Speakers at a webinar on Saturday suggested the country's Islamic banks to reshape their risk management strategies to cope with the losses due to Covid-19 pandemic.
They put forward the suggestion as the Islamic banks could not participate in the stimulus packages offered by the central bank and the government due to its shariah structure.
The banks will have to be innovative and inclusive to find solutions within the Shariah law to survive the unprecedented crisis, they said.
Bangladesh Institute of Bank Management (BIBM) in association with INCEIEF (The Global University of Islamic Finance) organised the webinar on 'Covid-19 and Risk Management for Islamic Banks: Proposal for the New Normal Scenario'.
Dr. Shah Md. Ahsan Habib, Professor of BIBM, presented are search paper. Other members of the research team included Dr. Md. Mahabb at Hossain, Assistant Professor of BIBM.
Dr. Habib said the country's Islamic banks have faced many unprecedented challenges during the Covid-19.
He said Bangladesh Bank (BB) has advised the banks for blocking all interest charged for April-May 2020 and not to realise the same from the clients during Covid-19.
In this situation, he said, Islamic banks faced a problem in distributing profit to the Mudarabah depositors for these particular months.
BB has instructed the Islamic banks to extend the time to pay instalments of the customers. However, the roll-over is strictly prohibited in the Baitransactions, the common mode of Islamic banks in Bangladesh.
Therefore, he added, the Islamic banks could not charge any profit or re-fix their sale value of Murabahah/Muajjal goods during the extended time.
Islamic banks also faced challenges in using refinance funds due to Shariah issues, and the quick adoption of digital technology.
Professor Habib said the Islamic banks should work on portfolio reallocation and product distribution. "A balancing composition of both debt-based and equity-based Islamic banking products itself is a fundamental risk management tool for the Islamic banks."
He said there should be an alignment of the debt-based and equity-based product compositions both at the asset and liability side. Equity-based investment products (Mudarabah and Musharakah) might be very effective in a crisis like Covid-19 when banks are sceptical about the efficient use of the investment funds by the clients of the Islamic banks.
He said the presence of equity-based products is the true indicators of the Islamic banks' approach of sharing risks and are the real inbuilt risk absorbers for the Islamic banks in the crisis.
"Adding Sukuk in Islamic banking in near future would add value to the risk management approach of the Islamic banks of the country."
He said Islamic banks needed to update their newer form of credit risk, cyber security, crime, and other operational risks to mitigate the evolving risk exposures in line with their risk appetite.
Ahsan Habib said that for handling the macro risks associated with the Covid-19, Islamic banks must work on strategising investment to support the policymakers in this critical moment.
"Islamic banks must have an internal strategy for approaching stimulus packages so that its clients and the bank itself might optimally benefit from these being within Shariah law."
He said that irrational profit targets would destroy the risk management framework at this critical time. "Rather, Islamic banks must be very careful about reputational risk at this moment."
He said considering the fund necessity during recession and crisis, Islamic banks may think to create a profit equalization reserve (PER) and investment risk reserve (IRR) in near future.
He said IT and Fin-tech service platforms and crime-prone activities must also be under extensive monitoring to handle any cyber risk and financial crimes.
"It might be a great time to continue with the digital marketing by a bank for improving trust and confidence of the banks' clients. Business recovery would be difficult for banking institutions in the presence of the erosion of trust and confidence."
He said risk management approach of the Islamic banks for industry consolidation Covid-19 reiterates that environmental risk must receive due emphasis in Islamic banking operation, and must also be a core component of Shariah compliance risk.
Mr. Habib said Islamic banks are expected to play leading roles in the country's upcoming green banking and the green growth movements in the post-Covid situation; and for that, the recovery approach of the Islamic banks needs to be 'green and environmentally sustainable'.
He said a supportive regulatory and governance framework is crucial for installing effective risk management in banks. A differential product basket of Islamic banks with debt and equity-based products composition might strongly bid for a separate act to govern a distinct nature of Islamic banking operation in the country.
Chairman (Acting) of CSBIB M. Azizul Huq said Islamic banks get advantages in Muslim-dominant country, but these banks do not get privileges as major banks are not faith based banks.
Director Executive Education & E-Learning of INCEIF Dr. Ziyaad Mahomed Islamic banks should be incentivised to establish an equity-based instruments.
Managing Director and CEO of Islami Bank Bangladesh Limited Md. Mahbub-ul-Alam said Islamic banks are at huge risks as it can't charge additional profit.
He said the Islamic banks have extended the period of loans but cannot charge on the extended time. Shariah council should think about a way out on this issue, he said.
"We have to address this issue as quick as possible, otherwise the Islamic banks will face a huge blow," he added.
Ahmed Firas, Head of Shariah HSBC Amanah Malaysia Barhad, and Dr. Md. Akhtaruzzaman, Director General of BIBM, also spoke at the webinar among others.
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