Streamlining Islamic banking
Monday, 14 December 2009
Abu Zafar Md. Sheikhul Islam
The Bangladesh Bank, through a circular dated 09 November 2009, has introduced 'Guidelines for Islamic Banking', as a supplementary to the existing banking laws. The guidelines are to be followed by the Islamic banks and conventional commercial banks having Islamic branches, with a view to bringing greater transparency and accountability in Islamic banking.
This is a major development in the banking sector that will help banks to organise their Islamic banking business and comply with the rules of Shari'ah. Eleven conventional banks of Bangladesh are at present providing Islamic banking services through 24 Islamic banking branches and counters while there are 07 full-pledged Islamic banks offering products and services through 500 branches and SME centres.
When introduced in 1983, Islamic banking in the country was conducted with very little support from the regularity authorities. Operations of Islamic banks were controlled and supervised by the Bangladesh Bank (BB) as per general guidelines framed for conventional banks. In the meantime, Islamic banking in the country achieved tremendous growth, with prospects of further expansion, mainly due to its popularity among the customers and efficient management and success of the Islamic banks and banks having Islamic banking branches (IBBHIBB).
Under the above circumstances, BB formed a Focus Group, comprising representatives from the central bank and the Central Shari'ah Board for the Islamic Banks of Bangladesh (CSBIBB) with a view to formulating a comprehensive guideline. Based on the recommendations made by the Focus Group, the 'Guidelines for Islamic Banking' has been finalised.
The guideline covers the main areas of Islamic banking - liquidity, maintenance of books of accounts and preparation of financial statements and related issues. It comprises of eight sections and three appendixes. Central Shari'ah Board for Islamic Banks of Bangladesh (CSBIBB) is the apex body of the Shari'ah Board/Council of the Islamic banks and banks having Islamic branch/counters/ offices/ windows, established in the year 2002 with a view to overseeing whether the Islamic banks are carrying out their operations in conformity with Islamic Shari'ah principles and give decisions on Shari'ah issues to the banks from time to time to run their business under uniform rules of Shari'ah. Fifteen banks of the country are now members of CSBIBB.
The first section of the guideline provides an introduction and definition of the terms used in Islamic banking. The second section elaborates the licensing policy, criteria, terms and conditions and other requirements for setting up full-fledged Islamic banks, opening Islamic branches by conventional banks and conversion of a commercial bank into an Islamic bank. Besides, the requirement of the kind of experience a chief executive officer (CEO) of a full-fledged Islamic bank should have and the separation of Islamic fund for the opening of a new Islamic branch have been specially mentioned.
Much emphasis has been given on the formation of an Islamic banking division at the head office of a conventional bank having Islamic branches with proper structure and sufficient manpower which should be headed by a senior executive accountable to the CEO. Among other regular jobs, the division will ensure investment of funds under Shari'ah principles, train up manpower and maintain SLR/CRR. Another important requirement is to control and segregate Islamic banking fund from the conventional fund.
Banks have been instructed to prepare an operational manual for Islamic banking business duly approved by their Board and prepare a full set of documents pertaining to deposits, investments and financing products, besides designing distinct documents, forms, books, and deposit receipts, cheque books for Islamic branches. It is also a must to maintain separate accounting system for Islamic banking branches -- separate ledger books and software for keeping records of deposits, investments, profit-loss accounts, separate Trial Balance etc. AQ detailed procedure for the conversion of a conventional bank into an Islamic bank has been provided in the guideline. Paying Zakat on reserves has been made compulsory for the IBBHIBB.
The section three of the guideline deals with the responsibility of the Board of Directors of the IBBHIBB for ensuring compliance of Shari'ah. Such banks have to appoint now a Shari'ah director having requisite knowledge and expertise in Islamic jurisprudence. The Board will ensure Shari'ah compliance in Islamic banking operation through an independent Shari'ah Supervisory Board (SSB). Members of SSB should have the following educational qualification: Kamil/Dawra/Post Graduate Degree in Islamic Studies/Arabic/Islamic Law/Islamic Economics/Islamic Banking with profound knowledge in Arabic language. Besides, they must have 3 years of experience in teaching or research or as members of Fatwa Board or publish 03 exclusive articles. Other criteria for integrity, honesty and reputation were also mentioned (Appendix - I).
Section four and five of the guideline describe Shari'ah principles for receiving deposits and investment products respectively. Section five also includes Shari'ah principles for import/export business, remittance and other banking services.
Special emphasis has been given on the maintenance of CRR/SLR, addressing liquidity crisis and utilisation of surplus funds of Islamic banks/branches in section six of the guideline.
According to section seven of the guideline, conventional banks will now maintain CRR/SLR for its Islamic branches at the same rate as applicable for Islamic banks and maintain a separate current account with BB. Excess fund of Islamic banks/branches may be invested in government Islamic bonds and in case of crisis, they may avail fund from BB on Mudaraba basis. IBBHIBB may open Mudarana Short Notice Deposit account with each other to meet liquidity crisis. They may also collect fund from sources that follow Islamic Shari'ah. Section seven also elaborates on the guidelines and specimen reports and financial statements for IBBHIBB which are run under Islamic Shari'ah.
Section eight of the guideline provides a framework for the rate of return on the profit accrued from investment and financing (Appendix - III) for Mudaraba depositors.
The IBBHIBB has been asked to follow AAOIFI guideline in addition to the statements prescribed by them. BB has asked the banks to comply with the guideline within 31st December and to submit compliance report by 31st January 2010. BB will monitor the progress of compliance of these banks through its on-site inspection teams.
While the issuance of the guideline is a giant step for the banking sector of Bangladesh, some other issues also need to be addressed. The issues include operation of Islamic banking windows and counters by the conventional banks. Conventional banks may avail the opportunity of online banking and open windows/counters at their branches easily and operate those under Shari'ah principles.
The guideline refers to AAOIFI standard for accounting and auditing for the preparation and disclosure of financial statements. The AAOIFI standard for Shari'ah could also be made compulsory as the standard is so comprehensive and is followed by banks and financial institutions throughout the world. A clearer guideline is required for both internal and BB inspection on Shari'ah banking.
The appointment, qualification and experience of Muraqibs are required to be announced which is a primary need for proper Shari'ah compliance in banking operation. Besides, inspection by BB on-site inspection teams may not be sufficient for the purpose; a skilled and well-experienced team may be appointed at the Central Bank. Initially, a panel of Shari'ah auditors, comprising Shari'ah inspectors from different IBBHIBB, may be prepared. They may conduct Shari'ah inspection in favour of BB at an Islamic branch by a team of inspectors from other banks.
In order to fully comply with the new guidelines, conventional banks with Islamic branches will have to appoint a Shari'ah Director in the Board, form a strong Islamic Banking Division, attach the division with mainstream business and give authority to govern, manage and control the activities of the Islamic branches. It would also be necessary to vertically link the division with Investment/Credit Division which will assess and verify and will be the sanctioning authority of the investment proposals. The division may also perform financial and some primary HR activities of the Islamic branches and maintain Islamic banking software. This may establish greater transparency and accountability in Islamic banking in Bangladesh.
The writer is SVP and Head of Islamic Banking Division of Prime Bank Limited. He can be contacted at e-mail: ai120101@primebank.com.bd
The Bangladesh Bank, through a circular dated 09 November 2009, has introduced 'Guidelines for Islamic Banking', as a supplementary to the existing banking laws. The guidelines are to be followed by the Islamic banks and conventional commercial banks having Islamic branches, with a view to bringing greater transparency and accountability in Islamic banking.
This is a major development in the banking sector that will help banks to organise their Islamic banking business and comply with the rules of Shari'ah. Eleven conventional banks of Bangladesh are at present providing Islamic banking services through 24 Islamic banking branches and counters while there are 07 full-pledged Islamic banks offering products and services through 500 branches and SME centres.
When introduced in 1983, Islamic banking in the country was conducted with very little support from the regularity authorities. Operations of Islamic banks were controlled and supervised by the Bangladesh Bank (BB) as per general guidelines framed for conventional banks. In the meantime, Islamic banking in the country achieved tremendous growth, with prospects of further expansion, mainly due to its popularity among the customers and efficient management and success of the Islamic banks and banks having Islamic banking branches (IBBHIBB).
Under the above circumstances, BB formed a Focus Group, comprising representatives from the central bank and the Central Shari'ah Board for the Islamic Banks of Bangladesh (CSBIBB) with a view to formulating a comprehensive guideline. Based on the recommendations made by the Focus Group, the 'Guidelines for Islamic Banking' has been finalised.
The guideline covers the main areas of Islamic banking - liquidity, maintenance of books of accounts and preparation of financial statements and related issues. It comprises of eight sections and three appendixes. Central Shari'ah Board for Islamic Banks of Bangladesh (CSBIBB) is the apex body of the Shari'ah Board/Council of the Islamic banks and banks having Islamic branch/counters/ offices/ windows, established in the year 2002 with a view to overseeing whether the Islamic banks are carrying out their operations in conformity with Islamic Shari'ah principles and give decisions on Shari'ah issues to the banks from time to time to run their business under uniform rules of Shari'ah. Fifteen banks of the country are now members of CSBIBB.
The first section of the guideline provides an introduction and definition of the terms used in Islamic banking. The second section elaborates the licensing policy, criteria, terms and conditions and other requirements for setting up full-fledged Islamic banks, opening Islamic branches by conventional banks and conversion of a commercial bank into an Islamic bank. Besides, the requirement of the kind of experience a chief executive officer (CEO) of a full-fledged Islamic bank should have and the separation of Islamic fund for the opening of a new Islamic branch have been specially mentioned.
Much emphasis has been given on the formation of an Islamic banking division at the head office of a conventional bank having Islamic branches with proper structure and sufficient manpower which should be headed by a senior executive accountable to the CEO. Among other regular jobs, the division will ensure investment of funds under Shari'ah principles, train up manpower and maintain SLR/CRR. Another important requirement is to control and segregate Islamic banking fund from the conventional fund.
Banks have been instructed to prepare an operational manual for Islamic banking business duly approved by their Board and prepare a full set of documents pertaining to deposits, investments and financing products, besides designing distinct documents, forms, books, and deposit receipts, cheque books for Islamic branches. It is also a must to maintain separate accounting system for Islamic banking branches -- separate ledger books and software for keeping records of deposits, investments, profit-loss accounts, separate Trial Balance etc. AQ detailed procedure for the conversion of a conventional bank into an Islamic bank has been provided in the guideline. Paying Zakat on reserves has been made compulsory for the IBBHIBB.
The section three of the guideline deals with the responsibility of the Board of Directors of the IBBHIBB for ensuring compliance of Shari'ah. Such banks have to appoint now a Shari'ah director having requisite knowledge and expertise in Islamic jurisprudence. The Board will ensure Shari'ah compliance in Islamic banking operation through an independent Shari'ah Supervisory Board (SSB). Members of SSB should have the following educational qualification: Kamil/Dawra/Post Graduate Degree in Islamic Studies/Arabic/Islamic Law/Islamic Economics/Islamic Banking with profound knowledge in Arabic language. Besides, they must have 3 years of experience in teaching or research or as members of Fatwa Board or publish 03 exclusive articles. Other criteria for integrity, honesty and reputation were also mentioned (Appendix - I).
Section four and five of the guideline describe Shari'ah principles for receiving deposits and investment products respectively. Section five also includes Shari'ah principles for import/export business, remittance and other banking services.
Special emphasis has been given on the maintenance of CRR/SLR, addressing liquidity crisis and utilisation of surplus funds of Islamic banks/branches in section six of the guideline.
According to section seven of the guideline, conventional banks will now maintain CRR/SLR for its Islamic branches at the same rate as applicable for Islamic banks and maintain a separate current account with BB. Excess fund of Islamic banks/branches may be invested in government Islamic bonds and in case of crisis, they may avail fund from BB on Mudaraba basis. IBBHIBB may open Mudarana Short Notice Deposit account with each other to meet liquidity crisis. They may also collect fund from sources that follow Islamic Shari'ah. Section seven also elaborates on the guidelines and specimen reports and financial statements for IBBHIBB which are run under Islamic Shari'ah.
Section eight of the guideline provides a framework for the rate of return on the profit accrued from investment and financing (Appendix - III) for Mudaraba depositors.
The IBBHIBB has been asked to follow AAOIFI guideline in addition to the statements prescribed by them. BB has asked the banks to comply with the guideline within 31st December and to submit compliance report by 31st January 2010. BB will monitor the progress of compliance of these banks through its on-site inspection teams.
While the issuance of the guideline is a giant step for the banking sector of Bangladesh, some other issues also need to be addressed. The issues include operation of Islamic banking windows and counters by the conventional banks. Conventional banks may avail the opportunity of online banking and open windows/counters at their branches easily and operate those under Shari'ah principles.
The guideline refers to AAOIFI standard for accounting and auditing for the preparation and disclosure of financial statements. The AAOIFI standard for Shari'ah could also be made compulsory as the standard is so comprehensive and is followed by banks and financial institutions throughout the world. A clearer guideline is required for both internal and BB inspection on Shari'ah banking.
The appointment, qualification and experience of Muraqibs are required to be announced which is a primary need for proper Shari'ah compliance in banking operation. Besides, inspection by BB on-site inspection teams may not be sufficient for the purpose; a skilled and well-experienced team may be appointed at the Central Bank. Initially, a panel of Shari'ah auditors, comprising Shari'ah inspectors from different IBBHIBB, may be prepared. They may conduct Shari'ah inspection in favour of BB at an Islamic branch by a team of inspectors from other banks.
In order to fully comply with the new guidelines, conventional banks with Islamic branches will have to appoint a Shari'ah Director in the Board, form a strong Islamic Banking Division, attach the division with mainstream business and give authority to govern, manage and control the activities of the Islamic branches. It would also be necessary to vertically link the division with Investment/Credit Division which will assess and verify and will be the sanctioning authority of the investment proposals. The division may also perform financial and some primary HR activities of the Islamic branches and maintain Islamic banking software. This may establish greater transparency and accountability in Islamic banking in Bangladesh.
The writer is SVP and Head of Islamic Banking Division of Prime Bank Limited. He can be contacted at e-mail: ai120101@primebank.com.bd