Bangladesh has a population that is overwhelmingly Muslim (91%), creating a strong and expanding demand for Islamic banking and finance, which is promoting the nation’s economic growth. Bangladesh ranked 14th out of 135 nations around the globe on the Refinitiv Islamic Finance Development Indicator 2021, a composite weighted index that assesses the overall development and health of the Islamic finance industry. Bangladesh is also among the top 10 nations with the greatest Islamic finance assets, according to the Islamic Finance Development Report 2021. The Islamic financial assets of Bangladesh were valued at US$50 billion as of 2020, or 10.75% of the country’s current GDP.
Review of 2022
Out of the 10,942 branches in the banking sector, 10 fully-fledged Islamic banks have 1,679 branches. In addition, 434 Islamic banking windows and 41 Islamic banking branches of 13 conventional commercial banks in Bangladesh offer Islamic financial services. At the end of June 2022, there were 2,207 Islamic bank branches in total, including Islamic branches and windows of conventional commercial banks.
At the end of June 2022, the total deposits held by the Islamic banking sector were at BDT4,123.41 billion (US$39.78 billion), up by BDT126.61 billion (US$1.22 billion) or 3.17% from the end of March 2022, and BDT441.77 billion (US$4.26 billion) or 12% from the same period the previous year. Islamic banks’ portion of total deposits made up 26.19% of all deposits made by banks as a whole.
Comparatively, the total investments (loans and advances) of the Islamic banking segment increased by BDT211.8 billion (US$2.04 billion) or 5.87%, and by BDT538.86 billion (US$5.2 billion) or 16.43% as compared with the end of March 2022 and the end of the same quarter of the previous year respectively to reach BDT3,818.29 billion (US$36.83 billion) at the end of June 2022. According to a Bangladesh Bank report, 28.52% of the total loans and advances made by all banks were made by Islamic banks.
Total remittances mobilized by Islamic banks during April to June 2022 were BDT157.17 billion (US$1.52 billion), up by BDT22.47 billion (US$216.76 million) (16.68%) from the end of March 2022 and down by BDT43.23 billion (US$417.03 million) (21.57%) from the prior quarter in 2021. From April to June 2022, 32% of remittances mobilized by the financial industry came from Islamic banks.
In terms of sector, investments through Islamic banking, trade and commerce secured the highest position (37.66%) among all sectors at the end of June 2022, followed by large industry (27.88%); CMSMEs (cottage, micro, small and medium enterprises) (10.61%); construction (6.64%); miscellaneous (6.26%); services industry (5.41%); agriculture, fishing and forestry (2.08%); consumer finance (2.02%); transport (0.94%); and other institutional investments (0.5%).
Bangladesh Bank on behalf of the government issued a maiden sovereign investment Sukuk facility to raise BDT80 billion (US$771.75 million) for the implementation of the safe water supply project across the nation. The overall cost of the project is estimated at BDT88.51 billion (US$853.84 million) of which BDT8.51 billion (US$82.09 million) will be provided by the government. The total amount of Sukuk issued stood at BDT180 billion (US$1.74 billion) until the end of June 2022.
Preview of 2023
Given Bangladesh’s strong economic growth and favorable demographics, the country has a bright future in Islamic banking and finance. Undoubtedly, the rising demand for financial services created in accordance with their worldview would accelerate the development of Islamic financial goods and services in Bangladesh. In Bangladesh, it has been noted that Islamic banks are outperforming traditional banks in terms of profitability, capital sufficiency, asset quality and managerial effectiveness. This will increase investor confidence in the Islamic finance industry, which will lead to more capital infusion and the conversion of financial institutions into Shariah compliant ones. In turn, it will support the expansion of the Islamic finance industry in Bangladesh.
As the Sukuk market is flourishing in Bangladesh, there is also a need to restructure the Bangladeshi bond market. The majority of the country’s population needs to be brought under the umbrella of financial inclusion. The mass penetration of Islamic microfinance can be a game-changing phenomenon in the country.
Bangladesh has a strong local market presence and is beginning to access international markets as sovereign Sukuk have created some interest for local corporations to follow the lead into the international Islamic capital markets.
Bangladesh has a strong and stable economy and a strong foreign currency export market that may support business issuances. For new corporate issuers in the Islamic capital markets, Bangladesh may be the next big hub because both sovereigns and corporations there have prospects.
All Islamic banks in Bangladesh must have independent Shariah boards with Islamic experts on them in order to encourage effective corporate governance. Social Sukuk can be used in addition to green Sukuk by large non-governmental organizations and microfinance institutions that can significantly contribute to boosting financial inclusion and reducing poverty.
Conclusion
It would be beneficial for Bangladesh to embrace Shariah standards from international accounting and auditing organizations in order to appropriately handle concerns with Shariah compliance in the Islamic financial sector. According to the most recent report from Bangladesh Bank, Islamic banks and conventional banks with Islamic banking branches and windows may take the appropriate steps to become members of AAOIFI.
It is crucial to create a market for Shariah compliant shares and a secondary market to trade Sukuk. In order to improve the investment climate and promote long-term sustainability, there must be vested interest in promoting chances to introduce and execute green and social Sukuk. By lowering the stamp fee on Islamic products and allowing borrowing from traditional current accounts to fund Islamic assets for Islamic banking windows and branches, the central bank can promote the uptake of Islamic banking.
To advance the Islamic market, appropriate policies must be implemented to solve its problems with the development of the legal, regulatory and tax systems, among others. The high potential of Shariah-based investment facilities, particularly in facilitating infrastructure development, and the exceptional chances and potential to prepare a sustainable investment model through new Islamic products are both very important. A dedicated regulatory framework is also crucial.
Md Touhidul Alam Khan is the additional managing director, chief risk officer and chief anti-money laundering compliance officer of Standard Bank, Bangladesh. He can be contacted at [email protected].