Bangladesh policy steps may spur Islamic finance dev: Fitch 

Islamic finance in Bangladesh has potential to grow more, riding on strong bottom-up public demand for Islamic products coupled with continuous policy support from the government, says global credit rating agency Fitch in a new report.

Authorities have approved a number of conventional banks to convert into Islamic ones in the last few years, stimulating the sector's expansion. Conversions may have been fuelled partly by laxer prudential requirements. Other factors, such as customer demand for Sharia-compliant services, have also played a role to grow more, according to the report published on Wednesday. 

Earlier, another global rating agency Moody's Investors Service said Islamic banks in Bangladesh have higher asset risks than conventional private banks during economic downturns because they have rapidly increased corporate exposures that are untested through economic cycles.

At the same time, Islamic banks have weaker loss buffers than conventional peers to withstand a worsening in asset quality, and have weaker capitalisation because of higher financing growth and structurally weaker profitability, the Moody's report added.

Fitch in its report also talked about some challenges for this thriving sector as well.

"Long-standing constraints have posed challenges to Bangladesh's Islamic finance sector due to a lack of comprehensive regulations, weak enforcement in general and a dearth of Islamic liquidity-management and investment products."

Besides, inadequate use of fintech solutions by stakeholders, low skilled human capital, limited incentives for Sukuk issuers and a lack of standardisation in the country's Islamic finance sector, may disrupt the growth. 

"However, Islamic banks, by total assets, constitute over 95% of the country's Islamic finance industry, which we estimate reached over $48.1 billion in the second quarter of 2021. Within Bangladesh's banking sector, Islamic banks accounted for around 27% of deposits, 28% of loans and advances, and 38% of remittance handling," the report said.

Fitch expected that growth in Islamic banking in Bangladesh as a Muslim country should be supported by the opening of more Islamic windows and branches among conventional banks and raising public awareness about Shariah-compliant financial products. 

Apart from these, strong economic growth prospects would help to drive robust increases in Islamic banking assets over the medium term. Demographic factors are also showing potential for this growth, the Fitch report added. 

Nonetheless, the country's overall banking-sector loan growth will face constraints in the near term associated with high non-performing loan levels and thin capitalisation. It is still to be seen whether the domestic market share of Islamic banks will continue to grow at the rates.

Bangladesh's share of global Islamic banking assets, which was 2.3% at the end of the third quarter in 2020, was already higher than that of Indonesia (2.1%), Pakistan (1.3%) and Oman (0.7%), according to the Islamic Financial Services Board. 

The local Sukuk market is in its infancy, with outstanding volume of about $0.9 billion and a global Sukuk market share of 1.7% at end-2020. This partly reflects the still-developing nature of Bangladesh's debt capital market and the underdeveloped regulatory framework that supports Sukuk issuance. 

The government issued its first Sukuk in 2020, raising Tk80 billion. New regulations implemented in 2021 would provide a further impetus for sukuk issuance – another permission for banks to invest funds allocated for capital market investments in the private-sector "green" Sukuk. 

Beximco issued the country's first green Sukuk in 2021, the report added. 

The Bangladesh Bank's latest financial stability report, however, revealed an inline picture with Fitch.  It says, "Islamic banks showed a better performance compared to its conventional peers in terms of both classified-investment-to-total-investment ratio, and net-classified-investment-to-total-investment ratio in the year 2020.

According to the report, a total of eight full-fledged Islamic banks with 1,311 branches were operating in the country's banking sector as of December 2020. 

Besides, 9 conventional banks were operating 19 Islamic banking branches and 14 conventional banks operating 198 Islamic banking windows were providing Islamic banking services. The present number of full-fledged Islamic banks in the country is 10.

As of December 2020, more than one-fifth of the banking sector assets were held by the eight Islamic banks, while the top 4 Islamic banks jointly held 14.7% of total assets of the banking sector.

Moreover, the aggregate market share of Islamic banks, excluding Islamic banking windows of conventional banks, saw an increase in 2020 compared to the previous year.