Time to enact an Islamic banking law



Over the last four decades, the Islamic finance industry has witnessed impressive growth and tremendous success across the globe, thanks to its unique features like asset-based transactions, profit and loss sharing investment mechanism, risk-sharing tendency, linkage with real assets, and welfare-oriented activities.

According to Islamic finance and the securities market outlook, a publication of Standard Chartered, “the global Islamic finance industry currently boasts assets of around $2.2 trillion”. Experts anticipate this figure could grow to $4.94 trillion by 2025, fuelled by capital inflows into Islamic exchange-traded fund (ETF) products.

Islamic finance has become a phenomenon in a number of countries with a relatively small Muslim population. London is the hub of Islamic finance outside the Muslim world. Moreover, the United Kingdom has accommodated Islamic financial transactions through legislation, with the Finance Act introducing provisions for the tax treatment of products conforming to Shariah law.

Hong Kong has become the Islamic finance gateway to China. Governments in a number of other countries, including France, Germany, Japan, Singapore and South Korea, have also taken measures to promote Islamic finance.

In line with global trends, the Islamic banking sector in Bangladesh has also been witnessing robust growth due to policy support from regulators and strong public demand; dominating about one-third of the total banking sector here. Currently, ten full-fledged Islamic banks are operating with 1,679 branches out of 10,942 branches in the banking sector.

Besides, several non-banking financial institutions are offering Islamic financial services, with more interested in providing Islamic finance services. In addition, 24 Islamic banking branches of 11 conventional commercial banks and 511 Islamic banking windows of 14 conventional commercial banks provide Islamic financial services across the country.

Islamic Banking System (IBS) refers to financial services in accordance with Islamic Shariah. The Shariah compliance function is the only unique feature of IBS, which also promotes, fosters and develops the application of Shariah principles in the economy and offers contemporary financial services in conformity with Islamic jurisprudence.

Shariah bans interest, products with excessive uncertainty, gambling, speculations, short sales, as well as the financing of illicit activities harmful to society, which are strictly prohibited in the IBS. The abolition of interest and a fixed rate of interest is replaced by a variable rate of return based on real economic activities, making it different from conventional interest-based commercial banking.

Major deposit products of IBS in Bangladesh are- Al-Wadeah Current Deposit; Mudaraba Savings Deposit; Mudaraba Term Deposit; Mudaraba Special Deposit Account; and Mudaraba Savings Bond etc. At the same time, popular financing modes are- Bai-Murabaha, Bai-Istijrar, Bai-Muajjal, Bai-Salam, Bai-Istisna, Bai-As-Sarf, Murabaha, Musaraka, and Hire Purchase under Shirkatul Melk.

Responding to the public demand for Islamic Finance, the Bangladesh government and regulators introduced some Islamic monetary policy tools for the liquidity management of IBS. The government has introduced ‘Bangladesh Government Islamic Treasury Bill (BGITB)’ to facilitate funds for Islamic Finance. Bangladesh Bank, on behalf of the government, issued the non-tradable BGITB based on Murabaha to the purchase order on a competitive bidding auction basis, to finance government internal procurement or imports from overseas countries, for one month to one year tenure.

Bangladesh Bank can inject/sterilise liquidity temporarily into/from the banking system in case of liquidity shortfall/surplus via Repo (outright purchase)/Reverse Repo (through Bai-Muajjal and outright sale) of Taka denominated Bangladesh Government Ijarah Sukuk (BGIS) issued by the government treasury and its SPV.

The unrestricted Wakalah agreement is used as an alternative to Islamic Repo and Reverse Repo. Unlike the Repo and Reverse Repo systems, BB arranges an auction where participating Islamic banks (muwakkil) place their excess liquidity with BB (wakil), authorising them to use the money in a profitable venture/way, usually against a fixed fee.

Bangladesh Bank Musharaka Certificates (BBMC) is an equity-based instrument that can be issued against the government or central bank’s ownership in profitable commercial banks to regulate domestic liquidity through open market operations. For this purpose, an Open Market Operations Fund (OMOF) is established, and BBMCs can be issued against the OMOF

Interbank Mudaraba Placement Fund refers to a mechanism whereby a deficit Islamic banking institution (i.e. an investee bank) can obtain investment from a surplus Islamic banking institution (investor bank) based on Mudaraba (profit sharing) principle. The period of investment ranges from overnight to 12 months, while the rate of return is based on the gross profit rate before distribution for an investment of 1 year of the investee bank.

Commodity Murabaha is used to facilitate short-term interbank lending using transactions in commodities to structure an investment between two Islamic banks.—The Business Standard