Zillur Rahaman: Islam covers all the aspects of human life, financial management is not the exception. Islamic finance is closely related to the interest free financial services industry. Banking industry contributes a lot in the economic development of our country. As like, Islamic Banks have also significant contributions towards the growth and economic development of not only in Bangladesh but also in global market.
With the growing market demand and rapid expansion of Islamic finance, recently the Bangladesh Bank has approved the proposals of two conventional scheduled banks, NRB Global Bank and Standard Bank, to turn those into full-fledged Islamic banks with a view to reap benefit of the growing popularity of the segment. With the approval of NRB Global and Standard, the number of full-fledged Islamic banks rose to 10 in Bangladesh. Besides, 18 conventional banks have Islamic banking branches and windows. Two financial institutions have also so far been introduced as completely shariah-compliant based non-banking financial institutions over the past three decades.
Islamic banking, popularly known as non-interest banking, is a banking system based on the principles of Islamic or Sharia law and guided by Islamic economics. Two fundamental principles of Islamic banking are the sharing of profit and loss, and the prohibition of the collection and payment of interest by lenders and investors. Islamic law prohibits collecting interest or “riba.”
Typically, financial transactions within Islamic banking are a culturally distinct form of ethical investing based on Halal assets and equity. For example, investments involving alcohol, gambling, pork, and other forbidden items are prohibited. Risk-sharing and profit-sharing must be structured into contracts, investments should enhance society, and financing should be backed by assets. Islamic banks have developed tools to address these constraints and perform their basic function: to take deposits, invest them, and profit from the spread. Sharia boards acted as a safeguard against the excess of conventional finance.
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In tandem with the global rapid expansion of Islamic banking, Bangladesh has experienced a strong growth in Islamic banking following a strong public demand for the system. Since its inception in 1983, Islamic banking industry has recorded robust performance and the industry now accounted for more than 25 percent market share of the entire banking industry in Bangladesh. Though Islamic banking industry in Bangladesh has achieved more than 20 percent annual growth, the industry has immense potentials for further expansion as Bangladesh is a Muslim majority country with a vibrant economy of 6 percent real economic growth over the last decade.
One of the basic building blocks of Islamic finance is murabaha, where “two parties agree to trade at a price equal to the cost plus mark-up or profit”. This allows, for example, a bank to purchase an asset, like a car, for Tk.10,000 and sell it to its customer for Tk.11,000 in installments over a year. In conventional finance, the bank lends money at a certain interest rate using the car as collateral, while the murabaha transaction the bank purchases the goods and then sells it to its customer. Other financial instruments and tools such as ijarah (leasing), mudarabah (profit sharing, usually between investors and managers), musharakah (joint venture), sukuk (Islamic bonds), and takaful (Islamic insurance), allow the development of Islamic financial products that span retail and corporate banking, private equity, and insurance.
Muslims invested in and stored financial assets according to their religious principles for fourteen centuries before the emergence of the first Islamic financial institution, Dubai Islamic Bank, in 1975. Hundreds of Islamic banks have been launched since 1975, with millions of Muslims using Islamic finance products from Malaysia to Michigan. Some countries-including Malaysia, the United Arab Emirates, Iran, and Saudi Arabia-actively foster the nascent and growing industry.
Islamic banking is the largest sector in the Islamic finance industry, contributing to 71%, or $1.72 trillion, of the industry’s assets. The sector is supported by an array of commercial, wholesale, and other types of banks. Yet commercial banking remains the main contributor to the sector’s growth. There were 505 Islamic banks in 2017, including 207 Islamic Banking windows in over 51 countries, including the United States and other non-Muslim countries. However, the number of players is not necessarily indicative of the size of the industry, in terms of assets. Islamic finance’s second-largest market, Saudi Arabia, has 16 Islamic banks, including windows, which is less than the smaller markets of Malaysia and the United Arab Emirates.
It is also the leading centre for Islamic finance outside the Muslim world, with assets of UK-based institutions that offer Islamic finance services totaling more than $5 billion. In recent years, the UK has reinforced its position as the Western hub for Islamic finance. Presently more than 20 banks in the UK offer Islamic services and five of these banks are fully Sharia- compliant, including Al Rayan Bank.
The top three banks offering Islamic financial services in the United States in terms of asset size are The American Islamic Finance House, University Bank (through its subsidiary University Islamic Financial) and Harvard Islamic Finance Program. J.P. Morgan started offering Islamic banking services in 2013.
Global Islamic financial assets have soared from less than $600 billion in 2007 to more than $1.3 trillion in 2012, an expansion rooted in the growing pool of financial assets in Muslim-majority countries driven by consumer demand for products that comply with religious codes. Assets are concentrated in Muslim countries of the Middle East and Southeast Asia, but the sector appears poised to enter Western markets and complement conventional financing.
Islamic banking is commonly seen to have two advantages over conventional banking. The first is a perception that Islamic banks are bound to a higher moral standard. They will not take on irresponsible amounts of risk or pay outsize bonuses to their top bankers. The second is that earnings come from identifiable assets, not opaque combinations of derivatives and securities. Because Islamic banks cannot make money through interest, they rely on ties to tangible assets, such as real estate and equity, charging rent’ instead of interest.
Islamic financial system in Bangladesh has the potentials to promote inclusive growth along with financial stability and build long-term resilience through innovative ways. The statistics of Islamic Financial Services Board shows that the total assets of the Islamic banking industry stand to USD 2190.0 billion in 2018 from USD 2052.2 billion in 2017.
According to the Bangladesh Bank data, the total Shariah-compliant financing by Islamic banks from 19 countries reached USD 1,052 billion at the end in 2018 from USD 1,021 billion in 2017. Islamic banking industry of Bangladesh has also been experiencing an impressive growth due to strong public demand and supports from central bank as well as the government. Bangladesh Securities and Exchange Commission has recently issued the Bangladesh Securities and Exchange Commission (Investment Sukuk) Rules, 2019 which will help Islamic banks manage liquidity as well as promote Sukuk based Islamic capital market.
At the end of June 2019, Bangladesh’s 8 full-fledged Islamic banks have been operating with 1201 branches out of total 10396 branches of the whole banking industry. In addition, 19 Islamic banking branches of 9 conventional commercial banks and 41 Islamic banking windows of 7 conventional commercial banks are also providing Islamic financial services in Bangladesh. At the end of the June 2019, deposits and investments grew by 4.52% and 3.33% respectively, while remittance and excess liquidity of Islamic banking industry increased by 16.49% and 58.08% respectively compared to the end of March 2019. Islamic banking industry holds almost one-fourth share of the entire banking industry in terms of deposits and investments at the end of the June 2019.
According to the latest country report of Islamic Finance News (IFN), Malaysia based world leading Islamic finance news provider, presently the market share of assets of the Islamic banking industry is around 25 percent of the Bangladesh’s total banking assets. Bangladesh is ranked 10th among the top 35 jurisdictions in terms of domestic market share of Islamic banking.
The report also mentioned that Bangladesh is currently experiencing potential growth in Islamic banking and finance due to rapid expansion in the sector. An important advancement in the last few years has been the entry of 16 conventional banks in Bangladesh Islamic finance industry and the use of Islamic methods of financing through their Islamic banking branches, windows or units in addition to their interest-based branches.
It also said that the advancement provides the need and encouragement towards the globalization of Islamic banking, which includes some of the giants in the banking and financial industry. As Islamic finance and banking have become reasonably important in the global financial markets, especially in Asia, it has the potential to contribute successfully to the innovative development goals. It can ensure financial stability as well as include growth, and also effectively address development challenges for the region.
Over the years, Islamic finance has achieved the crucial mass for the industry to be recognized as mainstream finance. It has also received international recognition as a form of finance that increases access to finance and the potential for the eradication of poverty and for preserving financial stability.
When Islamic banking is becoming the fastest growing banking system worldwide, Bangladesh has already been a role model for expansion of the system and its popularity. A system that reduces non-performing loans and promotes social welfare, providing assets and equity based financial services, the Islamic banking now requires short-term money market support and specific law for its more sustainable operations in home and abroad.
Md. Zillur Rahaman is a Banker and Freelance Columnist.