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OP-ED: An alternative to traditional bonds

  • Published at 05:35 pm July 8th, 2020
The rising popularity of Islamic banking finance

Islamic banking in Bangladesh has made considerable progress 

After the recent budget by the government, there has been a lot of talk as usual by both professionals and laymen criticizing the budget from various standpoints. Many said it does not have a reflection of the current crisis we are undergoing, while there are others who didn’t find the proper allocation for the sector of their concern. 

This time we have a budget of Tk523,190 crores. The overall budget deficit shown is Tk145,380cr of which Tk68,016cr is supposed to be met from external sources while Tk77,363cr from internal sources. 

The funding government is eyeing at Tk47,364cr from banks and Tk30,000cr from certificates and other non-banking sources. This only shows that our government has to borrow a huge sum from banks and other sources. 

Fundraising of this enormous volume will need desperate efforts in the hard times of corona. The other day there was an advertisement in the national dailies inviting the public to invest in various instruments such as treasury bills and bonds and thus participate in the government fundraising.  

In its desperate efforts to raise funds, our government will definitely try to make it as lucrative and credible as possible for the public to invest in terms of bonds as being advertised. 

These have to be tailor-made to attract idle money of investors so that they feel encouraged and confident to come forward and invest. 

In this connection, I would like to draw the attention of relevant agencies and experts to a pertinent aspect from my layman’s point of view. 

Islamic banking in Bangladesh along with many other countries of the world has made considerable progress by now. 

These banks have their own set of laws conforming to Shariah law and at the same time, they have to do their business in compliance with all other rules and regulations pertaining to banking and finance in the country. 

It is an established fact that a substantial part of our population prefers this kind of banking which promises them “interest-free” banking. Many think that banking without interest is a futile and impractical idea in a modern-day world. 

To some critics, though this brand of banking is telling its clients that they do not give them interest, rather they give profit, actually, they are giving interest in a different name only. 

But the people who are convinced that this is very much a part of their perception and faith pertaining to their sense of “right and wrong” and feel safe by not taking an interest, would continue doing banking with Shariah-compliant or Islami banks. 

We are even used to seeing that prominent multi-national banks doing business globally have already opened up windows of Islami banking in very attractive and appealing names of their products such as Sadiq (truthful or trustworthy). 

They have come forward to make certain changes and adjustments in the way they do their business because they cannot afford to miss out on a substantial part of their clients. 

This, I must say is an innovative and prudent business strategy to include and not exclude a certain group of clients. It is the same strategy when you find KFC in India goes for a veggie burger instead of a chicken burger, or in Bangladesh, a soap advertises claiming to be halal.

Recently Islami Bank Bangladesh Ltd declared its remittance collection crossing $575 million mark in June 2020 -- which is another credential to the rising popularity of this kind of banking. 

There has been a visible trend towards accepting this alternative banking system the world over, including countries like the US, UK, and it is on the rise. 

At this point in time, it is crucial that the government should expand the base for fundraising to include more people. This can be significantly enhanced if the products of bonds which are all interest-based can be a little modified to promise its clients of “profit” not “interest.” 

If these are kept on variable profit rates instead of fixed interest rates, these will be able to attract a significant part of our population who strongly feel that it is not ethically correct as per their religious belief to take an interest. Following such steps, this segment of the population is expected to come forward and invest. 

We have government bodies such Bangladesh Islamic Foundation with qualified scholars on the government payroll. They can render useful services if they would study all relevant issues and suggest Bangladesh Bank to carry out necessary modifications to come up with products which are Shariah-based.  

Besides, all Islami banks have their experts on the subject -- the Shariah board -- who can also bolster this effort in suggesting ways and means in this regard. This is bound to see a considerable rise in the selling of products such as Shariah-based government bonds. 

In this connection, Malaysia has a very successful venture to its credit named Sukuk which they introduced in 1990. Sukuk is an Arabic word meaning “legal instrument, deed, check.” This is in fact the Arabic name for a financial certificate but can be seen as an Islamic equivalent of a bond. 

The government of Malaysia calls it the Government Investment Issue (GII). It reminds me of the American soldier being called a Government Issue (GI). In 1990, their investment in this bond was RM125mn which rose to RM138.7bn by 2017. 

This particular model may be studied by our Islamic scholars to work out on Shariah compliance of such bonds, whereas other experts in finance and banking, stock exchange, and government regulatory bodies working in close harmony can find its feasibility for investment. 

They can study a model for similar successful investments elsewhere in the world and replicate it with modification to suit our socio-cultural environment. 

Brig Gen Qazi Abidus Samad, ndc, psc (retd) is a freelance contributor. He can be reached at [email protected].    

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