Islamic banking industry is growing faster than the conventional banks as the banks contributed 23.12% of profit to the industry in 2012 though the shariah-based banks are still a minor proportion, grossly one fifth of the total banking sector, according to a Bangladesh Bank report released recently.
Bangladesh has a large population of Muslim, and among them, the embrace of Islamic banking is increasing at a faster rate due to their faith, said a senior executive of Bangladesh Bank.
According to the report, the profit to total assets ratio of Islamic banks reached 9.74%, which is higher than that of the industry average of 8.14%. On the other hand, the non-profit income to total assets ratio was only 1.4% as compared to the industrial average of 2%.
“Islamic banks and financial institutions fared better than conventional ones in the last global financial crisis, which may be a reason why we see niche presence of Islamic financing widening steadily in non-Muslim countries including the advanced Western economies,” said Bangladesh Bank Governor Dr Atiur Rahman.
Islamic banks have been operating in Bangladesh for three decades alongside the traditional banks. Islamic banks have certain similarities to the conventional banking system due to working in a similar financial environment.
The ROA (return on assets) of the Islamic banking industry is higher at 1.13% compared to the overall banking industry of 0.84% in 2012.
The ROE (return on equity) of Islamic banks stood at 17%, which is higher than that of the overall banking industry ROE of 10.56%, indicating the earnings of Islamic banks become higher compared to their equity position.
Islamic banks’ classified investment to total investment ratio of 3.9% showed a relatively better position as compared to 10% for the overall banking industry, said the report.
In the perspective of stability in the financial system, Islamic banks are less vulnerable to risk than conventional banks. They are able to pass the negative shocks on the asset side to the investment depositors, said a senior executive of Bangladesh Bank.
The risk-sharing arrangements on the deposit give secondary protection to the bank, in addition to its book capital. They also tend to be more conservative for providing a stable and competitive return to investors, he said.
Compared with the overall banking industry, the combined share of Islamic banks (excluding Islamic banking branches/windows of conventional banks) is 16.85% in assets, 19.85% in investments, 18.33% in deposits, 14.3% in equity and 17% in liabilities as of end December 2012, said the report.
Islami Bank Bangladesh Limited is the first bank that introduced commercial banking based on Islamic Shariah with foreign shareholding in Bangladesh in 1983.
Since then Islamic banking has been growing progressively together with the conventional banks.
Currently, 7 banks are operating as full-fledge Islamic banks with 750 branches while nine conventional banks are offering Islamic banking through setting up 20 widows.
Islamic banks are now focusing on a wider horizon, encompassing not only the conventional shariah products but also involved with SME’s and microfinance and financing in agriculture sector.
