This year, Islamic finance made much headway in Bangladesh, one of the Muslim-majority nations: three more banks -- Standard, NRB Global and Jamuna -- became Shariah-compliant while the Sukuk, a bond structured to comply with Shariah law that forbids the payment of interest, made its debut.
With the three new banks, the number of fully-fledged Islamic banks will be 11.
Then last month, the Bangladesh Bank allowed Reliance Finance to rename itself as Aviva Finance, as the non-banking financial institution requested to change its identity and branding as an Islamic finance company.
The huge response the central bank got from the investors for the Sukuk, the Islamic bond, suggests the future of Islamic finance is bright in Bangladesh.
Banks and individuals placed 39 bids worth Tk 15,153 crore in the auction for Sukuk against the targeted amount of Tk 4,000 crore.
“People are more confident in Islamic bank as 80 per cent of the population is Muslim,” said Salehuddin Ahmed, a former governor of the BB.
Usually, many are not interested in paying or getting interest from banks.
As a result, the cost of funds for the Shariah-compliant banks is lower than the conventional ones, he added.
Bankers said that the Islamic bank progressively seems attractive to conventional banks given their lower statutory liquidity ratio (SLR) and higher loan-deposit ceiling of 90 per cent, said a BB high official requesting anonymity.
SLR is the reserve requirement that banks are required to maintain in the form of cash, gold reserves and central bank-approved securities before disbursing loans to the customers.
Islamic banks have to keep SLR of 5.5 per cent of their deposits, whereas for conventional banks it is at least 13 per cent as per regulations.
“As a result, Islamic banks can hold more reserve funds than conventional banks, which is a big opportunity for them, because it positively affects their profitability,” he added.
On the other hand, the loan-deposit ceiling of Islamic banks is higher than in conventional banks.
As per the BB’s regulations, currently, conventional banks are required to maintain loan-deposit ratio (LDR) of 85 per cent, meaning they can lend Tk 85 against a deposit of Tk 100. The ratio for Shariah-based banks is 90 per cent.
The Islamic finance industry has experienced phenomenal growth and expansion in the country as the deposits and investments of the industry grew 2.35 per cent and 3.05 per cent respectively, while remittance and excess liquidity of Islamic banking industry increased by 2.63 per cent and 29.16 per cent respectively at the end of June.
Now, eight full-fledged Islamic banks have been operating with 1,274 branches out of the total 10,588 branches of the whole banking industry.
The banks are: Islami Bank Bangladesh, ICB Islamic Bank, Social Islami Bank, Al-ArafahIslami Bank, Exim Bank, Shahjalal Islami Bank, First Security Islami Bank and Union Bank.
In addition, 19 Islamic banking branches of nine conventional commercial banks and 155 Islamic banking windows of 12 conventional commercial banks are also providing Islamic financial services in the country, as per the central bank data.
Three more conventional banks namely Mercantile Bank, Midland Bank and NRB Commercial Bank have also started offering Shariah-compliant financial services through dedicated windows this year.
The Islamic banking industry holds at 24.67 per cent share of deposits, 25 per cent of loans and 27 per cent of remittance inflows, as per BB data.
“Islamic banking is gradually getting popular internationally. People of any religion now trust and are confident with Shariah-based banks as we have double compliance: one by the central bank and the other by our Shariah supervisory committee,” said Abu Reza Mohd. Yeahia, deputy managing director of IslamiBank Bangladesh, the largest private bank in the country.
Experts said Islamic banking has great potential but there are some challenges like the lack of Islamic banking and finance infrastructure, lack of concrete legal basis, low attention from the central bank, lack of Islamic capital market and the unavailability of Shariah law and awareness.
National Shariah boards under the central bank should be established to maintain the compliance of Shariah lenders, said industry insiders.
Conventional bankers also criticised that the Islamic banks are not to applying the rules of Shariah completely.
Few conventional banks are offering Islamic banking as a parallel service only to add to their profitability by attracting people who value the Shariah-based system, said a high official of a conventional bank seeking anonymity.
