Islamic banks have gained a stronger position than earlier in the banking sector of Bangladesh as one-third of all general banking activities are conducted through Islamic banks which hold 25.04% of total bank deposits, provide 24.93% of investments and handle 27.2% of the country’s remittances. According to the Islamic Finance Country Index (IFCI) 2019 rankings, Bangladesh has moved up from 10th to 8th in 2019 and scored 43.01 in 2020 as reported by the Islamic banking and finance industry in its global index ranking. The IFCI report suggests that Bangladesh has seen more comprehensive development than some leading players like Saudi Arabia, Iran and other major countries associated with the GCC.
Review of 2020
Deposit investment and remittance
The Islamic banking industry holds a one-fourth share of the entire banking industry in terms of deposits, investments and remittances in Bangladesh.
|Table 1: Share of deposit, investment and remittance position of Shariah-based banks compared with total banking sector in Bangladesh (BDT million )|
|Items||April-June 2020||January–March 2020|
|All banks||Islamic banks||Share of Islamic banks||Share of Islamic banks (%)|
|Source: Bangladesh Bank|
As per sectoral analysis, out of the total investment, the trade and commerce sector (43.91%) is identified as the highest among all sectors. Industrial working capital financing is the second-highest (23.33%) followed by the large and services industry (11.55%) (see Chart 1).
As per mode-wise analysis, it has been observed that the highest investments were made through the Murabahah mode (44.52%) followed by Bai-Muajjal (24.19%), hire purchase under Shirkatul Melk (18.85%), Ijarah (5.13%) and others (7.31%) including Qard with security (see Chart 2).
Preview of 2021
Bangladesh Bank, the central bank, has permitted three conventional banks, namely Standard Bank, NRB Global Bank and Jamuna Bank to undertake conversion into full Islamic banks and start operations in early 2021. Sukuk will be formally launched by the end of this year with priorities on financing infrastructure and large manufacturing projects. Bangladesh Bank has already published new guidelines on the 21st October 2020 to prepare for its first-ever government Sukuk issuance in Bangladesh.
Islamic banks in Bangladesh are adopting the latest and emerging technologies from the Fourth Industrial Revolution and working to develop robust agent banking networks across the country. It is also worth mentioning that despite COVID-19, Islami Bank Bangladesh, the largest Shariah bank in the country, recorded US$11.54 billion (BDT1 trillion) in deposits in 2020, setting a milestone for the first time in Bangladesh’s commercial banking history.
Kazi Khurram Ahmed, a director of Standard Bank and a member of the Shariah supervisory committee of the bank, opined: “The Islamic banking industry in Bangladesh is differentiating itself more and more from the conventional banks with compliance of full Shariah and governance with the aim ‘to move beyond the profit’, and to provide sustainable financial services through a responsible manner under Shariah.” Standard Bank is in the final stage of converting into a fully-fledged Islamic bank and to start its operations in early 2021.
The existing challenges are:
• Absence of a legal framework for Islamic banking operations
• Service diversification due to the unavailability of organized markets to offload risks, and
• Lack of a skilled workforce.
Recommendations to tackle the challenges are as follows:
• Preparing a comprehensive regulatory framework which abides by Islamic law
• Developing legal codes for insurance and taxes
• Building capacity to deal with the increasing uncertainties involved in financial innovation, and.
• Organizing awareness programs to drive growth.
Islamic finance has more than 25% share of the total banking sector in Bangladesh, with the country itself having a 35% share of Islamic banking customers in the world, a 50% share of the global Islamic microcredit space and a 28% share in the MSME sector — this means Bangladesh plays a key role in the global Islamic finance market. Additionally, due to inherent characteristics, financial inclusion is an integral part of Islamic banking.
Despite the challenges that the Islamic banking sector is facing due to the pandemic, the overall growth of the Islamic finance market in Bangladesh has been possible with inclusive investments in infrastructure and the possibilities brought by Sukuk, particularly through the digitalization of products and services. Even amid the global pandemic, this year has been remarkable because of the Islamic finance landscape being both bullish and competitive against its conventional counterpart. With the ethical inclusivity and attributes that enhance stability, Islamic finance continues to play a promising role in the country’s socioeconomic development, shaping a model of inclusive development for the country regardless of race, religion and language.