Bangladesh's Islamic finance industry is likely to continue growing over the medium term, driven by rising public demand, new branch openings, and supportive government policies.
Fitch Ratings, one of world's top credit-rating agencies, makes this prediction in its non-rating action commentary for Bangladesh, released Wednesday.
Many conventional banks are focusing on Islamic products, either by opening new Islamic branches or windows or by converting to full-fledged Islamic banks. The NCC Bank, a privately owned commercial bank, launched a Shariah-based service last Sunday.
Fitch Ratings notes that Islamic-capital markets remain nascent, but the government started issuing domestic sovereign sukuk in 2020, with its fourth auction in April 2022.
"This supports fiscal funding diversification and enables Islamic banks and takaful firms to invest their liquidity," the report says.
Fitch Ratings has identified a number of barriers to the smooth go-ahead, including underdeveloped regulations and a weak banking sector.
The Islamic finance regulatory framework is underdeveloped, with a lack of sukuk investment options and Islamic derivatives or hedging instruments, low awareness of Islamic products, lack of standardisation, inadequate fintech usage, lack of incentives for sukuk issuers, and under-skilled human capital, it elaborates.
The US-based agency notes that more lax prudential requirements have supported Islamic banking growth and motivated conventional banks to provide Islamic products.
The regulator, Bangladesh Bank, has set the statutory liquidity ratio limit for Islamic banks (5.5 per cent) much lower than for conventional banks (13.0 per cent).
Islamic banks also benefit from higher prudential limits, such as an advance-deposit ratio of 92.0 per cent in contrast to 87.0 per cent for conventional banks.
Bangladesh's positive economic growth prospects (real GDP growth 2023F: 5.0 per cent) due to rising private consumption, exports of ready-made garments, government spending, and investment should support Islamic and conventional banking performance over the medium term, it suggests.
The Islamic-finance industry faces longstanding challenges, too, including Islamic banks' limited branches and digital banking networks in rural areas - where 61.0 per cent of the Bangladeshi population resided in 2021, according to the World Bank.
Fitch says part of the Islamic liquidity-management infrastructure exists for Islamic banks, which can deploy and receive interbank placements from both Islamic banks and conventional banks, and invest in short-term government sukuk in the form of Bangladesh Government Islamic Investment Bonds.
The global rater, however, points out that no Islamic repurchase agreement or Islamic lender-of-last-resort facilities exist with the central bank. "Potential remains to expand the range of Islamic liquidity-management products."
The Bangladeshi financial sector is also underdeveloped in general.
The banking sector's asset quality, capitalisation, governance, and regulatory quality are weak, especially for public-sector banks, the rating agency remarks.
Quoting World Bank report the rating agency says banking penetration remains very low. About 47.0 per cent of Bangladesh's adult population didn't have a bank account in 2021, and 8.0 per cent of adults cited religious reasons for not having them.
"Insurance and takaful penetration was also very low, at 0.5 per cent in 2021."
While a challenge, it underpins the high long-term growth potential for Islamic finance in Bangladesh, which has the fourth-largest Muslim population in the world, the Fitch Ratings also commented.
Islamic banking has a domestic market share of 28.5 per cent of total industry loans and advances at end-1H22 (June 2021: 28.0 per cent).
There are a number of initiatives that could support Islamic-finance development. In August 2022, the Bangladesh Securities and Exchange Commission released regulations on forming a Shariah Advisory Council, which should help in the push for standardisation and support sukuk issuance.
In September 2022, Bangladesh Bank issued a policy on green bond financing for banks and financial institutions, which covers Islamic securities.
Standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions are partially adopted in Bangladesh.