Attributed to its intrinsic value, uniqueness of distinctive banking and sustainability aspects, Islamic finance has been growing fast in Bangladesh. Not only banking but other segments of Islamic finance like insurance and non-bank financial institutions (NBFI) are also enjoying strong positioning among customers and shareholders with the growth of the country’s economy.
Review of 2016
Among 57 scheduled banks working in the country, eight are fully-fledged Islamic banks with 966 branches and 15 are conventional banks with their 21 branches and 15 windows with Shariah banking operations. Some six banks are known to be in the process of converting into fully-fledged Islamic operations. Those banks altogether contribute about one-fifth of the banking industry in terms of assets. The banking industry in Bangladesh is largely dominated by private commercial banks with two-thirds of the market share in which Islamic banks hold about one-third. In the case of financial inclusion, Islamic banks are doing better through their small size deposit and investment products. Islamic banks have maintained a growing market share in all major business segments in 2016.
In addition to the General Index and Blue Chips Index, both the stock markets (Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE)) in Bangladesh have separate Shariah indices. Around one-third of 293 companies listed in the DSE from different sectors are in the Shariah index. Out of the CSE’s 258 companies, 63 companies are included in the Shariah index. These Shariah indices are mostly dominaned by banks, insurance companies, mutual funds and NBFIs.
Takaful has been growing steadily in Bangladesh as a Shariah-based segment of financial products since its inception in 1999. At present, 78 insurance companies are in operation of which 32 are life and 46 are non-life or general. A total of 11 (eight life and three non-life) Takaful companies are now running and more than a dozen conventional life and non-life insurance companies are offering Takaful products through windows or projects. The asset base of the Takaful industry has stood at US$929 million which is around 17% of the insurance industry in Bangladesh.
The NBFI sector in Bangladesh plays an important role in financing various sectors such as manufacturing and service industries, trade, housing, transport, information and communication technology and capital markets. With 33 companies, this sector consists of specialized financing companies, leasing companies, investment companies, merchant banks, etc. Two Islamic NBFIs with assets of US$221 million have a 3% market share.
Of the 34 mutual fund companies under both the DSE and the CSE, three are Islamic financial institutions. Market capitalization of those funds stood at BDT2.26 billion (US$27.97 million) in November 2016, which is 7.7% of the total mutual fund market. Recently, the Bangladesh Securities and Exchange Commission approved the prospectus of the SEML IBBL Shariah Fund, a closed-end mutual fund. The size of the Shariah mutual fund will be BDT1 billion (US$12.37 million) and the offer price of the units will be BDT10 (12.38 US cents) each.
Islamic microfinance institutions working for the poor on the principles of equity and justice have proved their worth in contributing toward poverty alleviation in Bangladesh. Of the 697 microfinance institutions (licensed with the Microcredit Regulatory Authority) operating in the country, some 13 offer Islamic financing. In addition, three Islamic banks, ie Islami Bank Bangladesh (IBBL), Social Islami Bank and Al-Arafah Islami Bank, conduct Islamic microfinance through specialized divisions.
Though the bond market is very small in the financial market of Bangladesh, several subordinated bonds have been issued in recent times. The importance of Islamic bonds or Sukuk is also drawing the attention of different stakeholders. The biggest issuance of Islamic corporate bonds, amounting to BDT3 billion (US$38.12 million), was first issued in 2007 by IBBL to support its Tier 2 capital. This Mudarabah perpetual bond facility has a market capitalization of BDT2.92 billion (US$36.13 million) in the DSE.
Preview of 2017
In terms of asset quality, capital adequacy and profitability, Islamic banks are outperforming their conventional peers. However, they still have scope to explore further alternative banking products like mobile banking, internet banking and e-commerce.
The DSE has already initiated steps to launch various new tradable products starting with exchange-traded funds to be followed in the long term by the expansion of current product offerings to include convertibles, bonds, Shariah compliant products including Sukuk, exchange-traded funds and REITs.
Takaful has ample room to grow in Bangladesh. Industry experts see its rapid growth as a welcome phenomenon. The formulation of appropriate rules and regulations is required for the healthy development of Takaful. Sound regulatory and supervisory mechanisms based on a Takaful act would serve as a vehicle for a thriving Takaful business. Stakeholders need to work together to develop standard practices and a regulatory framework to make the Takaful industry in Bangladesh more efficient and vibrant.
In Bangladesh, Sukuk could be an alternative source of financing for infrastructure projects such as bridges, a deep-sea port and vast road and rail river crossings that link the southwest of the country to the rural northern and eastern regions. The issuance of Sukuk in Bangladesh is expected to receive a positive response from Middle Eastern investors. The government of Bangladesh can raise the required funds by issuing cross-border Sukuk under a syndication process as well.
Islamic finance still has ample room to flourish in Bangladesh, a country of 160 million people who are largely Muslims. For a sustained growth of the Islamic finance industry, scholars and practitioners feel it is necessary to have separate Acts for different segments of Islamic finance like banks, insurance companies, NBFIs and Sukuk, etc. These will facilitate the industry to grow further in terms of volume and product innovation and will protect the interests of stakeholders with adequate legal support.