The government is considering introducing a separate security instrument for the Islamic banks, aiming to meet its budget deficit.
Such banks have no fixed-income instrument for liquidity management like conventional banks. The name of the instrument is likely to be 'Islamic financial instrument'.
To this effect, a project on the instrument will be taken up in the next fiscal budget. The finance ministry has started preparatory work. It will hold a high-level meeting sometime next week to scrutinise and discuss the issue.
A senior assistant secretary of the finance division who deals with the matter said there is no effective statutory liquidity ratio (SLR) management system in the Islamic Shariah-based banks and no opportunity to participate in the government securities like treasury bills (T-Bills) and bonds, short- and long-term debt instruments issued by Bangladesh Bank (BB) on the behalf of the government. For this, they have no fixed-income instrument for their liquidity management.
He, however, said there is a huge demand for Islamic financial instrument for the country's Shariah-based banks.
"Currently, the government can borrow only from the conventional banks through T-bills and bonds. The main source of deficit financing of the government is domestic sector. It borrows from two domestic sources: banking system through T-bills and bonds and the non-banking system mainly through National Savings Directorate (NSD)," a senior official of the finance division told the FE.
The government borrows from the conventional banks through government T-bills and bonds for meeting its deficit financing. Islamic Shariah-based banks are the most important part of the country's financial sector. So, the government is trying to introduce a separate instrument for the Shariah-based financial institutions, aiming to keep the government budget deficit financing risk-free and develop further, he said.
The government issues bonds as guarantee against the pool of funds formed by the Islamic banks and individuals in order to develop money market for smooth liquidity management of Islamic banks. Virtually, the government does not borrow money from this sector.
Contacted, managing director and chief executive officer (CEO) of Exim Bank Dr Mohammed Haider Ali Miah said Islamic Shariah-based banks cannot participate in the government T-bills and bonds, repo and primary dealers (PD) and even cannot participate in stock market.
"Presently, the country's Shariah-based banking sector has been facing an imbalance in liquidity management. A financial instrument is now badly needed for the sector to remove imbalance. There is a huge fund in the sector," he said.
Islamic Shariah-based banks are facing liquidity problem due to non-repayment against their investment fund. It would be better for the Islamic banking sector if the instrument is finally introduced, he added.
Currently, there are eight Islamic Shariah-based private commercial banks (PCBs) in the country with 1,120 branches. They carry out banking activities according to Islami Shariah-based principles i.e. profit-loss sharing (PLS) mode.
Moreover, 31 Islamic banking windows and 19 Islamic banking branches of 15 commercial banks are providing Islamic financial services.
Total deposits of the Islamic banks and Islamic banking branches and windows of the conventional banks stood at Tk 1857.3 billion at the end of December 2016 which accounted for 20.79 per cent of total deposits Tk 8933.92 billion, according to the BB's annual report.
Total credit of the Islamic banks and the Islamic banking branches and windows of the conventional banks stood at Tk 1647.0 billion at the end of December 2016 which accounted for 24.44 per cent of total credit Tk 6739.3 billion of the banking system of the country.
Islamic banking was first introduced in the country in 1983 by foreign investors from Saudi Arabia and Kuwait.
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