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Strengthening regulation of Islamic banks

| Updated: January 11, 2020 20:51:19

Strengthening regulation of Islamic banks

Shariah Governance (SG) outlines how Islamic financial institutions (IFIs) follow the Shariah principles in conducting their business functions. In global practices, there are two types of SG system -- centralised and decentralised. Countries, such as Malaysia, Bahrain, Pakistan, Indonesia, United Arab Emirates (UAE), Sudan, Brunei, and Oman practise centralised SG while Bangladesh, Saudi Arabia and Turkey practise decentralised SG structure. The applications of Shariah resolutions and Shariah compliance quality of the centralised SG practising countries are better than those of the countries pracising the decentralised system. Presence of a Centralised Shariah Supervisory Board (CSSB) under the central bank minimises the disputes and diversified Shariah rulings among the Shariah Supervisory Boards (SSB) and numerous other authorities.

Bangladesh has started its Islamic banking journey through the formation of the Islamic Bank Bangladesh Limited in 1983. Currently, according to Bangladesh Bank report 2019, Bangladesh has 8 (eight) Islamic banks, 19 Islamic banking branches and 35 Islamic banking windows to provide Islamic banking services.

In 2009, Bangladesh Bank outlined a SG guideline for the Islamic banks which is not comprehensive. Islamic banks have developed their SG mechanisms in the absence of a separate law and a complete Shariah Governance Framework (SGF). The self-developed models and their practices are not uniform because of the absence of an inclusive SGF and CSSB. Every Islamic bank has a different organisational structure and the SSB position is not the same.

The Central Shariah Board for Islamic Banks of Bangladesh (CSBIB) started its operation in 2002 as a private organisation for developing a unique SG practice in Bangladesh and performing its roles without an authorised body. Along with CSBIB, all Islamic banks have their separate SSBs having different names like Shariah Board, Shariah Committee, and Shariah Supervisory Committee. Though all Islamic banks have SSB, only four banks have positions in their organisational structure. Similarly, Islamic banking branches and windows also have SSBs with renowned Shariah professionals. The SSB works as an oversight board for overall banking activities and performs the Shariah audit and Shariah compliance review.

CSBIB's guidelines are not mandatory  and the central bank does not recognise it. That is why the CSBIB offers an advisory service and monitors the activities of SSB as a private firm. Due to this, if any Shariah violation occurs in the activities of the Islamic banks, the CSBIB is not able to take action against the banks, nor does it have the power to solve the disputes among the BOD, SSB and management on any Shariah-related issues. All Islamic banks, however, follow the resolutions of CSBIB to mitigate their reputational risk.

It is important to have a CSSB under the structure of the central bank for monitoring the Islamic banks, SSB functions, resolve the disputes among the banks, and take actions against Shariah violations.

This scribe suggests some procedures for legalisation of CSBIB and formation of a CSSB under the central bank. Initially, formation of CSSB and legalisation of CSBIB will be difficult without a separate Islamic banking act but if the government and the central bank really want, it is possible to do so. There should be no problem in the legalisation of the CSBIB or formation of CSSB under the central bank with legal power and authority. If the government modifies the existing law, it will not be a problem to form a CSSB under the central bank. In Malaysia, the government established CSSB at the central bank. Thus, the government can modify the existing CSBIB or can make it as an advisory body by establishing a new CSSB under the central bank.

If the government or the regulatory authorities are really interested, they can issue a circular to legalise the existing CSBIB or form a CSSB under the central bank.


Md. Kausar Alam is a PhD researcher at University Putra Malaysia, Selangor, Malaysia. kausarflorence@gmail.com

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