Why has it been so hard for the home to the third largest Muslim population in the world to feature as a major player in the realm of Islamic finance? Is it due to regulatory constraints or sheer apathy? NAZNEEN HALIM explores.
In theory, Bangladesh has no reason not to thrive in the Islamic banking space. With a Muslim population of 130 million, a growing middle class sector and increased foreign interest in the investment arena, Bangladesh has been relatively quiet in the sector, preferring to grow its Islamic retail business to debt capital market growth.
According to a senior banker from one of the four foreign banks in the country with an Islamic finance window, the issuance of Sukuk has been stalled due to excess liquidity issues primarily attributed to a lack of response from good credit borrowers and adequate interest-free financial instruments.
However, even now, the country’s Islamic retail arena only represents approximately 1% of the nation’s entire banking portfolio. Instruments such as Mudarabah, Murabahah, Ijarah, Salam and Istisnah are touted to be the most popular. However, Mudarabah has come under the spotlight recently, with calls for an alternative to the instrument due to the country’s Islamic finance practitioners questioning the weightage based module for profit sharing as prescribed by Bangladesh Bank, the country’s central bank.
Gias Uddin Ahammed, a senior banker at Sonali Bank, recently questioned the feasibility of the Murabahah system in the Bangladeshi Islamic finance sphere; he proposed a new system for the assignment of weightage to the Mudarabah profit distribution module. Apart from the lack of banking facilities catered to Mudarabah deposit account holders, the biggest setback faced by the system is the lack of interbank money market activity, which is of course still heavily dominated by conventional banks in the country.
Gaining traction
Bangladesh seems to have adopted a more practical approach to Islamic banking, similar to Indonesia, by choosing to grow the country’s microfinance and SME sector. Microfinance, typically aimed at households earning less than US$2 a day, was brought to prominence by Grameen Bank in Bangladesh, whose founder, Muhammad Yunus won a Nobel Prize in 2006 for pioneering the service in 1976. An Islamic version of the model was then developed in Egypt in 1963 by the economist, Ahmad Elnaggar.
Islamic microfinance currently accounts for approximately 0.5% of global microfinance, with the leading three countries being Afghanistan, Bangladesh and Indonesia, according to a report by the law firm, Allen & Overy.
Social Islami Bank Limited (SIBL), with a paid up capital of BDT2.99 billion (US$42.5 million), is one of the seven fully fledged Islamic banks in Bangladesh which has chosen to plug the gap in rural financing; reason being it sees the sustainability of this mode of financing in the country.
Choosing to focus on SMEs, agro-finance, remittance and alternative delivery channels, SIBL chose to shift its focus to these sectors to take advantage of the growing financing demands of this demographic in an aim to grow its commercial business. Muhammad Ali, managing director of the second generation bank, said: “We would like to shift our focus from the big corporate houses to the micro areas so that the economic activities do not remain confined, but rather spread all over the country, bringing the teeming millions under economic mobility.” Ali said he was optimistic that the new investment areas to be identified by SIBL will play a vital role in creating adequate employment opportunities, income generation and poverty alleviation. Through tapping these sectors, SIBL is expected to increase its contribution to the national economy through financing industrialization in the country, in tandem with the gradual expansion of the overall business.
Central bank blues
The need for Bangladesh Bank’s backing is perhaps the main gripe among the country’s Islamic bankers. One Bangladesh based Islamic investment banker attributes the excess liquidity to insufficient legal support from the central bank. Banks also face a dearth of expertise to appraise, monitor and evaluate as well as audit Shariah compliant financing projects. “We have not yet been successful in devising an interest-free mechanism to place our funds on a short term basis. And we face the same problem in financing consumer loans and government deficits. Also, the risk involved in profit sharing is seen to be too high for banks to bear, that almost all of the Islamic banks in Bangladesh have resorted to financing techniques which carry a fixed assured return,” he said.
Currently, there is neither a central Shariah board to oversee the Islamic banking sector nor are there any Islamic banking guidelines.
The central bank has yet to fulfil its promise with regards to this guideline which it announced in 2005.
Perhaps the best way forward is to be practical. Virtually speaking, the future of Islamic microfinance and SME spending seem brightest for Bangladesh.
This article was published in the December 2010/January 2011 issue of Islamic Finance Asia