Islamic banking in Bangladesh and the way forward

Bangladesh, the newly independent nation, inherited a fragile banking structure. Just after independence, Bangladesh government nationalised the entire domestic banking system with six nationalised banks namely Sonali Bank, Agrani Bank, Janata Bank, Rupali Bank, Pubali Bank and Uttara Bank under Bangladesh Bank Nationalisation Order 1972. Subsequently, three specialised state-owned banks were allowed to operate for ensuring adequate credit facilities for agricultural development and industrialisation of the country. With the passage of time, the size of the banking sector has been enlarged both in terms of number and volume during its fifty years' successful journey with many ups and downs. Started a bit later, the Islamic Banking industry has also passed four decades of its operation side by side with its conventional counterparts.
Conceptual Framework of Islamic Economic and Banking: Different economic thoughts had emerged at different times, of them three schools of economic thoughts are very popular: capitalism, socialism and communism. None of these three could meet the demand of time and society. These political, economic and social systems with their inherent weaknesses have given rise to problems of various nature.
Now, the question comes whether Islam has any economic thought or not? Indeed, Islam has a complete economic thought where the concept of ownership belongs to Allah (SWT) and human being are the 'Trustee' or 'Khalifah of Allah(SWT). Allah (SWT) said in the Holy Quran "I am placing a Khalifah on the planet earth" (Surah Al-Bakarah: Ayat 30). Allah (SWT) also said "Spend out of that in which He has made you successor" (Surah Al-Hadid: Ayat 7) and "Give them from the wealth of Allah (SWT) which He has given to you" (Surah An-Nur, Ayat: 33). That means, concept of ownership in Islam is "Trusteeship Ownership".
Basis of Islamic Economics and Banking: Islamic economics is derived from answering three basic questions. Although these questions are also addressed in conventional economics, but Islamic economics answers the question from a different dimension. These are:
a) What to produce? (Production Decision): Islamic economics prioritises the need in three broad categories; these are: Necessity (Daruriyyat), Comfort (Hajiyyat) and Beautification (Tahsiniyyat).
b) How to produce? (Management Decision): Islamic economics addresses the permissible modes as well as environmental protection issues.
c) For whom to produce? (Distribution Decision): It ensures socio-economic justice and optimum allocation of resources.
The basic objectives of Islamic economics are to ensure general well-being (Falah), promote better provisioning (Hasana) and to ensure justice (A'dl)and excellence(Ihsan). Islamic Banking is a branch of Islamic economics which is based on 'Maqasid-Al-Shariah' and the foundation of 'Maqasid-Al-Shariah' are Quran, Sunnah, Ijma (consensus of Islamic scholar) and Qiyas (interpretation of points of Islamic law).
Islamic Banking: Organization of Islamic Conference (OIC) defines Islamic Bank as "a financial institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shari'ah and to the banning of the receipt and payment of interest in any of its operation."
If we analyse the OIC definition of Islamic Banking, we can point out two main components:1) Commitment to the principles of Islamic Shari'ah i.e., Maqasid or Objective part and 2) Banning of Receipt & Payment of interest i.e., Mechanism part. In this write-up, Maqasid aspect of Islamic banking has got main focus, as several studies have been conducted on mechanism part.
Maqasid (Objective) of Islamic Banking: The broad Maqasid of Islamic banking is to maximise welfare in one side and to minimise ill-being on the other. Based on these broad objectives, we can set the priorities of Islamic banking under the following self-explanatory dimensions:
• Ensure distributive justice in resource allocation
• Ensure NEED based & welfare oriented banking instead of GREED based profit-centric banking
• Ensure universal welfare
• Moral filtering in financial deliveries through ethical banking
• Ensure transfer payments:
a) Compulsory: Zakat, Kaffarah etc.
b) Optional: Waqf, Sadaqah etc.
Savings in the light of Maqasid-al-Shariah: Islamic banking, as part of its in-built philosophy of financial inclusion, inspires people to get access to financial net as such it always encourages small ticket size deposit to bring to the banking net. It also ensures 'Masalahil Mursalah' (benefit that is considered to be good in reasonable sense) through products & services. In addition to safe custody of public money, unlike other conventional banks, Islamic banks ensure 'halal' profit as it provides depositors a portion of investment income that is earned through deployment of Mudaraba fund.
Investment in the light of Maqasid-al-Shariah: We have discussed that the objective of Islamic banking is not maximisation of profit rather maximisation of welfare. As such, it prioritises the demand for investment and gives emphasis on fulfilling basic needs of common people and discourages investment in luxurious products that serves the interest of few people. Driven by ethical aspects of banking, Islamic banking does not invest in products and services that are harmful for the society and environment. In order to ensure mass welfare, Islamic banks invest in industries where more employment can be generated. As part of philosophy of Islamic economics, the objective of Islamic banking is to discourage concentration of wealth in few hands and as such it always tries to diversify investment by size, sector and geographical locations.
Background of Islamic Banking in Bangladesh: The establishment of Islamic Banking in Bangladesh was first initiated by the Bangabandhu Government through signing of the IDB (Islamic Development Bank) Charter by the then Finance Minister Mr. Tajuddin Ahmad back in 1974. In 1978, Islamic Banking definition was approved at the Organization of Islamic Conference (OIC) held at Dakar, the Capital of Senegal which had given a conceptual framework to operate Islamic Banking. In the subsequent year, Ambassador of Bangladesh to UAE recommended the Bangladesh Govt. to establish a Bank like Dubai Islamic Bank and accordingly the Ministry of Finance sought opinion from the Central Bank. In 1980, Bangladesh Bank sent a team of representatives abroad to study on the operations of several Islamic banks. In the 3rd Islamic Summit held at Makkah in 1981 suggested the Islamic countries to develop a separate banking system to facilitate trade & commerce within the Shari'ah framework. Consequently, Ministry of Finance wrote to Bangladesh Bank to open separate Islamic banking counter in all branches of state owned banks as a pilot project. In 1982, Islamic Development Bank (IDB) visited Bangladesh and showed their interest to participate in establishing a joint venture Islamic Bank herein. Finally, the dream came true on March 30, 1983 when Islami Bank Bangladesh Ltd. was established and started its commercial operation as the first Shari'ah based bank not only in Bangladesh but also in South-east Asia.
Journey of Shari'ah based Banking: After establishing the first Shari'ah based bank-Islami Bank Bangladesh Ltd. (IBBL) in 1983, Al-Baraka Bank Ltd. was given license in 1987. The bank was renamed as 'Oriental Bank Ltd.' in 2004 and subsequently taken over by ICB Banking Group in 2008 and further renamed as 'ICB Islamic Bank Ltd.'. In 1995, Al-Arafah Islami Bank Ltd. and Social Islami Bank Ltd. were established to operate under Shari'ah principles. In 2001, another Shari'ah based bank came into existence under name and style 'Shahjalal Islami Bank Limited'. EXIM Bank Ltd. created the first instance in Bangladesh to convert all of its operations of conventional banking into Shari'ah-based banking in 2004. Subsequently, First Security Islami Bank Limited and Union Bank Ltd. were given license to operate Islamic banking in 2009 and 2013 respectively. Due to growing demand of Islamic banking in Bangladesh, Standard Bank Limited and Global Islami Bank Ltd. were given permission to convert their operation from conventional banking to Shari'ah based banking in 2020.
Widening Financial Network: During the last four decades of its operation, Islami banking in Bangladesh has appeared not as an alternate banking system rather emerged as a main stream banking system. Currently, 34 banks are conducting Islamic banking activities of which ten full-fledged Islamic banks have 1,659 branches all over the country. In addition, 11 conventional banks have 23 Islamic banking branches and 13 conventional banks have 535 Islamic banking windows. Altogether, Islamic banking in Bangladesh is currently being operated through 2,217 units of branches and windows.
In addition to main stream banking, the agent banking model was introduced in Bangladesh in 2013, to serve underprivileged people in rural areas across Bangladesh. Islamic banking industry also came forward in this new avenue of banking. Currently, around 4,000agent banking outlets are being operated under islami banks with a deposit of Tk.17,880 crore having 59% market share among all the agent outlets of the country. The number of accounts of agent outlets under islami banks stood at 43.63 lac securing 25% market share. During 2022, islami banks' agent outlets mobilised remittance of Tk.66,796 crore which contributed 58% of remittance mobilised through agent banking.
Mobilisation of Savings and Deployment of Fund: Total deposit of Islamic banking industry stood at around Tk.410,000 crore at year end 2022 having 26% market share while total investment (loans and advances) stood at Tk.405,000 crore securing around 30% market share. Total manpower of Islamic banking industry stood at around 50,000 which is around 25% of total workforce of the banking industry.
IBBL continues to retain its leadership in all business parameters in Islamic banking industry. It holds 34.45% of deposit of Islamic banking industry followed by 11.54% by First Security Islami Bank, 10.42% by EXIM Bank, 10.25% by Al-Arafah Islami Bank while Islamic banking branches and windows contribute slight over 7% in the pie. IBBL also takes the leadership in terms of investment having 33.88% market share followed by 13.27% by First Security Islami Bank, 10.96% by EXIM Bank, 9.75% by Al-Arafah Islami Bank while Islamic banking branches and windows contribute slight over 5% in the investment pie.
Facilitating International Trade and Remittance: Islamic Banking industry has immense contribution in foreign exchange and remittance businesses. During 2022, Islamic banks handled Tk.1,687 billion import and Tk.1,171 billion export having 26% and 24% market share respectively. During the same period, it mobilises remittance of Tk.751 billion having 39% market share. IBBL alone handled around 25% remittance of the banking industry during the period.
Financial Inclusion and Welfare Oriented Deposit: Financial inclusion is the in-built mechanism in Islamic banking. It strives to bring unbanked population in the banking net. Islamic banks first introduced small ticket size deposit (Ten Tk. deposit account) in 1995 even well ahead of Bangladesh Bank's instruction to do so. The number of deposit accounts of Islamic banks stood at 2.85 Crore which is around 21% of deposit accounts in the banking industry where IBBL alone contributes 14% of the deposit accounts pie. In addition to regular Shari'ah compliant deposit products, Islamic banks have introduced a good number of welfare oriented deposit schemes like, Mudaraba Cash Waqf Deposit, Mudaraba Hajj Savings Deposit, Mudaraba Mohor Savings Deposit etc. which are being replicated by other conventional banks as well.
Industrialisation and CMSME Development: Islamic Banking has huge contribution in different branches of investment including industrial finance, Cottage, Micro and Small & Medium Enterprises (CMSME) investment, agricultural investment, Islamic micro finance and other welfare oriented investment schemes. The industrialisation that was started back in 2004-2005 with the establishment of textile and ready-made garments (RMG) was propelled by Islamic banking in general and IBBL in particular. Currently more than 6,000 industrial units are being operated by IBBL of which more than 1,000 textiles and RMG units are there. Islamic banking industry contributes around 27% of industrial finance market share while it has 38% market share in CMSME investment.
Agri and Microfinance: As part of national priority, Islami banks gives utmost emphasis on investment in agriculture. Currently, Islami banks have around 17% market share in agricultural investment despite having a good number of dedicated banks to do so. In 2022, IBBL alone opened LC for USD 712 million against fertiliser which was around 63% of total fertiliser import under Govt. subsidy.
In addition to regular Shari'ah compliant investments, islami banks also work for poverty alleviation program. The initiative was driven by IBBL back in 1995 through Rural Development Scheme (RDS) under Islamic Microfinance Model. Currently, there are 16 lac members having deposit base of Tk.1,560 crore. 8.71 lac members have so far availed investment having outstanding investment of Tk.5,600 crore where recovery rate is more than 99%.
Socio Economic Development: Islami banking industry has mademention-worthy contribution in socio-economic development of the country in addition to its regular business operation during last four decades of operations. Islami banks in Bangladesh have created direct employment opportunities of approximately 1.20 crore people through their diversified investment operations across the country. Every year islami banks contribute handsome amount of fund to the national exchequer. During 2022, islami banks paid approximately Tk.6,700 crore to the national exchequer in the form of corporate tax, advance income tax, VAT, excise duty etc. Islami banks, particularly IBBL, have significant contribution in developing foreign exchange reserve. IBBL alone contributed USD 12 billion by selling foreign exchange to the central bank since its inception.
Corporate Social Responsibility (CSR) is in-built philosophy of islami banks. Being a responsible corporate citizen, islami banks in Bangladesh has made CSR expenses of Tk.1,129 crore during 2022 which is 50% of total CSR expenditure of banking industry during the period. It is worthy to mention that IBBL alone contributed around 29% of the CSR expenditure during the period under review.
Islami Banks also came forward at the crisis moment of nation in line with national priority. Govt. declared 28 stimulus packages worth Tk.1.92 trillion to tackle with multifarious devastating outcome of COVID-19as well as retain and accelerate business growth. Out of the above, 10 stimulus packages worth Tk.1.69 trillion was implemented by banking sector where islami banks played significant role.
Growing interest of Islamic Banking Globally: Islamic banking is growing at a faster rate not only in Bangladesh but also abroad than that of their conventional counterparts. Currently, 526 Islamic banking institutions are functioning in 72 countries around the globe. The quantum of Islamic finance assets stood at USD 4 trillion of which Islamic banking assets is USD 3 trillion having 6% global market share. Now the question comes why Islamic banking is growing at a faster rate than conventional banking? Is it because of religious emotion or it has some economic justifications? Definitely, Islamic banking has some inherent beauty and strengths for which Islamic banking has expanded even in many non-Muslim countries including UK, USA, Germany, Argentina, Denmark, Luxemburg and Switzerland. Islamic banking has also been proved to be more resilient during global financial meltdown. The secrets behind success of Islamic banking are shown below:
• Money is not used as a commodity rather a medium of exchange
• Complete avoidance of interest in all of its activities thus compounding is not allowed
• Operates basically for the welfare of the people
• Doesn't invest only for profit, but looks into the need of the society
• Ensures fairness and justice in all sorts of transactions
• Real assets based and real assets backed supervised investment
• Encourage socially desirable enterprises and discourages socially undesirable ones
• Ensures maximum employment and balanced development
• The relationship between banker and the client is 'business partner' not lender and the borrower
Prospects and the Way Forward: There are ample prospects of Islamic banking in Bangladesh. Due to its inherent strength of mechanism and beauty of Maqasid, Islami banking has become very popular among all walks of people. As a consequence, around one third of the country's banking system is currently running under Islamic system. Due to growing demand for Shari'ah compliant products and services, a good number of private sector banks are in the pipeline to convert their operation into Islamic system. Both the stock exchanges have introduced Shari'ah Index in the capital market. Central bank has also come up with different Shari'ah compliant products in recent times which includes Sovereign Investment Sukuk, Islamic Bank Liquidity Facility (IBLF), Mudaraba Liquidity Support (MLS), Pre-finance against CMSME etc.
Despite having huge prospects, there are some issues that are needed to be addressed for flourishing Islamic banking operations. This is the high time to enact a separate Islamic Banking Act incorporating all the latest developments of Islamic financial market. Bangladesh Bank is in the process of revising the existing Islamic Banking Guidelines-2009. In addition to that an independent Shari'ah Board needs to be formed at central bank for overall supervision of the Islamic financial system.
There is a dearth of Islamic banking knowing professionals despite having strong demand. Practical aspects of Islamic banking should be incorporated in educational curriculum of universities both in graduate and post-graduate level. Continuous research and development is always the key to success which needs to be ensured through collaboration with faculty members of universities and practitioners of Islamic banks. There should have uniform practices among all Islamic banks. And finally and most importantly we should enrich our international collaboration and branding.

Khaled Mahmud Raihan is an FCCA and a Senior Vice President of Islami Bank Bangladesh Ltd. He can be reached at [email protected]