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Bringing Islamic banking under legal framework

Abu Zafore Md. Saleh | Published: September 18, 2019 21:29:37 | Updated: September 25, 2019 21:26:49


When Islamic banking is becoming the fastest growing banking system worldwide, Bangladesh has already been a role model for expansion of the system and its popularity. A system that reduces non-performing loans and promotes social welfare, the Islamic banking now requires short-term money market support and specific law for its more sustainable operations in the country.

This Shariah-based banking was introduced in Bangladesh in 1983, to present halal (religiously permissible) and interest-free lifestyle. This banking has quickly flourished alongside a steady growth of the Bangladesh economy in recent decades. It has earned a reputation in society by turning itself into a promising industry and also enormous popularity within a short time.

In fact, the concept of Islamic Shariah-based business and banking has evolved from the guidelines of Quran and Sunnah that have provided solutions to problems of livelihoods and economic activities. In the holy Quran [11:6], Allah says: "There is no creature on earth but that upon Allah is its provision, and He knows its place of dwelling and place of storage. All is in a clear register." Accordingly, the humankind have been asked to eat and drink from the halals and to ensure safety and purity in economic functions of human life. Business has been declared as halal and interest as haram (prohibited).

Currently, there are 08 (eight) Shariaf-based banks and 02 (two) financial institutions (F1s) in Bangladesh. To capitalise popularity of Islamic banking, some conventional banks have introduced Shariah-based banking and 09 (nine) such banks have opened 19 Shariah-based branches and 07 (seven) banks have 25 Shariah windows. More banks are interested in Shariah-based business in view of the people's interest in embracing interest-free banking.

Almost one-fourth (23.66 per cent) of the country's banking deposit, or Tk 2.42 trillion out of Tk 10.23 trillion, belongs to the category of the Islamic banking, according the latest Bangladesh Bank report. The share of Islamic banking in investment is increasing, now at 24.1.6 per cent (Tk 2.37 trillion) of the aggregate amount of Tk 9.82 trillion invested by the banking sector as a whole. Also about 43 per cent or Tk 131 billion of the total remittances received by the country in 2018 came through the Islamic banking channels.

The success of the Islamic banking introduces Bangladesh to the world with a different identity. The country has been a role model for Islamic banking. Former OIC Fikah Academy Chairman Justice Allamah Taki Usmani said Bangladesh is performing the role of a leader in Islamic banking system in the world.

The system has to comply with norms, rules and regulations of the Quran, Hadith, Ijma and Kiyas and practices are to be followed in banking operations. Islamic banks collect deposits from clients in the form of Mudaraba contract and invest the same in the form of Bai Muajjal, Bai Murabaha, Musharaka, Ijarah, 'Hire Purchase' under Shirkatul Melk, Bai Salam and Bai Istisna. Profit derived from the operations is distributed among general deposit holders and shareholders following the method of "Weighted Average" or of "Income Sharing Ratio".

It is an operation not based on "Interest" by any means. Investment in 'Physical Assets' is the prime consideration since Islam does not allow investment in the form of money to earn money. That is why, in Islamic form of investment or financing, banks and FIs invest money to purchase or manufacture products or assets as per needs of the clients.

Islamic banking system supports income from rent of assets in the form of Ijarah (lease) or Hire Purchase under Shirkatul Melk. In the process, the demand of physical products increases and the economy deals with a real growth from the operations of these banks and FIs. It also encourages and patronises employment generation and poverty alleviation through real economic functions and increases productivity of the population. Furthermore, inflation can be minimised through management of demand and supply of commodities in the market.

If a properly complied Shariah banking system is in operation, it would reduce chances of non-performing investment/loans. It patronises only physical asset-based investment. There is no scope to invest/finance in a vague purpose or to divert funds elsewhere with malafide intention. The physical asset-based investment is recoverable at any point of time. More importantly, performance of that asset brings income to support repayment. Thus, in Shariah-based banks and FIs, ratio of non-performing loan is low compared to the ones in conventional banking system.

If a partnership-based investment project like Musharaka is implemented properly, there is hardly any chance of incurring loss and defaulting repayment. However, for some unavoidable circumstances, Musharaka and Mudarabah cannot be implemented in most cases.

Another key feature of the Islamic banking system is that profit rate of the investment is not compounded on the profit itself. It is a simple rate calculated on the principal amount. The Islamic banks and FIs thus ensure the clients' comfort in repayment. They cannot also charge default premium/delinquent charge. Only damages can be charged and that amount can be used only in charity. Profit maximisation is in no way the objective of the Islamic banking system; it is rather more social welfare and charity oriented.

Islamic banking system needs short-term source of funds for day-to-day operations but there is no established "Call Money Market" in this sector. Since an Islamic bank cannot borrow money from another bank for short term, it is necessary to introduce a unique "Call Money Market" within the system. It is important because Shariah banking can only finance where it is permitted and the scope is narrow. Mutual money market like "Call Money Market" can resolve the issues of emergency to run day-to-day operations.

Particularly for the two existing Shariah-based financial institutions -- Islamic Finance and Investment Ltd. and Hajj Finance Ltd -- it is hard to operate sustainably in this market without short-term money market support in the form of call money. Because they have to pay more than the Bank Deposit Rates. Management of Cost and Fund is difficult for these FIs, which also have to compete with other banks and FIs.

Today, Islamic banking is emerging as the most promising banking system all over the world. Banks such as HSBC and Standard Chartered Bank have taken initiatives to divert a significant portion of their capital to do this business, given the rising demand of it. "Islami Bank of Britain" was established in 2004 and it has branches in London, Birmingham and Manchester. Islamic Bank has started operations in Manheim city of Germany.

Standard and Poors (S&P), in its recent publication, stated that the Islamic banking system has emerged as a real alternative to conventional banking. In the context of current crisis in conventional system, Islamic banking system has offered itself as a more viable alternative.

For its usefulness, practical orientation and also popularity, the Islamic banking system has become the fastest growing banking system globally. It is contributing to economic activities and addressing social issues such as financial inclusion of the masses around the world, mainstreaming the rural economy, and building a trustworthy and interest-free banking system for pious people.

In Bangladesh, as most people are pious and believes in halal income, Islamic banking has captured their thinking. What is required is to promote and consolidate the Islamic banking system further in the country. To do that, it is necessary to introduce Islamic Banking Law and Rules. Countries like Malaysia and Indonesia made laws before introducing the Islamic banking system. Even in Thailand, Islamic banking was launched in 2003, a year after Islamic banking law was framed (in 2002).

Clearly, Bangladesh needs to enact Islamic banking law for providing a legal framework for the banking system that has come of age. Proper law and regulations would ensure dynamic leadership in the sector. Because, Islamic banking, which already accounts for one-fourth of the entire banking business, is growing day by day.

However, the country's capital market is based on stocks and only a few debentures and bonds are available there. More bonds and debentures are required for diversification of the capital market. Meanwhile, Mudarabah-based Islamic Bond is getting popularity. If Sukuk or Bond gets more attention of the competent authorities, it can be a source of liquidity for Islamic banks in the long term.

The Parliamentary Standing Committee on the Ministry of Finance, in a meeting in 2011, emphasised the importance of making Islamic banking law. If the law is introduced, the Shariah-based financial system would transcend the present boundary and reach a new milestone in the near future.

Abu Zafore Md. Saleh is the Managing Director and CEO at Islamic Finance and Investment Limited (IFIL).

md@ifibd.com

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