Legal framework needed for Islamic banks

The first Islamic bank in the country was established in 1983. This was in fact the first Islamic bank in the South and South-East Asia region.
Bangladesh is currently having a significant number of Islamic banking institutions including eight full-fledged Islamic banks and 16 Islamic banking windows of conventional banks. Islamic banking covers almost 25 per cent of the total banking market share. According to the Bangladesh Bank, growth of deposits is more in Islamic banks than in conventional banks. In 2013, growth of Islamic banks' deposits was 25.83 per cent compared to 20.58 per cent in conventional banks. The reason for such increasing trend of Islamic banking in Bangladesh or anywhere else in the world may well be attributed to its intrinsic value, uniqueness of distinctive banking, ethical and sustainability aspects. There is a still scope for further growth of Islamic banking in Bangladesh because the overwhelming Muslim population of the country (about 90 per cent of the population) apparently prefer to satisfy their banking needs in a Shariah-complaint way.
BANGLADESH SCENARIO: Though the Bangladesh Bank gave license to the first Islamic bank in the country in 1983, this sector needs a lot of attention in terms of regulatory issues and other supportive factors. There is no comprehensive Islamic banking law until today to control, guide and supervise this sector except incorporation of some Islamic banking provisions in the amended Banking Companies Act, 1991. Apart from this, the Bangladesh Bank issued guidelines for conducting Islamic banking in Bangladesh via a circular on November 09, 2009. According to the Bangladesh Bank, "This guideline has been prepared mainly on the basis of the Banking Companies Act 1991, the Companies Act 1994 and the Prudential Regulations of the Bangladesh Bank. However, this guideline should be treated as supplementary, not a substitute, to the existing banking laws, rules and regulations. In case of any point not covered under this guideline as also in case of any contradiction, the instructions issued under the Banking Companies Act and Companies Act will prevail".
No separate division in the central bank to control, guide and supervise the operation of the Islamic banks has yet been opened and inspection and supervision of the Islamic banks operation are being carried out by the Bangladesh Bank as per the general guidelines formulated for the conventional banks.  There is no Shariah Supervisory Council in the Bangladesh Bank. The main job of a Shariah Supervisory Council is to protect the genuineness in carrying out Islamic banking. The Council normally consists of scholars of Islamic law and is consulted regarding a bank's contractual dealings, its new products and its daily activities. They are appointed to ensure that the day-to-day running of the bank would be complaint with Islamic law. The existence of this council will promote uniformity in the Islamic banking practices.
In view of rapid expansion of Islamic banks in Bangladesh, it is high time for the government to act on and promote a regulatory framework for Islamic banks in the country. But it is not an easy thing to do.  Islamic banking and finance are an ideological discipline based on Shariah principles and the emergence of Islamic banks was initiated with the intention of eliminating the roles of interest, generating permissible (halal) activities, promoting profit-loss sharing, establishing social equity and justice, upholding ethical value and maintaining sanctity of contract. While conventional banking and finance is governed by the laws of a nation, that is legislation passed by the State, Islamic banking and finance are governed by two sets of law - one, divine Islamic law (Shariah) and the other, man-made (conventional) laws. Islamic jurisprudence offers its own framework for the implementation of commercial and financial contracts. Banking and company laws appropriate for the enforcement of Islamic banking and financial contracts do not exist in many countries.
EXPERIENCE OF OTHER COUNTRIES: Two different approaches are taken by countries where Islamic banking is operating parallel to conventional one. One approach is to replace the existing banking system with Islamic banking and the other one is to set up individual Islamic banks in parallel to the conventional interest-based banks. Pakistan, Iran and Sudan have taken the former while rest of the countries took the latter.  Therefore, the legal frameworks of Islamic banks vary from country to country. For example, Malaysia, Turkey, Sudan, Yemen and the United Arab Emirates have enacted Islamic banking laws parallel to the existing conventional banking system. On the other hand, in countries like Saudi Arabia, Egypt, Qatar, Pakistan, Iran, Jordon and Bahrain, they have not enacted any new laws to accommodate Islamic banks. Instead, Islamic banks operate under the existing legislations which legalise the conventional banks.
It is also often assumed that two different systems within the same economy would give rise to certain clashes. These clashes and challenges should be addressed if efforts for bridging the gap are to be effected at a useful level. These clashes include those based on legislative grounds and those faced in the process of judicial adjudication of disputes. It even includes those which are relevant to alternative means of dispute resolution. Therefore, it is not an easy task for any government or regulatory body to create a legal framework overnight. Rather it is a complex issue and needs to be implemented gradually. An overnight solution to the problem may not produce desired result. For example, the government of Pakistan tried to institutionalise Islamic banking system at once at the national level. Their sudden effort did not produce expected outcome due to lack of required support or further progress slowed down. Later, they changed their strategy and adopted a policy of gradual implementation of legal framework for Islamic banking.
However, Malaysia is a country where this effort has been successful due to a gradual implementation of Islamic banking regulations which Bangladesh can consider. Malaysia started developing its Islamic banking and financial infrastructure in 1983 by introducing the Islamic Banking Act 1983. The main purpose of the enactment of this law is to govern the operations of Islamic banks.  Under Section 3 of the same Act, they set out a rule that every bank that wants to practise Islamic banking must establish a Shariah advisory body to advise the bank on the operations of its banking business to ensure that the bank complies with the Shariah. There is a National Shariah Advisory Council in Malaysia which advises the Central Bank in Malaysia. Since in Islamic banking the depositor is a partner of the banks and share in the profits or loss with the banks which contradicts the traditional banking system  and accept deposits from clients on the basis of sharing of profit and loss, Malaysia amended the Partnership Act 1932 on December 31, 1984. In 2009, Malaysia passed the Central Bank of Malaysia Act 2009 recognising the National Shariah Advisory Council as the ultimate authority and centre for any issues and questions on Shariah relating to financial institutions and also the courts of law. Under this Act, any ruling made by the National Shariah Advisory Council shall be binding on Islamic financial institutions, the court and arbitrator.
The conventional banks in Malaysia, which operate under the Banking and Financial Institutions Act 1989,  are also allowed to carry out Islamic banking and finance business in addition to their conventional banking business. Like the Islamic Banking Act 1983, any licensed institution carrying on Islamic banking business and Islamic financial business under the Banking and Financial Institutions Act 1989 may refer a question to the National Shariah Advisory Council and shall comply with directions on Islamic banking business and Islamic financial business issued by Bank Negara which is the central bank in Malaysia in consultation with the National Shariah Advisory Council. In addition, there is a separate Shariah Advisory Council for the Securities Exchange  Commission in Malaysia whose role is to advise and provide the Securities Commission on Shariah matters related to Islamic capital market transactions and activities.
Once started as a small segment of the banking industry, Islamic banking and finance have emerged as a key player in the banking industry in recent years and is gaining recognition across the globe. Therefore, the government should develop a legal framework  keeping in view the fact that financial soundness may be one of the many reasons for retaining the confidence of clients of any bank, but in the case of an Islamic bank, Shariah compliance is a matter of equal importance.
The writer is working in a private bank in Bangladesh and a member of the Institute of Islamic Banking and Insurance, the UK.
 akbar.chowdhury@yahoo.com