Product structure of Islamic banks in Bangladesh

Bangladesh established its first Islamic bank in 1983. Since then, this sector has been witnessing  a significant growth in terms of size and market share. According to Bangladesh Bank, in 2006, the total deposit of Islamic banks and Islamic windows of conventional branches stood at Tk. 232981 Million which was 9.67 per cent of all banking sector. By the year 2009, total deposit of this sector reached at Tk532.6 billion which was 17.5 per cent of total banking sector. In 2012, total deposit stood at Tk 961.2 billion which was 17.81 per cent of total banking sector. On the investment side, the total investment of Islamic banks  in 2006 stood  at 210493.80 million which was 14.88 per cent of total banking sector of Bangladesh. In 2009 total investment reached at 492.90 which was 20.20 per cent of total banking sector. In 2012, the total investment stood at Tk 1017.10 billion which constituted 21.10 per cent of total banking sector.   
Since this industry is still emerging in the country, it is essential to know at this stage    if the products and services of Islamic banks in Bangladesh  are consistent with the  practices that have been  developed  and universally accepted  by the practitioners of Islamic banks  across the globe. It is really important for Islamic banking industry in the country not only for the sake of outreach but also for the regulators to formulate policy which will  enhance the credibility and international stakeholder's confidence.
PRODUCT AND SERVICES OF ISLAMIC BANKS IN BANGLADESH: Traditionally, banks accept deposits and offer loans. Therefore, banks  normally have both deposits and loan products. For Islamic banks there is no room for offering loan products except  Qurd-al-Hasana or interest-free loan. Therefore, for Islamic banks asset-side products are known as investment products. These investment products resemble to loan products in conventional sense, although Islamic banks invest money through various unique  principles and techniques which are interest-free and shariah- complaint.
The  major part of  the deposits of Islamic banks in the country  is  mobilised on the principles of Al-Wadia (safe custodianship) and mud?raba (trust financing). Based on these two principles Islamic banks offer various types of  deposits accounts which are: Current accounts, savings accounts and investment accounts. According to Bangladesh Bank, as of September 2014, among different types of deposits of the Islamic Banking industry, Mudaraba Term Deposits secured the highest position (49 per cent) [chart-1] followed by Mudaraba Savings Deposits (MSD) (17 per cent), Mudaraba Special Savings (pension/profit) Deposits (9 per cent), Special Scheme Deposit (10 per cent), Current Account Deposits (4 per cent) etc.
Based on the theoretical viewpoint and nature of the contracts, the Islamic investment  principles can primarily  be classified into two broad categories: profit and loss share (PLS)-based contracts and non-PLS based contracts.  The non-PLS based contracts or debt-like instruments  are usually  used by Islamic banks  as Islamic mode of financing. These contracts are mainly five sale-based contracts which   are: Salam Sale ,Muajjal Sale, Istisna Sale, Ijarah Sale, Murabaha-Sale. In practice, Islamic banks offer various fee-based products based on these five-principles. Therefore, the shariah principles adopted by Islamic banks are:  a) Profit and loss sharing, b) fees-based, c) free services and d) ancillary principles.  Mudarabah (capital or trust financing) and musharakah (partnership), are the only two principles that fall into PLS-based contracts. Currently, PLS-based products are not very popular and is very negligible  in terms of size.  As of September 2014, the total share of Musharaka (1.20 per cent) and Mudaraba (0.05 per cent) is only 1.20 per cent and 0.05 per cent respectively.

Fees-based principles  can be further divided into  three categories : i) fees-based on mark-up, ii) fees-based on commission and iii) Fees-based on services.  Products and services which charge fees-based on mark-up  usually use Muajjal Sale,  Ijarah Sale, Murabaha-Sale and Hire Purchase. Two are pre-dominant in the financing principles of Islamic banking: Murabahah (Cost-plus-profit margin) and Ijarah (Lease financing).  The analysis of mode-wise investment as of September 2014  revealed that the highest investments was made through Bai-Murabaha mode (44.01 per cent) at the end of the quarter July-September 2014, [chart-2] followed by Bai-Muajjal (24.94 per cent), HPSM (15.73 per cent), Ijara & Ijara-bil-Bai (7.48 per cent), others (4.48 per cent). Fees based on commission principles are used normally for different types of  LC's, Bank Guarantee and various bill collection. Fees based on services principles are used for foreign remittance disbursement, locker services, issuing PO, DD, ATM cards and internet banking, etc., within free service principles, banks offer  qard al hasana. For letter of credit (LC) facilities, banks in the country  normally use murabaha and wakalah principles in addition to Musharakh principles.
One of the major challenges Islamic banks face is to compete with conventional banks in terms of product offerings to attract customers. The theoreticians and practitioners of Islamic banks across the globe have diversified Islamic banking products. At the retail end, they have developed Islamic Credit Cards.  Some Islamic banks in Bangladesh  have now  started offering Islamic Credit card. For offering credit cards, banks are using either ujarah model or bai-murabaha model.
In 2004, Bangladesh introduced 'Bangladesh Government Islamic Investment Bond' in which Islamic banks can invest in case of liquidity surplus or crisis. In 2012, the Bangladesh Bank (BB) introduced the Islamic Inter-bank Fund Market (IIFM) for Islamic banks to invent if any banks have excess fund. Both Islamic Bond and IIFM follows Mudarabah Principles.
SOME SPECIAL FEATURES  OF THE PRACTICES:
l Professor Sudin Haroon (1998) observed that  the Islamic banks in Bangladesh adopted the above-mentioned principles for various products and services.  After three decades of its introduction, the same principles are still being used  which shows that there is no changes in the structure of Islamic banking products  even though many new products were introduced.
l On the asset side, the share of PLS-based  financing is still very marginal and the growth of Islamic banks largely depended on non-PLS- based  financing.
l The principles adopted by Islamic banks in Bangladesh mainly resemble with GCC countries. Even for introducing Islamic credit card which is the latest addition into the country, Banks in the country followed the ujarah, murabaha principles which were   adopted by   GCC countries.  
SUGGESTIONS: In the light of the existing product structure, following are some steps  that  Islamic banks can take  to further accelerate the growth of Islamic banking in the country :
l There must be an effort to offer PLS-based financing or equity-based financing. While non-PLS based financing is also developed by Shariah Scholars and there is no problem in using these modes, still the bulk of financing by Islamic banks should be equity-oriented in order to achieve the broader objective of Islamic Economic system. Currently PLS-based financing such as musharakh is being used by some banks in a very small scale, while mudarba financing has  no existence.  
l Until today, the development of Islamic financial products has generally been limited to the re-engineering of the conventional products to meet Shariah requirements. Butg there is a still scope for product innovation and differentiation. Products can  be developed on the basis of various religious obligations which a Muslim should obey  in his of her life time.  For example, various products can be developed aiming the Hajj, such as  Savings for Hajj. Products can also be developed  for  various religious institutions such as mosques, Waqf institutions,  religious scholars, wealthy businessman and Halal industry as well.
l The Bangladesh Bank issued a circular in 2014 forming a refinance fund to support Islamic banks and other financial institutions to provide Shariah financing to the agro processors, small enterprises, renewable energy and environment friendly initiatives. Besides, the emphasis on  SME and agricultural sectors  has now opened scopes for financial engineering and innovating new products by using various PLS- and non-PLS-based principles.  Islamic banks can develop new products aiming these sectors.
The author works in a private bank in Bangladesh and has a post-graduate degree in Islamic Banking, Finance and Management from the
United Kingdom.
akbar.chowdhury@yahoo.com