Banking to the pious

Wafiur Rahman
Thursday, November 9th, 2017


The state of Islamic banking in Bangladesh today


Islamic banking is a type of interest-free banking activity which is consistent with the principles of Shariah laws (Islamic laws). Islamic laws forbid payments or acceptance of specific interests or fee (Riba) for loans of money. Such banks have the same motive as that of conventional banks, which is lending capital, but without charging any fixed interests as per Shariah laws. Under Islamic laws, these banks are not allowed to penalize the borrowers for late payments either and even if they do, that has to be donated to charity. The bank lends money on a profit-loss sharing basis.


Interest based banking system was inherited by Bangladesh, as the British introduced it here during their colonial rule in this region. Since then, the framework of the banking system of Bangladesh is interest based though majority of the population is Muslim. But all this started to change slowly after the success of Ahmad Elnaggar, who first covertly started a modern Islamic bank in Mit Ghamr, Egypt in 1963. In early 1980s, Naser Social Bank, the first modern islamic Bank in the world, was established in Egypt and it prompted all the Islamic scholars and groups, including those in Bangladesh, to incept Islamic banking system in Muslim countries. As a result of their hard work to provide Islamic financial services only, Bangladesh first saw the rays of Islamic banking in 1983 when Islamic Bank Bangladesh Ltd started their operations in March 1983.


Current overview


Out of the 56 scheduled banks, 8 of them are running Islamic banking. 17 other banks have opened Islamic banking services as well, with Standard Bank, Jamuna Bank, NCC Bank, IFIC Bank and South Bangla Agriculture and Commerce Bank applied for Islamic banking services. Agrani Bank has applied 5 windows and 5 branches only for Shariah banking, Eastern Bank and Uttara Bank applying for 10 windows/branches. According to the central bank, the position of Islamic banks is solid. 9% out of 16% of the additional national reserves come from the Islamic banks.


19% of the collective deposits and 22% of the advanced balances are controlled by the Shariah banks. In light of the recent development of the banks’ fund managements, Bangladesh Bank has established a policy for Islamic banks, where they can issue up to 90% of their deposits as loans, unlike other banks whose limit is 85%.


Given the nepotism and corruption of the traditional banks, customers have all but lost faith in them. Investing in those banks is a big risk now. In light of this, businessmen are eyeing for Islamic banking as the way out. According to sources, as interest-based transactions are cardinal sins in Islam, they are extremely interested in opting to bank there. They are also less risk-prone, hence are ahead of the competition against traditional banks currently.


There is currently a large sum of liquidity in the Islamic banks. Previously the government could not take loans from the Shariah banks, as they were outside the interest format. But in order to avail their loans, the Islamic investment bonds policy is being revised. The draft policy has been sent from the central bank to the ministry of finance, under the title of Islamic Investments Bond Policy 2014. This was modeled in light of the Malaysian Sukuk Islamic bonds. Once it is ratified, then the government would be able to take loans from the Islamic banks.


Shariah Board formed


The central bank regulations for the formation of Shariah boards dictate that each of the banks have their own Shariah board/council, to ensure the Shariah regulations and conformity to Islamic laws in an unanimous manner. They are also to unanimously take Fatwas (policy rules) and implement them. This is where the question of having a joint Shariah board or council, along with a central bank Shariah council.


The central bank has also formed a central council for such titled Central Shariah Board for Islamic Banks of Bangladesh. Every Islamic bank has their own Shariah council, but there is currently no regulatory body to look at those councils. For example, there have been various interest-based refunding schemes that the Islamic banks have accepted, but the central bank has also approved.


M Mahfuzur Rahman, former executive director at Bangladesh Bank, said that the central bank does not differentiate between traditional and Islamic banks. Every Islamic bank can form their own Shariah council. They will look into the activities and policy implementations of their respective banks. So in light of that, a lot of them wanted to deposit their money as per Shariah policies. Islami Bank Ltd had successfully managed to do so, and this had inspired many banks to emulate their success. Some were downright Islamic from the beginning, and some had converted their system to it.


He also added that Islamic banking is now a success story. Most of the banks want to emulate their successes. But they are not getting approvals from the central bank for partial Islamic banking services. Islamic banking has a significant contribution towards the economic growth of this country, especially in LCs and remittances. They even have their presence in the share market.


Shah Abdul Hannan, former deputy governor of Bangladesh Bank, said that their success is likely due to the huge response and support they received from the customers. Their socio-economic contributions have been successful on all counts, and they have also proved that they can carry out all the modern banking amenities, all despite being in the regulations of Islam.

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