Even with immense potential, the Islamic financing industry in Bangladesh has faced various challenges, especially in the last couple of years. The lack of diversification of the industry, primarily dominated by banking, is a big barrier to tapping its potential. Now, governance and management problems in some Islamic banks have emerged as a big challenge. Several media reports make it clear that the sound financial foundation of the country's leading Islamic bank has already been weakened due to mismanagement. A few other Islamic banks have also faced the jolt of wrong intervention from a section of directors. So, there is a ripple effect in the Islamic financing industry and the overall banking industry for obvious reasons.
Currently, Islamic banks represent 25.37 per cent share in deposits and 29.18 per cent share in investments in the country's banking industry. The first and lead Islamic bank alone shares around one-third of the overall Islamic banking market. Islami Bank Bangladesh Ltd (IBBL), the pioneer in the country's Islamic financial industry, mobilised around 35 per cent of the total deposits in the country's Islamic banking industry as well as around nine per cent of the overall sector by the end of FY23. Thus, the bad performance of the bank usually casts a shadow on the overall industry.
Statistics available with Bangladesh Bank also showed that at the end of June 2023, there were 10 full-fledged Islamic banks in the country operating with 1671 branches against 11,177 branches in the whole banking system. Besides this, 23 Islamic banking branches of 11 conventional commercial banks and 588 Islamic banking windows of 14 traditional commercial banks also provide Islamic financial services in Bangladesh.
The latest annual financial stability report, prepared and released by the central bank a few months back, indicated a gloomy situation of Islamic banking in the country last year. It said: "The Islamic banks in Bangladesh, as a whole, showed improved performance in terms of return on assets (ROA) in 2022. But they registered lower growth in total assets, investments (advances), deposits, and shareholders' equity." It also added that the overall asset quality of the Islamic banks marginally impaired during 2022. The main reason behind the bank's asset quality deterioration is an increase in default and rescheduled investment ratios.
The brief and cautious evaluation of the country's Islamic bank is alarming. There is, however, no rigorous study on the correlation between the overall performance of the banking sector and that of the Islamic banks in Bangladesh. Nevertheless, trouble in the Islamic banks affects the overall banking sector, which is reflected in various indicators. The financial stability report pointed out that in the last year, the country's banking sector continued to register a slowdown in asset growth, which began in 2021. The asset growth rate stood at 7.50 per cent in 2022, which is lower than the previous two years. The overall asset quality in the banking sector also deteriorated in 2022, as the gross non-performing loan ratio (NPL ratio) increased marginally, primarily due to increases in NPL ratios of state-owned commercial banks, foreign commercial banks and specialised development banks.
Though the Islamic financing industry includes banking, capital markets and insurance sectors, in Bangladesh, it is banking which is preeminent. Islamic insurance, or Takaful, was introduced in 1999 and is still in a nascent stage.
Currently, 12 life insurance companies offer family Takaful products, and two non-life insurance companies have products of general Tafakul. Neither the Insurance Development & Regulatory Authority (IDRA) nor Bangladesh Bank has comprehensive statistics on the Tafakul sector. So, it isn't easy to know the actual size and market penetration status of the country's Islamic insurance industry.
Sukuk, or Islamic bond, is a new product in the country's financial market. In 2020, the central bank issued its maiden Sukuk, which offers a profit of 4.69 per cent annually for a tenure of five years. The total amount of Sukuk issued stood at BDT 180.00 billion till the end of June 2023, as per the quarterly update report of Bangladesh Bank. Earlier in 2004, the Bangladesh Government Islamic Investment Bond (BGIIB) was introduced to maintain the Statuary Liquidity Ratio (SLR) by the country's Islamic banks. The government, however, is yet to borrow using the bond due to a lack of Shariah-compliant projects. At the end of FY23, the total sale of the bond stood at Tk 81.36 billion.
Again, both the country's bourses have the Shariah Index, which is a subset of the broad market index. The Sharia Index includes different stocks that have to pass the rules for Shariah compliance.
As demand for secured and ethical investment options grows, Islamic securities can cater to the demand. It requires adequate policy space so that Islamic debt instruments can be issued without difficulty and investors can purchase those flexibly. Regulatory supervision is also necessary to ensure compliance with Shariah principles.
It is to be noted that the Islamic financial system relies on risk sharing and links the growth of investment and credit to the development of the real sectors of the economy. Speculative transactions that aggravate risk without creating value are also forbidden in this system. That's why the system is less risky and more disciplined than the conventional banking and financial system. Moreover, it is not necessarily restricted to followers of the Islamic faith only. Instead, it provides an opportunity for anyone who wants to invest and operate an ethical financial system.
The central bank's quarterly assessment rightly mentioned that the other systems of the Islamic financial sector, such as the Islamic capital market, Takaful and microfinance sector, may also flourish systematically if supportive policies are adopted and implemented. It will lead to the expansion of the overall Islamic finance industry in the country.
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