Islamic banking in Bangladesh is taking shape rapidly with partial practice of Shariah amid the absence of a proper regulatory framework, posing threat to religious belief and profit margin of the banks’ clients and investors.
Islamic banking, an ideological banking and finance system, based on a frame within the Shariah principles, has been initiated aiming to provide economically viable financial intermediation alternatives to conventional banking.
The intermediation between the ‘haves’ and ‘have-nots’ among customers across all segments is consistent with Shariah intending to eliminate interest by developing a real sector, generating permissible (halal) activities, promoting profit and loss sharing, establishing social equity, upholding values and maintaining purity of contract.
Islamic banking in Bangladesh
Islamic banking was first introduced in Bangladesh way in 1983 by foreign investors from Saudi Arabia and Kuwait.
Currently, eight full-fledged Islamic banks are operating with 1,068 branches in the country, says the latest data of Bangladesh Bank (BB).
The banks are Islami Bank Bangladesh Limited (IBBL), Al-Arafah Islami Bank Limited, Social Islami Bank Limited, Export Import Bank of Bangladesh Limited (EXIM Bank), Shahjalal Islami Bank Limited, First Security Islami Bank Limited, ICB Islamic Bank Limited and Union Bank Limited.
Moreover, 19 Islamic banking branches of nine commercial banks and 25 Islamic banking windows of eight commercial banks are also providing Islamic financial services.
With a workforce of 30336 people, Islamic banking covers 22.72% market share of the country’s entire banking sector in terms of deposits and investments.
As of June 30, the total number of deposits and investments in Islamic banking was Tk1,99,424.90 crore and Tk1,85,244.93 crore respectively.
The ‘flexible’ Shariah
The data mentioned above shows the upward trend of growth in Islamic banking. But a question arises whether it is expanding in the Shariah compliant way.
Md Yasin Ali, supernumerary professor of Bangladesh Institute of Bank Management (BIBM) said: “Most of the Islamic Banks in Bangladesh are not Shariah compliant. They cannot maintain Shariah in banking operation like profit sharing, lending and other issues. Shariah-compliant banking covers less than 2% of the Islamic banks’ lending portfolio.”
“In fact, the banks are fooling their clients taking advantage of their religious sentiment. They are actually exploiting the religious belief of the clients, which is not good for Islamic banking,” he opined.
He also underscored the need of establishing good governance in conventional banking, which in phases would eventually eliminate the other ‘bad’ practices.
BIBM Associate Professor Md Alamgir, who conducted several studies on Islamic banking in Bangladesh, seconding Yasin’s sentiment, said the Islamic banks are operating based on the ‘flexible’ Shariah instead.
Alamgir said:“If a bank strictly follows the Shariah principles, the bank has to provide financial services amid the risk, and its Islamic term is “Mudaraba and Musharaka.” The principles mainly deal with equity-based transactions and must be free from Riba (interest).”
“During its inception, IBBL followed the Shariah principle, incurring losses. After that, the Islamic banks started their operation by making the Shariah rules flexible. Instead of risk-sharing of the asset, the banks started cost-plus profit lending,” he said.
In the cost-plus profit lending system, a bank purchases a commodity on behalf of the customer, and then sells it adding profit to the buying price. Under this arrangement, the bank discloses its cost and profit margin to the customer.
“The flexible practice of Shariah is a complete violation of Shariah principles,” he observed, saying: “Islamic banking defying Shariah is completely equivalent to deceiving clients and investors of the banks that are banking upon a religious belief of permissible (halal) banking.”
Most banks, the researcher said, are not following the BB guidelines while opening new branches and windows of Islamic banking as they actually run based on the conventional method.
He suggested forming an independent and central Shariah supervisory council under the BB for proper audit and monitoring of the Islamic banks’ operation in accordance with Shariah principles.
He said, “Though the Islamic banks have their own Shariah boards, they lack expertise.”
A BB official anonymously said banks in the Islamic banking system do not have to fix the interest rate to the clients since they collect deposits in the profit-loss system.
Using the method, the banks can easily deceive the deposit holders by showing a thin profit margin, he stated.
Experts’ take on Islamic banking
When contacted, former Finance Adviser (caretaker government) AB Mirza Azizul Islam said: “The central bank has to monitor the Islamic banking operations. Islamic banks are bound to maintain Shariah principles. If they are found violating the rules, Bangladesh Bank must take punitive actions.”
Ex-BB Deputy Governor Khondkar Ibrahim Khaled said: “There is no relation of banking with Islam. Linking banking to Islam is nothing but doing business taking the advantage of religious illiteracy of the people.”
He said the Islamic banks were not conforming to the Shariah principles of keeping customers as partners of profit or loss. So, it is not Islamic banking.
He suggested the people to be aware of the misuse of religious belief, saying that Islamic banking would be in practice using another name.
Lack of regulatory framework and expertise
Many conventional banks have applied to the central bank for license to convert to Islamic banks. The central bank, however, has stopped giving permission in this regard while there is no proper regulatory framework for strict monitoring of Islamic banking.
Interestingly, Bangladesh’s banking sector is yet to have any Shariah governance in terms of regulatory issues and other relevant factors.
Till date, there is no complete Islamic banking law to control, guide and supervise this sector except the inclusion of some Islamic banking provisions in the existing Banking Companies Act.
A central bank official said the BB had issued a guideline for conducting Islamic banking on November 9, 2009, which needs to be updated.
“Inspection and supervision of the Islamic banks are being done following the general guidelines of the BB, which was actually adopted for conventional banks. The central bank does not even have a separate wing to deal with the Islamic banking,” he said.
The conventional banks can move the Artha Rin Adalat (money loan court), a specialised court for legal battle related to financial issues, but that too lack a separate section for Islamic banking.
In addition, the government has to borrow only from conventional banks through treasury bills and bonds to finance development projects as there is no regulation for Islamic banks to fund the projects.
The Islamic banks in Bangladesh have been facing excess liquidity problem, which is depriving them of being financiers in public projects.
At the end of June, the surplus liquidity of Islamic banks was Tk7,886.01 crore, a BB data reads.
The central bank’s stance
BB Executive Director Subhankar Saha said: “As there is no law, we are taking care of the issues related to audit and monitoring of the Islamic banks as per the existing guidelines.”
“If any bank is found violating the guidelines, we are taking punitive actions against that,” he added.
BB Deputy Governor Abu Hena Mohd Razee Hassan said: “Despite lacking a complete law, Islamic banking is still an important part of the country’s banking sector.”
“We are working to formulate a proper regulatory framework for Islamic banking,” he added.