Most of the conventional banks in the country are increasingly becoming interested in starting Islamic banking to get more deposits.
The banks believe this will help them tap into a large market who have a strong emotional connection with the word “Islamic.”
Bangladesh Bank (BB) is not, however, allowing banks to convert into Islamic banking or even open such branches because of not having a central sharia council to regulate this particular brand of banking.
Two conventional banks – NCC Bank and Southeast Bank – have applied to the central bank for permission to convert into full-fledged Islamic banking. Several other banks have sought permission to open Islamic banking branches, said a Bangladesh Bank source.
The central bank decided not to allow it until formation of a central sharia council. At present, there is no unified sharia board to regulate or monitor Islamic banking in the country. The norms of the Islamic banks in Bangladesh vary as each bank is following sharia rules according to their choice since sharia laws vary from country to country.
Without a unified sharia policy or council, it will be extremely difficult to establish good governance or apply regulations on these banks.
Bangladesh Bank is currently regulating existing Islamic banks following each respective banks sharia board norms. The central bank has little scope to strictly enforce or scrutinise their activities because of lack of a sharia board and a unified code of conduct against which it can compare standards.
The committee formed by the government to amend the banking company act of 1991 had previously recommended not to allow new Islamic banking branches because of the difficulty in monitoring their activities and even the unavailability of a unified code of conduct. The cabinet, however, disagreed with this suggestion.
NCC Bank Managing Director Nurul Amin said they would again request the central bank to allow them to convert into a full-fledged Islamic bank since the government has not brought any changes in the banking law. BB was also waiting for the government signal.
In accordance with the banking company law, a conventional bank should keep an SLR (statutory liquidity ratio) of 19% against its deposits where Islamic banks are allowed to keep 11.50%.
As a result, a senior central bank executive said, Islamic bank can use more liquidity for further investments. Besides as a Muslim majority country, many clients are psychologically attracted to the notion of Islamic banking and, because of this, Islamic banks get more deposits than conventional banks.
“So banks are interested to use this psychological sentiment and the added advantage in liquidity to get more deposits,” he said.
Presently, six banks are operating in the country as full-fledged Islamic banks. They are Al-Arafah Islami Bank, EXIM Bank, First Security Islami Bank, Islami Bank Bangladesh, Shahjalal Islami Bank and Social Islami Bank Ltd.
Of the conventional banks, 15 are operating Islamic banking through specialised branches. They are Sonali, Agrani, Pubali, AB, The City, Prime, Southeast, Dhaka, Premier, Standard, Trust, Bank Asia, Jamuna, Standard Chartered and Al Falah.
According to BB, growth of deposits is more in Islamic banks than in conventional banks. On April, Islamic bank deposit growth stood at 21.73% and credit growth at 14.59% compared to 18.90% and 11.12% respectively in conventional banks. Islamic bank deposit growth was 25.83% on January compared to 20.58% in conventional banks.
In 2012 of the total Tk5.4tn bank deposit, Islamic banks had Tk1tn and conventional banks had Tk4.4tn.
In 2011, total deposits of the banks were Tk4.5tn where deposits in Islamic banks stood at Tk800bn and conventional banks deposit stood at Tk3.7tn.
Nurul Amin said witnessing the growth trend in Islamic banks, conventional banks became interested to start Islamic banking as public sentiment is very positive. It results in getting deposit easy.
Note that since the early 1970’s, Islamic Banking practices have been gaining popularity and showing steady growth at an astounding rate of 10-15% annually in recent years, despite the world-wide economic downturn. Islamic banks base all their rules and regulations on the Sharia law of Fiqh al-Muamalat (rules of transactions).
Islamic banks are now located in over 51 countries around the world, including the United States, and there are over 300 institutions that qualify as Islamic Banking institutions. Islamic finance and investing institutions are the largest growing sector in this industry, growing at 25 % in the year 2010.
One of the most distinguishing practices in Islamic banking is the interest free loans. Sharia law prevents the charging of interest on lent money. To comply with these laws, Islamic bankers have designed many different programs that allow for the lending of money, making of bank profits and compliance with Sharia law.
Some Islamic banks found in Asia, most notably Bangladesh, participate in micro-lending programs, but some banking regulators find that this practice is not in accordance with Sharia law.