Each of the practices in Islamic finance is anchored on a particular belief – “money is not an earning asset in and of itself”. The only way to understand the system is to consider it in view of Islamic outlook towards the state’s role, economic and social justice, distribution of wealth, and most importantly ethics. Islam unequivocally abhors materialism, greed, consumerism, exploitation, and extortion in any form or to any degree by anybody, particularly the owners of capital. Quran, the holy principal book for Muslims, contains severe warnings against greed and avarice in several places.
Islam encourages the tradition of sharing wealth with the part of the society that is less fortunate and ensuring everyone’s participation in the promotion of Islamic values in every endeavour that humans take including banking. The value of money is only attributed to its being a by-product or functional aspect of human effort which is the means for every Muslim to serve their Lord. In Bangladesh, this interest-free banking, as an ethical concept, has recently gained momentum.
Rapid expansion in the banking sector of Bangladesh is the reason Islamic banking is experiencing potential growth in the country at present. In the Islamic finance sector of Bangladesh, 16 conventional banking institutions have entered so far. In addition, financing activities are being carried out in compliance with Islamic methods through branches, units, or windows operated under the Shari’ah law alongside the ones that run interest-based operations. All these marks a significant advancement which supports the fact that Islamic banking needs to be globalized associating some banking and financing giants in the industry.
Despite being within a demanding financial environment, Islamic finance, as we have noticed, has made notable progress transcending beyond the economies of Islamic countries and regions. Behind this resilience and sustainability are the Shari’ah principles that incorporate specific elements that necessitate strong economic connectivity which is founded upon ethical considerations. Islamic finance has brought crucial contributions to the industry over the years which make it worthy of being recognized as the mainstream finance. Islamic finance facilitates access to the financial sector and increases potentials for poverty eradication and financial stability.
The Islamic banking industry in Bangladesh currently has one fourth of the total banking assets. This market share allows the country to enjoy systematic importance at the domestic level. Bangladesh ranks 10th among the leading 35 jurisdictions considering the total market share of Shari’ah based Islamic banking.
In Bangladesh, Islamic banking has experienced robust growth as 8 full-fledged Islamic banking institutions are currently running their operations under 1380 branches out of 59 scheduled banks with 10387 branches across the country. Moreover, 19 branches of 9 interest-based commercial banks and 35 windows of 7 commercial banks in Bangladesh are now adopting Islamic banking to provide financial services under Islamic principles. Islamic banking institutions have also been making great contributions to facilitate economic growth and the creation of employment opportunities. These banking institutions have more than one fifth of the market share and employ more than 35,000 human resources to mobilize financing and deposits in the key industries, sectors, and service areas, and collect about one third of the foreign remittances received by Bangladesh.
In Islamic Banking system in Bangladesh, the total deposits are BDT 2,802,280.00 million ($32.96 billion) and investment for BDT 2,627,520.00 (US$30.90 billion) as of December 2019.
The central bank of the country (i.e. Bangladesh Bank), has already issued approvals of four interest-based commercial banks to convert into complete Shari’ah based banks. One of those conventional banks is Standard Bank Limited (SBL) which is set to start its Shari’ah based banking operation in full swing from January 01, 2021. Incorporated under the Companies Act, 1994, on May 11, 1999, as a public limited company, SBLhas achieved decent progress running commercial operations since then. With several products on deposit and credit schemes, SBL works with the mission to become the leading private commercial bank in the country in terms of asset quality, capital adequacy, competency of management, efficiency, and profitability.
“We are in transformation process for conversion into full Islamic Bank and it is needed to gather proper knowledge & wisdom by the concerned officials to run the bank full compliance under Shari’ah in the country”, opined by Qazi Akramuddin Ahmed, Chairman of Standard Bank Limited, Bangladesh. Shari’ah based banking institutions in Bangladesh have pivotal role to serve the unprivileged people of the country who are in extreme poverty level and the banks key focuses and products are designed considering the human necessities towards development of projects who caters the ultimate need of the society including employment opportunity, added by the Chairman of SBL.
Conventional banks in Bangladesh are required to maintain SLR (statutory liquidity ratio) and CRR (cash reserve requirement) by 18% of the total deposits from clients. The loan-to-deposit ratio must be 85%. These regulatory requirements are not much strict for Islamic banking institutions as they only have to keep the SLR and CRR by 11% and loan-to-deposit ratio to 90%. Experts opine that the country’s central bank does not have all of the required prudential guidelines to monitor and regulate Islamic banks. Taking advantage of this gap, banks violate Shari’ah principles frequently while adopting profit-sharing policy for investments and deposits. A provisional rate for profit is set by Islamic lenders prior to giving out loans and mobilising deposits.
The Institute of Chartered Secretaries of Bangladesh (ICSB) arranged a webinar on "Islamic Banking and Financing- an emerging need of promoting corporate governance in the banking sector” recently where all speakers who are Islamic scholars emphasized the weaknesses of the country’s present banking system and affirmed that the current predicament of the country’s banking sector is mostly because of the implementation of poor corporate governance. The speakers emphasized the Organisation for Economic Co-operation and Development (OECD), the practice and weakness of corporate governance, and how Shari’ah based governance practice can help with the improvement of the corporate governance practice in banking institutions. They further recommended that Shari’ah compliant banks can be encouraged more to improve their operations and that the central bank have a Shari’ah Board. They suggested that the Shari’ah Board in every bank be mandated to operate with full authority to decide on and ensure compliance with Shari’ah principles in all segments of banking operations.
Even amid the existence of limitations, the prospect and potentiality of Islamic banking in Bangladesh are still high. The successful initialization of Islamic banking operations has made it evident that interest-free banking is a feasible idea. Islamic banking institutions have managed to bring under their coverage a lot of entrepreneurs and depositors who have avoided any association with interest-based banks for so long just because of their adherence to religious injunctions.
The world in the 21st century is quickly evolving into a fast-paced digitalized economy at the magnitude and scope beyond imagination. Thus, it is the demand of the time that Islamic finance be transformed through the acceptance and integration of disruptive technologies, especially the ones which enhance transparency, ensure accountability and promote trust. This change is sure to occur for the sustainability and relevance of Islamic finance and its growth momentum.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Md. Touhidul Alam Khan is the Additional Managing Director of Standard Bank Limited, Bangladesh. He is Fellow Member of Institute of Cost & Management Accountants of Bangladesh (ICMAB) and first Certified Sustainability Reporting Assurer (CSRA) in Bangladesh. He is also post graduate diploma in Islamic Banking & Insurance from Institute of Islamic Banking and Insurance (IIBI), United Kingdom.