Islamic Banking Problems and Prospects of Bangladesh

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Islamic Banking Problems and Prospects of Bangladesh

To know Islamic Banking Problems and Prospects of Bangladesh at first we should have to know what is Islamic Banking.

What is Islamic Banking

A banking is a systematic process of financial activities of an organization. Islamic banking is a process where as all activities of banking will be run by the Islamic Shariah.The Shariah is the system of Islamic laws, based upon the Quran and the teachings of the Prophet Muhammad (pbuh) that tells Muslims what is allowable and what is forbidden. Another name for the Shariah is simply, “Islamic law.”

Islamic banking is the prohibition of the collection and payment of interest,usury  riba or ribaa. This is an absolute prohibition, applying equally to governments, banks, investment funds, corporations and individuals. Islamic banking main objectives to avoid interest of all financial transaction of banking arena.To ensure the buying and selling for every deal of investments.

Islamic Banking is profit sharing and partnership organization. All Islamic Banking products are necessarily based on the Shariah or are Shariah compliant. The former means that there are evidences from the Quran and the Sunnah for the legitimacy of those products. The latter are products derived from other rulings or products that do not oppose the Sharee’ah in any way.

Islamic Banking Area of Bangladesh:

There are 56 (Fifty Six) banks are working in Bangladesh including eight full flagged Islamic bank.

Eight Islamic banks operating in Bangladesh are :

SL Name of the Banks Islamic Banking Branch Conventional Branch Total Branch
1. Islami Bank Bangladesh Limited (IBBL) 286 286
2. Al-Arafah Islami Bank Limited (AIBL) 110 110
3. EXIM Bank Limited 80 80
4. Social Islami Bank Limited (SIBL); 94 94
5. Shahjalal Islami Bank Limited (SJIBL); 92 92
6. First Security Islami Bank Limited (FSIBL); 117 117
7. ICB Islamic Bank Limited 33 33
8. Union Bank Limited (UBL) 17 17
9. Prime Bank Limited 05 128 133
10. Southeast Bank Limited 05 98 103
11. AB Bank Limited 01 87 88
12. Dhaka Bank Limited 02 71 73
13. Pubali Bank Limited 02(Windows) 424 424
14. Bank Asia Limited 05(Windows) 92 92
  Total 842(7 Windows) 900 1742


Problems of Islamic Banking in Bangladesh

1. Nature of the Problem and Challenges
The Islamic banks in the world have been facing various problems.Islamic banking in Bangladesh is also facing some
problems of challenges.

First, they have not yet been successful in devising  an  interest-free  mechanism  to  place  their  funds  on  a  short-term  basis.  They  face  the  same problem in financing consumer loans and government deficits.

Second, the risk involved in profit-sharing seems to be so high that almost all of the Islamic banks in Bangladesh have resorted to those techniques of financing which bring them a fixed assured return. As a result, there is a lot of genuine criticism that these banks have not abolished interest but, they have, in fact, only changed the nomenclature of their transactions.

Third, the Islamic banks do not have the legal support of the Central bank in Bangladesh, do not have the necessary expertise and trained manpower to appraise, monitor, evaluate an audit the projects that are required to finance. As a result, they can not expand despite having huge excess financial liquidity.The implementation of an interest-free banking in Banking raises a number of questions and potential problems which can be seen from the macro and micro operational point of view.
2. Problems Related to Macro Operation of the Islamic Banks
1. Liquidity and Capital
2.Valuation of bank Assets
3. Financial Stability
4. The Ownership of Banks
5. Lack of Capital Market and Interest-free Financial Instruments
6. Insufficient Legal protection
7. Controlling and Supervision by the Central bank on the Basis of Islamic Shariah
8. Lack of Unified Shariah Rulings
9. Absence of Islamic Inter-Bank Money Market
10. New Banking Regulations
11 . Accounting principles and Procedures
12.  Shortage of Supportive and Link Institutions
13.  Shortage of Skilled and Trained Manpower in Islamic Shariah banking
14. Lack of Co-operation among the Islamic Banks
15 . Lack of Familiarity by International Financial and Non-financial Sector with Islamic Products and procedures.
16. Severe Competition in the Financial Sector
17 . Economics slowdown and Political Situation of the Country
18 . Inadequate Track Record of Islamic Banking
19  . Absence of Infrastructure for International Islamic Trade Financing
20 . Defaulting Culture of the Borrowers
21  . Short-term Asset Concentration in the Islamic Banks
22   . Lack of Course or paper on Islamic Economics, Banking and Finance at the Educational Institutions.
23.   Lack of Uniform Operational procedure of Islamic Banking
24 .  Lack of Specialised Islamic Banks and Non-Bank financial Institutions
25.   Lack of Consortium or Syndication of the Islamic Banks
26  . Lack of Harmonization of Islamic financial Practices
27 . Lack of Inter-country Study on the practical Operations of Islamic Banking
28 . Lack of Secondary Securitisation Market
29 . Lack of Coordinated Research Work on Islamic Economics, Banking and finance
30 . Lack of Apex Training Institute for the Islamic Banks.

3. Problem Related to Micro Operation of the Islamic Banks :
1. Increased Cost of Information
2. Control over Cost of Funds.
3. Mark-up Financing and Corrupted Mark-up
4. Excess Resort to the Murabaha Mode of Financing
5. Utilization of Interest Rate of fixing the Profit Margin in Bai-Modes
6. Financing Social Concerns.
7. Lack of Positive Response to the Requirement of government Financing.
8. Failure of Islamic Banks to Finance High Return Projects.
9. Sacrifice of allocative Efficiency
10. Loss of Distributive Efficiency.
11. Depression of Profit.
12. Lack of Full-fledged Shariah Audit.
13.  Fraud-Forgery or corruption in Islamic Banks.
14 . Minimum Budget for Research and Development.
15 . Working Environment.
16 . Issuance of Letter of Guarantee (L/G)
17 .Minimum Budget for Research and Development.
18 . Lack of Shariah Manual or Guidelines.
19 . Islamic Investment Risk Analysis and measurement Methodology.
20 . Non-exemption of Stamp Duty for Purchasing Property by Banks.
21  .Lack of Co-operation between Islamic Banks and Islamic NGOs for extending Micro credit.
22   Lack of Establishment of Links with other Training Institutes and Shariah Supervisory
23   Lack of Intention of the Management to be strict with Shariah Guidelines.

The above problems are some of the burning problems confronting the Islamic banks in Bangladesh. However it is felt that much operational work and in-depth research work has to be undertaken to allow the Islamic banks to flourish with highest quality and strength.

The prospects of Islamic Banking in Bangladesh
1. Need for Re-organization of the Whole financial System Review  of  the  problems  of  Islamic  banking  in  general  and  Islamic  banks  of  Bangladesh  in  particular  poses  a challenging feature for the promotion and survival of Islamic banks in Bangladesh. The policy implication is not that Islamic banks should never be floated within the conventional banking framework. Rather it is the conventional banking system whose operational mechanism needs to be re-examined and converted into PLS system considering beneficial impact of the latter on the economy. However, as long as Islamic banks are to operate within the conventional banking framework, the recommendations under the following heads may be taken note of.
2. New banking philosophy for the Islamic Banks
There seems to be a gap between the ideals and actual practice of Islamic banks in Bangladesh. In their reports,booklets, bulletins and posters there banks express their commitment to striving for establishing a just society free from exploitation. Study shows that a little progress has been achieved so far in that direction. Though this failure is attributed mainly to the pervasive influence of conventional banking system itself, lack of vigilance of the promoters of Islamic banking in realizing the objective is no less to blame. There should be a through review of policies that have been pursued by these banks for about a decade and points of departure have to be identified to redesign their of action.
3. Future Policy and Strategy

The first action that deserves immediate attention is the promotion of the image of Islamic banks as PLS banks.
Strategies have to be carefully devised so that the image of Islamic character and solvency as a bank is simultaneously promoted. To this end, Pilot schemes in some very selected areas should be started to test innovative ideas with profit-loss-sharing modes of financing as major component. Islamic banks should clearly demonstrate by their actions that their banking practices are guided by profitability criterion thereby establishing that only Islamic banking practices ensures efficient allocation of resources and provide true market signals through PLS modes. Islamic banks should continuously monitor and disseminate through various means the impact of their operations on the distribution of income primarily between the bank and the other two parties: the depositors and the entrepreneurs, and then on different income groups of the society. These presuppose establishment of a fully equipped research academy in each Islamic bank.
4. Stepping for Distributional Efficiency.

The task is more challenging for Islamic banks, as they have toe promote their distributional efficiency from all dimensions together with profitability, Islamic banks, step by step, have to be converted into profit-loss-sharing banks by increasing their percentage share of investment financing though PLS modes. The Islamic banks, to do that, can be selective in choosing clients for financing under PLS modes. They should establish direct functional relationship between the income of the depositors and between the income the income of the bank and that of the entrepreneurs. The relationship improves with share of bank financing under PLS modes increases.

5. Promotion of Allocative Efficiency

The Islamic banks can improve their allocative efficiency be satisfying social welfare conditions in the following manner. First , they should allocate a reasonable portion of their investible funds in social priority sectors such as agriculture (including poultry and fishery), small and cottage industries and export-led industries like garment, shrimp cultivation. Secondly, when the percentage shares of allocation of investible funds are determined among the sectors of investment financing, profitability of projects should be the criterion for allocating investment funds.
The criterion would be best satisfied if more and more projects were financed under PLS modes.

6. Modern banking Policies and practices

Islamic banks, with a view to facing the growing competition either fellow-Islamic banks or the conventional banks which have launched Islamic banking practices, will have to adapts their functioning in line with modern business practices, though improvement and expansion of the range of dealing in the banking sector. Thus, it is necessary for them to provide comprehensive banking and investment services to clients and simultaneously to take advantage of modern technological breakthroughs in areas such as electronic communication , computerization etc.
7. Government and Central bank Responsibilities

Government should think actively for the promotion of Islamic banking in Bangladesh considering its pro-development role. It should amend existing financial laws, acts and regulations to create favorable environment conducive to smooth operation of Islamic banks. The bank Reforms Committee may be entrusted to draft an Islamic Banking Act. Government should also allow establishment of Islamic insurance and other subsidiary companies in order to facilitate their operation. Bangladesh Bank should develop some Islamic Monetary and Saving instruments and create separate window for transactions with the Islamic banks and a full-fledged Islamic banking Department for analyzing, supervising, monitoring and guiding purpose, thereby facilitating Islamic banks for their smooth development in Bangladesh.
8. Inter-Islamic Bank Co-operation and Perspective Plan

All  Islamic  banks  should  come  forward  to  help  each  others  and  adopt  a  perspective  plan  say  for  20  years  for Islamization of the banking system of Bangladesh. To actualize this mission, they should set-up immediately and Apex Research Adademy and a Training Institute designed with modern tools. Books and other accessories.

Conclusion and Implication

1. Islamic banks can provide efficient banking services to the nation if they are supported with appropriate banking laws, and regulations. This will help them introducing PLS modes of operations, which are very much conducive to economic development. It would be better if Islamic banks had the opportunity to work as a sole system in an economy. That would provide Islamic banking system to fully utilize its potentials. Studies show that Islamic banks can not operate with its full efficiency level if it operates under a conventional banking framework, their efficiency goes down in a number of dimensions. The deterioration is not because of Islamic bank’s own mechanical deficiencies.  Rather  it  is  the  efficiency-blunt  operations  of  the  conventional  banking  system  that  puts  obstructions  to efficient operation of Islamic banks. This does not mean that the survival of Islamic banks operating within the conventional banking framework is altogether threatens. Evidences from Bangladesh indicate that Islamic banks can survive even within a conventional banking framework by which over from PLS to trade related modes of financing.
2. Even under the conventional banking framework Islamic banks can operate with certain level of efficiency by applying in a reasonable percentage the PLS modes. The distinguishing features of Islamic banking. This has been possible  in  some  countries  of  the  Muslim  world  where  the  management  of  Islamic  banks  was  cautious  about possible impacts of every policy measure. Particularly, the management of these banks was judicious in selecting sectors or areas as major of their operations. Sudan Islamic banks is a typical example in this respect. Islamic banks in Bangladesh have much to learn from the experience of this successful Islamic bank.
3. Having been considered the pro-efficiency character of Islamic banking and its beneficial impacts on the economy, government policy in Bangladesh should be in favour of transforming conventional banking system into Islamic banking. It is reasonable to assume that risks involved in Mushraka or Mudaraba financing are different from those involved in trade-type financing. It follows, therefor, that prudential regulations of these transactions should be different.
4. Determination of profit and loss in profit/loss sharing arrangement and treatment of costs and reserves in such accounting is a pertinent issue to be addressed with utmost importance and priority. However, Islamic banking is a very critical institution to materialize the economic objectives of Islam. It should however, be noted that it is ot the International Journal of Islamic Financial Services Vol. 1 No.3
whole of the Islamic framework. Compared to the conventional banks it is very much viable by itself, but the full impact of it can only be realized by supplementing it with corresponding reforms in other spheres of life in general, and in the monetary and fiscal fields in particular.
Finally, it may be mentioned that if the Islamic financial system, is to become truly liquid and efficient it must develop more standardized and universally (or at least widely) tradable financial instruments. The development of a secondary financial market for Islamic financial products is crucial if the industry is to achieve true comparison with the conventional system. It must also work hard to develop more transparency in financial reporting and accounting and ideally – a form of Islamic GAAP. Development if the whole sale and especially inter-bank and money markets, will be the key to Islamic finance growing outside its current little sphere of influence, and becoming a truly national invigorating force.

1. Islami Bank Bangladesh Limited(IBBL)
Islami Bank Bangladesh Ltd., which was incorporated on 14th March, 1983, went into operation on 30th March, 1983 and introduced a full package of banking services in August 1983, Islami Bank Bangladesh Limited is considered to be first interest-bank in South East Asia.

IBBL is a public limited company with limited liability under the companies Act, 1913, it is a joint venture multinational bank with sixty four percent of equity being contributed by the foreign sources. Regarding shareholding structure of the bank, the local shareholders hold shares in the ratio of thirty six to sixty four.
In December, 1997 the number of its shareholders stood at 6863, its shares are quoted in the two stock markets of the country namely Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE), Being in high demand the shares are presently sold at three time higher than the face value. Authorized capital of this bank is Tk. 500 million. At present (2015) IBBL has a paid-up capital of Taka 14,636.28 million and Shareholders equity Taka 43,785.28 million.Deposit Taka 473,141 million.

The Authorized Capital of the Bank is 20,000.00 Million and Paid-up capital is 16,099.90 Million in 31/12/2015 The Bank is managed by 23-member Board of Directors elected by the shareholders, An Extensive committee consisting of 8 Directors and a Management Committee consisting of the top Executives of the Bank also oversee the day-to-day function of the Bank. A representative from the Shariah Council also take part in the above committee. Powers and functions are suitably distributed amongst these bodies. The bank has also a 10 -member Shariah council consisting of Fuquah, Islamic Economists and a Lawyer. The
council gives decision on Islamic issues, which are generally followed in the Bank. The Council conducts audits the operation of Bank branches each year on selective basis and put forward report identify the deviations and suggestions for purification of the banking transactions. Besides these committees and Council, types of activities for improvement of the Bank’s overall position.

3. Al-Arafah Islami Bank Limited:
Al-Arafah Islami Bank Limited was incorporated in June 18, 1995 and started operation as 3rd Islamic bank in the private sector banking in Bangladesh from September 27, 1995. The bank is having an Authorized capital of Tk. 1000 million and paid up capital of Tk. 207.6 million. It renders all types of commercial banking services within the stipulation laid down by banking Companies Act 1991 and directives as received from the Bangladesh Bank from time to time. Bank is managed by 23-member Board of Directors.
International Journal of Islamic Financial Services Vol. 1 No.3

The Bank has a 7-member Shariah council consisting of Fuqaha, lawyers and Islamic Economists. The Council gives its advice in order to ensure that the Bank does not involve any element which is not approved by Islamic Shariah. By August 1998 Al-Arafah Islami Bank opened 21 branches all within the country.

Social Investment Bank Limited (SIBL)

Social Investment bank Limited is a fourth Islamic Bank in Bangladesh. It was incorporated on 5 thJuly, 1995 and launched its banking operations of 22nd November, 1995. It nature it is a venture bank of some renowned Islamic organizations of the world and the Government of Bangladesh. At the Operational level,
the bank is committed to provide a linkage among the three sectors of the real economy:

a) formal sector;
b) non-formal sector; and c) Islamic voluntary sector.
The authorized share capital of the bank is Taka 1000.00 million divided into one million shares of Taka 1000.00 each At the end of June 1998 the Paid-up capital of the bank stood at Taka 120.00 million. The bank is managed by a 24-member Board of Directors including three foreign directors and its sub-commit-
tee. The bank has also a 8-member Shariah Council consisting of Fuqaha, Islamic Economist and lawyer.
The Council gives decision on Islamic issues which are generally followed in the bank. By June 1998 Social Investment Bank has opened seven branches all within the country.
4. Faysal Islamic Bank of Bahrain EC, Dhaka, Bangladesh

Faysal Islamic Bank of Bahrain EC, Dhaka has obtained permission to open its branch in Bangladesh on
6th March 1997. The bank started functioning with effect from 11 th August 1997. The principal activities of
Bangladesh branch are to provide all kinds of commercial banking services to the customers. All functions
of the bank are performed in strict adherence to the principles of Islamic Shariah. In order to ensure such
conformity to Shariah, the bank’s operations are checked and monitored by its Religious Supervisory
Board (RSB) to whom the management reports periodically. In case of new operations and activities, prior
approval of the RSB is invariably by the Bank Management. The Bangladesh branch will also be monitor-
ing by the same Shariah Board i.e. RSB.

6. Other Foreign Islamic Banks Branches Operating in Bangladesh

Besides the above branch of Faysal Islamic bank of Bahrain E.C., there are three more branches of three
Pakistani Banks have been operating in Bangladesh namely habib Bank Limited, National Bank of Paki-
stan and Muslim Commercial bank Limited. It may be mentioned that in Pakistan, as in evident in many
papers that these banks are operating in accordance with Islamic Shariah. But, unfortunately, here, in
Bangladesh, branches of these banks are operating as conventional banks, so their operations have been
excluded from the purview of this study. Only the activities of Faysal Islamic bank of Bahrain EC is
considered appropriate for this study.

7. Islamic banking in Conventional Banks :

It is appropriate to mention that in the country two conventional banks have taken the initiative of limited
Islamic banking activities within their present conventional set-up. These two banks are prime Bank Lim-
ited and Dhaka bank Limited. The first one has opened two Islamic banks are Prime Bank Limited and
Dhaka Bank Limited. The first one has opened two Islamic banking branches one in Dhaka on 18th December 1997 respectively. The Dhaka Bank Limited had opened an Islamic banking deposit counter at its principal office. Dhaka in 1995 to attract the depositors willing to deposit their money in the interest-free account. But, due to the pressing demand of the customers linked with along with the traditional system.
Prime Bank Ltd. Is the only bank in Bangladesh which is operating branches on both conventional interest-based banking and Islamic shari’ah based banking other traditional banks of the country are being induced by their successful operations to open full-fledged Islamic banking branches.

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