. Adding BDT 3.9bn for other assets, non-banking assets, placements with banks under liquidity stress and gratuity, BB allowed the bank to defer BDT 53.9bn [1 p.3]. Provision held actually fell in 2025, from BDT 22.6bn to BDT 19.9bn, because fully provided investments were written off (BDT 5.25bn per the auditor) and no new specific provision was charged [1 p.52]. At March 2026 the required figure was BDT 62.4bn and the deferred amount BDT 41.9bn [3 p.35]; we have not found the June 2026 figure in the half-year notes.

Stated factually: booked standalone equity of BDT 24.2bn less the BDT 53.9bn deferred shortfall gives BDT -29.7bn, or BDT -25.8 a share, before any tax effect [1 p.17] [16]. The auditor's own measure is that full provisioning would have produced a 2025 loss after tax of BDT 53.1bn [1 p.3]. The deferral is a regulatory forbearance, not a recovery; it changes when the loss reaches the income statement, not whether the loans are collectable.

Capital: CRAR 10.72% against 12.5%, and negative once deferred provisions count

Solo CRAR fell from 15.31% (2021) to 12.13% (2024) and 10.72% (2025), against 12.5% required with the conservation buffer [4 p.39] [1 p.54]. Eligible capital was flat at BDT 41.4bn, but risk-weighted assets rose 15% to BDT 386.6bn, mostly credit risk, so the shortfall against 12.5% grew from BDT 1.3bn to BDT 6.9bn [16]. The auditor puts the shortfall at 1.78pp or BDT 6.9bn [1 p.3]. Core capital is 7.12% of RWA; the rest is Tier-2 Mudaraba subordinated bonds and general provisions [1 p.54].

If the deferred BDT 53.9bn were deducted from capital, CRAR would be about -3.2% [16]; the auditor says CRAR 'turns negative' [1 p.3]. Capital instruments outstanding are BDT 11.4bn of AIBL Mudaraba bonds, of which a BDT 5.0bn perpetual bond counted as Additional Tier-1; BDT 2.6bn was redeemed in 2025 [3 p.35] [1 p.15]. The bank paid BDT 500m of profit on the perpetual bond in 2025 out of a BDT 865m standalone profit [1 p.19].

Funding: Mudaraba deposits are 87% of the base, and their cost doubled since 2021

Mudaraba deposits, where depositors share profit at provisional rates set by the bank, made up 86.7% of deposits at December 2025 and 87.0% at June 2026, up from 80.0% in 2023 [16]. The shift came from the cost-free side: Al-wadeeah current and other accounts fell from BDT 79.7bn (2023) to BDT 59.8bn (2025) and BDT 57.8bn (June 2026), so their share fell from 19.0% to 11.8% [5 p.148] [1 p.12] [2 p.1]. Mudaraba savings deposits rose to BDT 86.1bn and scheme deposits to BDT 97.8bn, while Mudaraba term deposits have been flat at about BDT 241bn since December 2025 [2 p.1].

This is the line that drove earnings down. Profit paid on deposits and borrowings rose from BDT 21.2bn (2023) to BDT 35.5bn (2025) while investment income stopped growing [4 p.17] [1 p.14]. Profit paid divided by average deposits rose from 5.21% to 7.55% [16], reflecting higher market rates after 2023, a costlier mix and a bank that had to pay up to keep deposits after its name was tied to the S. Alam group. Total deposits grew only 0.5% in H1 2026 [16]. Borrowings (placements from banks and FIs) were BDT 60.3bn at June 2026 [2 p.6].

Investment book: 52% manufacturing and 77% Dhaka, with lumpy corporate exposures

The investment book is corporate and concentrated. At December 2025 manufacturing was BDT 261.0bn, 52% of the BDT 501.2bn book, led by ready-made garments (BDT 82.7bn), steel and engineering (BDT 41.1bn), textiles (BDT 32.7bn) and spinning (BDT 27.6bn); trading was BDT 88.2bn and services BDT 67.9bn [1 p.45]. Individuals were only BDT 15.7bn, so retail diversification is small. Geographically, BDT 386.9bn sat in Dhaka division, 77% of gross investments [1 p.45]. A book like this classifies in large lumps: a few big trading and manufacturing groups decide the NPI, which is why the auditor's finding that single-borrower limits were breached for multiple clients matters [1 p.10].

The bank's own IDR, on the BB formula, was 91.55% at end-2024, just under the 92% cap [4 p.17]; on a simple investments-to-deposits basis the ratio has been above 100% since 2022 (102.4% in 2025) because the bank also funds the book with placements from other banks and Mudaraba bonds [16]. That leaves little room to grow financing until deposits grow; investments rose only 4.4% in 2025 and 1.7% in H1 2026 (standalone) [16] [2 p.6]. Liquidity is held mostly in government Islamic bonds and sukuk (BDT 58.9bn at December 2025, up from BDT 44.3bn) and with Bangladesh Bank (BDT 23.1bn) [1 p.17]. The auditor also lists BDT 2.06bn of placements with other banks 'under liquidity stress' with no provision held [1 p.3]; these are deposits placed with weaker Islamic banks.

Earnings: profit paid ate 85% of investment income, but H1 2026 margin is recovering

Standalone net investment income fell from BDT 12.5bn in 2024 to BDT 6.1bn in 2025, because investment income slipped 1.5% to BDT 41.4bn while profit paid rose 19% to BDT 35.3bn [1 p.19] [1 p.5]. The auditor made this a key audit matter and notes the net margin fell from 2.2% to 1.97% [1 p.5]. Investment income stalls when a large share of the book stops paying: bad/loss investments on which no profit is charged rose to BDT 71.7bn [1 p.46]. Profit paid absorbed 70% of investment income in 2024 and 85% in 2025 [16].

Income from shares and securities, mainly government Islamic bonds and sukuk, rose from BDT 2.7bn to BDT 3.9bn and was 26% of operating income [1 p.19] [16]. Commission, exchange and brokerage was BDT 4.1bn, slightly lower. Operating expenses fell 4% to BDT 11.6bn as salaries fell from BDT 7.9bn to BDT 7.2bn [1 p.19], but with income down cost/income rose to 77% [16].

Below the operating line, provisions of BDT 2.4bn were mostly general and off-balance provisions; there was no specific charge [1 p.52]. Tax fell from BDT 3.3bn to BDT 0.2bn, an effective rate of 20% against 82% in 2024, partly from a deferred tax credit [1 p.19] [16]; the auditor says current tax was under-provided by BDT 214m [1 p.3]. Profit after tax was BDT 865m standalone and BDT 854m consolidated [1 p.14] [1 p.19].

H1 2026 shows the first improvement: investment income +6.4% to BDT 22.2bn, profit paid +4.4%, so net investment income rose 16% to BDT 4.21bn. Provisions halved to BDT 0.58bn, PBT rose 41% to BDT 1.66bn, but tax rose to BDT 0.68bn and profit after tax was BDT 982m (EPS BDT 0.85) against BDT 959m (EPS 0.83) [2 p.8]. With the deferral, provisioning is now a choice the bank and BB make each quarter; reported profit tells little about economic earnings until the BDT 41.9-53.9bn gap is closed.

Ratios: ROE from 10% to 3%, spread from 3.3% to 1.3%

Across seven years the ratios show a bank whose returns were modest before the shock and are close to zero after it. ROE was 10.4% in 2020 and 3.3% in 2025; ROA 0.64% and 0.13% [16]. The spread of net investment income over average investments fell from 3.27% to 1.25%. Credit cost, booked provisions over average investments, stayed below 1% in every year, which is the other side of the provision shortfall: provisions booked never matched the classification [16]. Equity fell to 4.0% of assets.

Subsidiaries: two capital-market units worth 12% of equity, with BDT 0.9bn of deferred losses

AIBL has two subsidiaries, both in the capital market. AIB PLC Capital Market Services Ltd (CMSL, 60.5% owned; bank's investment BDT 2.42bn) is a stockbroker and margin lender on the DSE and CSE; AIB PLC Capital Management Ltd (CML, 98%; BDT 0.49bn) is a merchant bank [1 p.23] [2 p.12]. Together they carry BDT 2.91bn in the bank's books, 12% of standalone equity [1 p.6] [16]. The auditor made their carrying value a key audit matter because no impairment was recognised [1 p.6].

Their numbers are small and negative. CML lost BDT 13.0m in 2025 after BDT 4.4m in 2024 [1 p.76]. CMSL's own statements are not in our copy of the 2025 report; the minority share of group profit (BDT 0.6m) implies CMSL earned about BDT 1.6m [1 p.14] [16]. The bigger point is CMSL's margin book: its investments have lost BDT 1.43bn of market value against BDT 0.50bn provided, and BSEC allows it to defer the BDT 0.92bn gap to 31-Dec-2031; the bank's 60.5% share is BDT 0.56bn [1 p.3]. The bank lent to CMSL above 10% of its Tier-1 capital, against BRPD Circular 3 of 2025, and pledged a BDT 1bn deposit at Union Bank for CMSL's borrowings [1 p.10]. Group minus bank profit was BDT -10.8m in 2025 [16]. They are not significant to earnings; they are a small additional capital call.

Governance and dividends: sponsors back, but SPCD C06 and the deferral rule out cash dividends

Sponsors and directors held 15.11% at the 2025 balance sheet date, half the 30% BSEC requires of listed companies [1 p.7]. The share register moved in 2026: institutions held 298.8m shares at December 2025 and 436.7m at June 2026, while general public holdings fell from 678.9m to 541.0m shares; sponsors stayed at 174.0m [2 p.21]. This happened before the July board change and is consistent with blocks being assembled ahead of it.

Dividends: AIBL paid 10-15% cash for 2019-2023 plus 3% and 5% stock for 2022 and 2023 [5 p.18] [4 p.17]. Nothing was paid for 2024 or 2025; the auditor states the 2025 dividend 'is not distributable' under the BB deferral letter [1 p.2], and the bank was among 11 listed banks with no dividend [14]. From FY2026 BB's SPCD Circular No. 06 (23-May-2026) bars any cash dividend for a bank whose paid-up capital is below BDT 2,000 crore (BDT 20bn) [6 p.1]. AIBL's paid-up capital is BDT 11.5bn [2 p.6], so even a recovered AIBL could pay only stock dividends until paid-up capital rises by about 74%; and banks with deferred provisions cannot pay dividends at all under the deferral terms [1 p.2].

Other governance findings in the 2025 audit: single-borrower funded exposure limit (BDT 6.2bn, 15% of capital) exceeded for multiple clients; maturity buckets in the liquidity statements unreliable; no fixed-asset register; non-banking assets held past the allowed time [1 p.6] [1 p.10] [1 p.11]. The opinion itself is unmodified [1 p.2].

Multiples: 0.69x reported book, while equity after deferrals is negative

At BDT 15.0 the stock trades at 0.69x June 2026 reported NAV and 19.5x trailing consolidated EPS of BDT 0.77 [15] [2 p.3] [16]. Year-end P/B ranged from 0.66x to 1.09x in 2019-2025. Against equity after the deferred shortfall, which is negative, a price-to-adjusted-book multiple has no meaning. Market cap is BDT 17.3bn. These are facts about the price, not a view on it. Trading is thin: typically 20,000-60,000 shares a day in September-October 2026 [15].

What's next and risks: the deferral schedule and recoveries decide everything

What will move the numbers next, in direction only: (1) the new sponsor board's recovery plan, including a specialised recovery department [1 p.24], works on the NPI and investment income lines (up if cash recoveries come in); (2) the BB deferral schedule decides how fast the BDT 41.9-53.9bn gap hits provisions (down for profit, equity and CRAR) [3 p.35]; (3) Mudaraba deposit rates follow BB policy rates and competition among the surviving Islamic banks (profit paid); (4) capital raising or new Mudaraba bonds would be needed to restore CRAR; (5) SPCD C06 fixes the dividend form from FY2026 [6 p.1]. The Q3 2026 results (period to 30-Sep-2026) were due in October 2026 and are not yet in our corpus.

FAQ

How large is Al-Arafah Islami Bank's provision shortfall?

BDT 53.9bn at December 2025 (BDT 50.0bn on investments), deferred by Bangladesh Bank letter of 28-Apr-2026 [1 p.3].

What is AIBL's NPI ratio?

Classified investments were BDT 88.5bn, 17.5% of gross investments at December 2025; BB states 17.16% [1 p.2] [1 p.45].

Did Al-Arafah pay a dividend for 2025?

No. The auditor states the dividend is not distributable under the BB deferral [1 p.2].

Who controls Al-Arafah Islami Bank now?

BB returned the board to the founding sponsors in July 2026; Prothom Alo reports effective control by KDS Group [9] [12].

What is AIBL's capital adequacy?

CRAR 10.72% (core 7.12%) at December 2025 against 12.5% required [1 p.54].

Which results does this report use?

Audited 2025 statements, annual reports 2023-2024 (five-year data from 2019), and unaudited Q1 and H1 2026 statements. Q3 2026 is not yet in our corpus.

Sources

1. Al-Arafah Islami Bank PLC audited financial statements 2025 (year to 31-Dec-2025), incl. auditor's report · link · accessed 2026-10-31
2. Al-Arafah Islami Bank PLC unaudited financial statements, six months to 30-Jun-2026 · link · accessed 2026-10-31
3. Al-Arafah Islami Bank PLC unaudited financial statements, quarter to 31-Mar-2026 · link · accessed 2026-10-31
4. Al-Arafah Islami Bank PLC Annual Report 2024 (five-year data 2020-2024) · link · accessed 2026-10-31
5. Al-Arafah Islami Bank PLC Annual Report 2023 (five-year data 2019-2023) · link · accessed 2026-10-31
6. Bangladesh Bank SPCD Circular No. 06, 23-May-2026, dividend declaration policy for banks (Bangla) · link · accessed 2026-10-31
7. The Business Standard, 'Cenbank now reconstitutes S Alam-controlled AIBL and Commerce Bank boards' (Sep-2024) · link · accessed 2026-10-31
8. The Business Standard, 'S Alam's grip on banks' boards ends' (Sep-2024) · link · accessed 2026-10-31
9. The Daily Star, 'BB dissolves Al-Arafah Islami Bank board, restores founding sponsors' (Jul-2026) · link · accessed 2026-10-31
10. The Business Standard, 'Al-Arafah Islami Bank gets 14 new directors as sponsor-backed board returns' (Jul-2026) · link · accessed 2026-10-31
11. The Financial Express, 'Al-Arafah Bank board reconstituted, founding sponsors reinstated' (Jul-2026) · link · accessed 2026-10-31
12. Prothom Alo, 'S Alam out, Al-Arafah Islami Bank now under KDS' control' (Jul-2026) · link · accessed 2026-10-31
13. The Daily Star, 'Al-Arafah Islami Bank's share soars after board restructuring' (Jul-2026) · link · accessed 2026-10-31
14. The Financial Express, '11 listed banks declare no dividend' (2026) · link · accessed 2026-10-31
15. AnalystBro price data (TradingView feed): DSE:ALARABANK daily bars to 29-Oct-2026 · link · accessed 2026-10-31
16. AnalystBro model for this report (workbook tabs below) · link · accessed 2026-10-31