Bangladesh is the world’s third-largest Muslim majority country, with Muslims comprising close to 90% of the nation’s 160-million population. This has led to the emergence of Islamic banking as an attractive banking channel to meet the demand of Muslims for Riba-free banking services and this alternative is gaining momentum at an unprecedented pace. In Bangladesh, about 77% of this population live in the rural area; while 23% are from urban areas.
The country’s economy, with a growth rate of 6.2%, is dependent on traditional agriculture and has an inflation rate of 15%. The growth potential for Bangladesh’s Islamic finance industry is enormous, due in part to a steadily growing economy and financial reforms. With support from the Bangladesh government, financial regulators and the central bank, Bangladesh can be poised to become the next hub for Islamic finance in Asia and on a global scale.
Islamic banks have been operating in Bangladesh for three decades alongside conventional banks. Islami Bank Bangladesh (IBBL) is the first bank that introduced commercial banking based on Islamic Shariah with foreign shareholding in Bangladesh established in 1983. Since then Islamic banking has been growing progressively together with the conventional banks. Currently, eight banks are operating as fully-fledged Islamic banks with more than 750 branches, and nine conventional banks are offering Islamic banking through setting up of 20 Islamic banking branches and eight more conventional banks are doing so with 30 Islamic banking windows. Islamic banks are now focusing on a wider horizon, encompassing not only conventional Shariah products but also involved with SME financing, microfinance and financing in agricultural sectors.
2013: A review
In Bangladesh, the total banking deposit is US$74.97 billion out of which US$14.13 billion (18.84%) are Shariah-based deposit as at the 30th September 2013. On the other side, total loan and advance size of the country is US$56.04 billion out of which Shariah-based investment commands 21.49% or US$12.04 billion as at the 30th September 2013.
Islamic banks in Bangladesh have shown remarkable growth in the both 2012 and 2013 in terms of total assets, total liabilities, total deposits and total financing and advances. The Islamic banking asset base has been grown by 28.3% as investments (financing and advances) grew by 25%; and similarly the liability base has grown by 28.6% due to an increment of 22.9% in deposits in 2012 compared to that of 2011. In addition to that, net profit demonstrated a 39% growth as compared to 2011. While conventional banks suffered declining profitability in 2012, especially towards the end of the year, Shariah banks showed their prudence and efficiency in managing assets and attaining profits, bucking the trend of increasing non-performing loans (NPLs) in the banking system in Bangladesh. It may be said that Islamic finance is one of the fastest growing sectors in the republic’s financial industry.
The inclusive nature of Islamic banking is evidenced in their growth and already significant engagement in agriculture, SME and microfinance; without any refinance support like those available for conventional banks.
In October 2013, the central bank made a move to structure appropriate Shariah compliant SME refinance support lines for Islamic banks. Apart from Islamic banking, Takaful is also gaining ground in Bangladesh. A separate inspection department for Islamic banks has been formed, and Bangladesh was host to the IFSB-Bangladesh seminar on Islamic finance and Islamic Finance
news Roadshow in 2013.
A daylong international conference on Islamic finance, titled “Islamic Finance
News Roadshow” was held in February 2013 in Bangladesh. During the roadshow, Islamic scholars and panelists discussed on various issues on Islamic finance such as the challenges and opportunities of Bangladesh’s Islamic finance sector, possibilities and opportunities for diversification of Islamic products, facilitating Shariah compliant investment flows in Bangladesh and South Asia through innovative products, structures and channels among others. During the roadshow, the panelists urged upon Sukuk as an alternative source of financing for infrastructure projects in Bangladesh. It has been suggested for the Bangladeshi government to raise required fund through cross-border Sukuk syndication in order to further boost the Islamic banking sector.
2014: A preview
The central bank along with Islamic finance market participants are working jointly towards developing a fairly comprehensive set of the needed norms, guidelines and regulations. Presently, Bangladesh has a well functioning interbank Islamic money market for efficient day-to-day liquidity management by Islamic banks and a new Shariah compliant short-dated Treasury bill is anticipated. Sukuk is already in extensive use in the Middle East and Southeast Asia; this instrument is likely to be very useful for financing Bangladesh’s much-needed infrastructure projects.
Realizing this importance, the central bank has introduced the ‘Guidelines for Islamic Banking’. The regulator stated that as Islamic banking has become a part of mainstream banking in Bangladesh, it has become necessary to introduce proper guidelines to bring greater transparency and accountability to the industry.
During the IFSB-BB seminar on the prospects and challenges in the development of Islamic finance for Bangladesh held in Dhaka; Dr Atiur Rahman, the governor of the Central Bank of Bangladesh (Bangladesh Bank), said: “The Islamic banks in Bangladesh generally have higher capital adequacy ratios and lower non-performing loan ratios than their conventional banking counterparts. Aggregate assets and deposits of Islamic banks in Bangladesh have nearly doubled in the last four years; by the end of 2012 aggregate assets and deposits both crossed trillion taka threshold, comprising around a fifth of total banking sector assets and liabilities. This share of Islamic banking looks set to grow further with time, given its faster growth than conventional banking.”
“Challenges of course are also coming hand in hand with the ongoing growth trends and the emerging new growth prospects. Designing and introducing new Shariah compliant versions of conventional deposit and loan products tailored to needs of our financial market require ingenuity as well as thorough understanding of relevant Shariah principles and practices; appropriate risk management norms and standards are needed for the new Shariah compliant financial products and services, risk mitigation requires developing of new Shariah compliant variants or substitutes of their conventional financing equivalents,” the central bank governor added.
Afzalul Haq, the vice-president and head of Islamic banking of Bank Asia, opined: “In Bangladesh Islamic banking is progressing steadily and it has immense potential. We have so far explored only a small portion of the demand for Islamic banking. As there is huge demand, the future of Islamic banking in Bangladesh is very bright in terms of its market share or its balance sheet size.”
The Islamic banking industry in Bangladesh will celebrate its Golden Jubilee in the year 2033 marking its 50th year. And the present shape of the industry is being modernized in terms of this changing scenario forecasting on the world economy in the year 2033. The government can help to explore the growth opportunities for Islamic finance, as well as tax and regulatory developments to boost the country’s Islamic capital markets. With the proper implementation of regulations, education and understanding of Islamic financial products, and the provision of sufficient infrastructure, Bangladesh is set to become a major player in the field of Islamic finance of the world.
Md Touhidul Alam Khan is the senior executive vice-president and head of corporate assets & client origination, team leader of Green Banking Unit, Bank Asia, Bangladesh. He is also associate fellow member of Institute of Islamic Banking and Insurance (IIBI), UK, associate nember of Institute of Cost & Management Accountants of Bangladesh (ICMAB) and Certified Sustainability Reporting Specialist (CSRS). He can be contacted at