Islamic Banking Operations in Bangladesh

Islamic Banking Operations in Bangladesh

What is Islamic Banking ?

Islamic banking is a system of financial intermediary that avoids receipt and payment of interest in its all transaction and conducts its operation in accordance with Islamic shariah.

The definition of Islamic bank, as approved by the General Secretariat of the OIC, is stated in the following manner. “An Islamic bank is a financial institution whose status, rules and procedures expressly state its commitment to the principle of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations

Islamic finance has emerged as an effective tool for financing economic activities worldwide. Islamic finance has been offering benefits for economic growth, reducing poverty and fostering shared prosperity. It also addresses specific needs of those who do not currently use conventional finance for religious reasons. Islamic financial institutions are supporting agricultural finance, contributing to improve food security, promoting financial sector development and widening financial inclusion.Following 2010, the global finance industry registered notable annual growth of over 17% percent (MGCC,2016). However, the year 2015 saw a deceleration in the rapid growth that has characterized the Islamic financial services industry since the aftermath of the global financial crisis (IFSB,2016). Having begun as a nascent sector of 1970s that predominantly focused on Shariah-compliant banking systems, today Islamic finance is a complete financial system of its own that includes capital market products and services such as Islamic securitized assets(Sukuk), Islamic equities, Islamic investment funds, and also Islamic insurance services(MGCC,2016). However, Islamic banks dominate the Islamic financial industry, despite continued growth in sukuk and other Shariah-compliant financial assets.

Islamic Banking Operations in Bangladesh

It is well recognized that the operational procedures and approach of the Islamic banks are different.From a practical standpoint, Islamic banking varies in terms of the level of risk sharing. Ideally, while conventional intermediation is largely debt-based, and allows for the risk transfer,Islamic intermediation, in-contrast, is expected to be asset-based,and centers on risk sharing i.e in Islamic banking investors are expected to share the risk and return with Islamic banks. However practically, in the most instances deposits do not have the risk-sharing features,since the return on them is guaranteed; and on the best front, risk sharing is the exception rather than the rule, making credit risk the main risk faced by Islamic banks,similar to the conventional banks. The Capital Adequacy and Risk Management standard issued by the Islamic Financial Services Board (IFSB) suggested that the type and size of financial risks in Shariah-compliant contracts are not significantly different from those in conventional contracts (IFSB,2016).

Globally, Islamic banking activities expanded its frontiers and tapped new business and geographical horizons, and in many countries the growth in Islamic financial activities has attracted the attention of the conventional banking industry. It is well-known that the interest of conventional banks in Islamic finance is mainly to tap wider investor and consumer base and the trend indicates the growing universal appeal of Islamic financial products. Generally, Islamic banking activities are regulated under laws which had been designed for the conventional finance industry. Meanwhile, to address the uniform standard and regulatory needs, numerous measures have been introduced by international Islamic standard setting bodies, regulators, and fatwa institutions and Shariah advisory councils that include the issuance of standards, guidelines and resolutions to regulate Islamic financial market practices at the local and global levels.Despite all these concerns and initiatives, Islamic commercial law remains an under-explored field (ISRA and Thomson Reuters, 2016).

After the establishment of the first Islamic bank in Bangladesh, Islamic banking activities have grown consistently in the country during a period of over 33 years. Now Islamic banking is a well-established component of the banking industry having around one-fifth of the total market share.In context of Bangladesh, the information on the Islamic Banking practices is being made available through limited research activities only in recent years.

Islamic Banking Operations in Bangladesh

 

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