THE shariah-compliant banking was introduced in Bangladesh in 1983 to present halal and interest-free banking. The shariah-based banking has since then flourished. It has earned a place in society and became popular. Eight banks and two financial institutions have so far been introduced as completely shariah-compliant based banks and non-banking financial institutions over the past three decades. Capitalising the popularity, many conventional banks also introduced shariah-compliant windows by this time. Nine conventional banks have 19 shariah-based branches and seven banks have 25 shariah-based banking windows. Many banks are interested in converting to shariah-based banks.
The January–March Bangladesh Bank report says that there was a total deposit of Tk 10,23,206 crore — with Tk 2,42,118 crore being deposited in the Islamic banking category, which accounts for 23.66 per cent of the total deposit of the country. There was a total investment of Tk 9,81,980 crore from all the banks, in which Tk 2,37,279 crore was from the Islamic banking sector, accounting for 24.16 per cent of the total investment. Islamic banking contribution to the economy is, therefore, about a fourth of the size. About 43 per cent of the total foreign remittances, amounting to Tk 13,075 crore in 2018, came through Islamic banking channels.
Islamic banking contributes not only to the economy but also plays a very significant role in introducing Bangladesh to the outside world. Former OIC Fiqh Academy chairman Allamah Taki Usmani said that Bangladesh was performing the role of a leader in Islamic banking in the world.
This achievement has been made keeping to the norms, rules and regulations of the Qur’an, the Hadith, Ijma and Kiyas and their practice. Islamic banking collects deposit from clients in the form of mudaraba contract and invests the money in the form of bai muajjal, bai murabaha, musharaka, ijarah, hire purchase under shirkatul melk, bai salam and bai istisna. Profits derived from this operation is distributed to general deposit holders and shareholders following the ‘weighted average’ or ‘income sharing ratio’ process. It is not an operation related to ‘interest’ by any means. Investment in physical assets is the prime consideration in this process. Islam does not allow investments in the form of money to earn money.
That is why banks and financial institutions invest money in purchasing and manufacturing products or assets in the Islamic form of investment or finance keeping to the needs of clients. Besides, Islamic banking also supports income from rent of assets in the form of ijarah (lease) or hire purchase under shirkatul melk. In this process the demand of the physical products increases and economy deals with a real growth from the operation of these banks and financial institutions. Islamic banking also encourages and patronises employment generation and poverty alleviation through economic functions and increases productivity of the population. Inflation can be minimised through the management of the demand and supply of commodities on the market.
If a complied shariah banking system is introduced, it would minimise the chances of non-performing investments or loans because this system patronises only physical asset-based investments. There is no scope to invest or finance for a vague purpose and to divert the fund otherwise with mala fide intention. If there is a physical asset laid under investments, the investments are recoverable any time. Besides, the performance of that asset must bring income to support the repayment of the investments. That is why in the shariah-based banks and financial institutions, non-performing loan or investment ratio is low compared with the ratio in conventional banking system.
If a partnership-based investment form like musharaka is implemented properly, there is a very low chance to incur losses and defaults in the repayment process. But for some unavoidable circumstances, musharaka and mudarabah cannot be implemented for most of the investments. Another issue in the Islamic banking system is that the profit rate of the investment is not compounded on the profit itself. It is a simple rate calculated on the principal amount. In this process, Islamic banks and financial institutions make sure client comfort in repayment. Islamic banks and financial institutions cannot charge default premium/delinquent charge. Only mere damages can be charged. This amount can be only used in charity, not as profit. Profit maximisation is not the objective of Islamic banking; it is, rather, charity-oriented.
Islamic banking needs to have short-term source of funds for day-to-day operation. There is no established ‘call money market’ in the sector. Islamic banks cannot borrow money from another bank for a short term. It is, therefore, necessary to introduce and establish a unique ‘call money market’ within the Islamic banking system. It is important because shariah banking can only finance where it is permitted and the scope is very narrow. Mutual money market like ‘call money market’ can solve emergency issues to run the day-to-day operation.
It is very hard especially for the two existing shariah-based financial institutions, Islamic Finance and Investment Ltd and Hajj Finance Ltd, to survive without short-term money market support in the form of call money. Because of core deposits, these financial institutions have to pay more than the bank deposit rates. The management of cost and fund is difficult for these institutions. These institutions have to compete with both conventional and Islamic banks and financial institutions. However, they are doing good in the situation with constratins. Islamic Finance and Investment Ltd is developing as one of the most promising financial institutions and it has earned four international awards in recent times, including the Most Innovative Shariah Compliant FI in Bangladesh-2018 and the Finance Company of the Year 2019 Bangladesh.
Despite this constraint, Islamic banking is emerging as a promising banking system all over the world. Foreign banks such as Hongkong Shanghai Banking Corproation abd Standard Chartered Bank have taken initiatives to divert a mentionable amount of their capital for this business, considering its popularity. In 2004, Islami Bank of Britain was established in Britain. It has branches in London, Birmingham and Manchester. Islamic banking has been started in Manheim City of Germany. The Standard and Poors in its recent publication stated that the Islamic banking system has emerged as an alternative to conventional banking system. Basically, in the context of current situation of conventional banking, Islamic banking system has appeared as an alternative with merits.
Bangladesh is a country of endless opportunities where most of the population are religiously minded. It is now required to put everything together to develop and promote Islamic banking system. It is initially needed to introduce Islamic banking law and rules for this. Worldwide, laws have been implemented before introducing Islamic banking system. Malaysia, Indonesia and Thailand are examples in this regard. In Thailand, Islamic banking began in 2003 and an Islamic banking law was introduced in 2002. Now it is necessary to introduce an Islamic banking law in Bangladesh.
The capital market of Bangladesh is based on stocks. Only few debentures and bonds are available on the market. For the diversification of the capital market, it is necessary to introduce more bonds and debentures. Meanwhile, mudarabah-based Islamic bond is becoming popular. If sukuk or bond gets more attention, it will be a source of liquidity for Islamic banking system for a long term.
Islamic banking contributes to economic activities and addresses social issues such as the financial inclusion of the mass people, the inclusion of rural areas transactions in the mainstream economy, builds a trustworthy, interest-free banking system for people. It is now required to introduce a framework for Islamic banking system in Bangladesh under proper laws and regulations.
In 2011, the parliamentary standing committee on the finance ministry considered the need for the enactment of an Islamic banking law. If the law is introduced, shariah-based financial system would reach a new milestone.
Abu Zafore Md Saleh is managing director and chief executive officer of Islamic Finance and Investment Limited.
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