Time to enact an Islamic banking law
Bangladesh needs to enact a comprehensive Islamic banking law to provide a legal framework as Islamic banking, which already accounts for one-third of the entire banking business, is growing in demand day by day
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.
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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. A variant of this transaction is the Salam Sukuk, which uses forward commodity contracts to generate longer-term investments (usually three months).
Central Bank Wadiah (Trust) Certificate/Deposit is issued against funds placed by IBS at the central bank for various maturities. Remuneration is at the central bank's discretion, given the debt nature of the facility. Central banks may pay a bonus at maturity, usually tied to a domestic financial benchmark.
There are two forms of Central Bank Papers - Musharaka Certificates issued against the central bank ownership of a pool of income-earning assets; or Sukuk issued against the central bank ownership of real fixed assets. These papers are freely tradable with maturities of less than one year.
Similar to central bank papers, Government Papers are issued as a Musharaka Certificate against government ownership of a pool of income-earning assets or as Sukuk issued against the government ownership of real assets. These instruments are freely tradable with maturities that can be structured (particularly for Sukuk) similar to those of domestic government securities.
Islamic Repurchase Agreements or Sale and Buyback usually involve two separate contracts, an outright sale of a security at an agreed price and a forward purchase of security at a specified price and future date.
Bangladesh Bank introduced Mudarabah Liquidity Support (MLS) to ensure financial stability and the resilience of Islamic Banks. The repayment tenure of the short-term loan will be seven days, 14 days and 28 days. BB will provide support under the Mudarabah Contract to Shariah-based banks maintaining a current account with BB, where it acts as the Investor and the banks act as investment managers under an agreed Profit Sharing Ratio (PSR).
Bangladesh Bank has also introduced Islamic Banks Liquidity Facility (IBLF) to aid liquidity management and deepen the shari'ah-based banking system's financial system. Shariah-based banks maintaining current accounts with BB are eligible to participate in the IBLF, which is a framework of providing liquidity facilities to Shariah-based banks under the Mudarabah contract where BB acts as the Investor (Rab al-Mal) and banks act as the investment manager (Mudarib) under an agreed Profit Sharing Ratio (PSR).
Now, Bangladesh needs to enact a comprehensive Islamic banking law for providing a legal framework for the banking system that has come of age. Proper enactment of laws and regulations, a culture of compliance, the exercise of good governance and the practice of ethical transactions would ensure dynamic leadership in the sector. Because Islamic banking, which already accounts for one-third of the entire banking business, is growing in demand day by day.
The writer is an Islamic Banker and a Certified Sharia Adviser and Auditor (CSAA) fellow of Bahrain based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). He can be reached at [email protected]
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.
