The current state of Islamic banking
By Saif Islam Dilal
Islamic banking is rapidly gaining credibility, thanks to the deep faith of the country’s majority Muslim population. Although it is banking with emotions involved, by providing modern facilities and services, it is sustaining itself in the competition. Its system is followed by both the central banking procedures, as well as the Shariah banking laws. The actual investments made by the investors are bound to return to them in this bartering-like operation. It is also expanding thanks to its dependence, integrity and credibility, despite some Islamic banks operating in allegedly unscrupulous means. But in order to ensure funding in the real sectors, there is no alternative to Islamic banking system.
Interest is made haraam in Islam, effectively turning it completely haraam in Shariah banking as well. Despite modern banks being interest-based, businessmen are rather enticed towards this non-interest based banking system. But it is not the case that only Muslims across the world can avail this banking system. Plenty of non-Muslims are customers of Islamic banks with their own accounts, operating on a non-interest basis and setting a creative example of Islamic banking.
Islamic banking services commenced in Bangladesh in 1983. Out of the 56 scheduled banks, 8 of them are running Islamic banking. 17 other banks have opened Islamic banking services as well, with Standard Bank, Jamuna Bank, NCC Bank, IFIC Bank and South Bangla Agriculture and Commerce Bank applied for Islamic banking services. Agrani Bank has applied 5 windows and 5 branches only for Shariah banking, Eastern Bank and Uttara Bank applying for 10 windows/branches. According to the central bank, the position of Islamic banks is solid. 9% out of 16% of the additional national reserves come from the Islamic banks.
19% of the collective deposits and 22% of the advanced balances are controlled by the Shariah banks. In light of the recent development of the banks’ fund managements, Bangladesh Bank has established a policy for Islamic banks, where they can issue up to 90% of their deposits as loans, unlike other banks whose limit is 85%.
Given the nepotism and corruption of the traditional banks, customers have all but lost faith in them. Investing in those banks is a big risk now. In light of this, businessmen are eyeing for Islamic banking as the way out. According to sources, as interest-based transactions are cardinal sins in Islam, they are extremely interested in opting to bank there. They are also less risk-prone, hence are ahead of the competition against traditional banks currently.
There is currently a large sum of liquidity in the Islamic banks. Previously the government could not take loans from the Shariah banks, as they were outside the interest format. But in order to avail their loans, the Islamic investment bonds policy is being revised. The draft policy has been sent from the central bank to the ministry of finance, under the title of Islamic Investments Bond Policy 2014. This was modeled in light of the Malaysian Sukuk Islamic bonds. Once it is ratified, then the government would be able to take loans from the Islamic banks.
They usually take loans from the traditional banks in the form of different treasury bills and bond auctions. But the Shariah laws refrains Islamic banks from taking part in those auctions. The traditional banks usually have to deposit 19.5% of their filed deposits to the central bank, but the Islamic banks only have to deposit 12%. This is largely due to the normal banks keeping theirs in the form of bills and bonds. But the Islamic banks have to keep theirs in cash, which also helps them to receive fiscal incentives.
The government usually has to dish out interests against the loans they take from the traditional banks. Islamic banks do not conduct cash-based business, but rather product-based, which hinders government lending. This is why the Sukuk policy has been formed, from which the government can take loans for specific projects. In return the banks will have joint ownership till the point when the project revenues in return can be used to pay back the bank loans and revoke their ownership. They will even be able to pocket the profits.
Due to the recent global economic crisis, with the European and American banks becoming loan-risks, the risk-free investment in Islamic banks managed to entice investors towards them. This is why it was observed that Islamic banking activities had expanded to areas where Muslims were in the minority population. The scenario in the local Islamic banks shows a trend in making profits, where allegations of non-Shariah banking have been raised. This has spiraled due to the unavailability of Shariah laws in the central bank regulations. Not all the Islamic banks are reaping profits as well.
In order to be in tune with the times, modern services have been introduced in the Islamic banks. The general population is aware of the Mudaraba, Musharaka, Bai Murabaha, Bai Muajjal, Bai Salam, etc. The trend of financing non-existent corporations by the banks may have weakened them, but this has been countered through strong Islamic banking foundations.
Mudaraba – Mudaraba is the partnership in profit whereby one party provides capital and the other party provides labour, efforts or expertise. Profit is shared between both parties as per agreed ratios whereas the loss, if any, is borne by the fund provider (Rab Al Mal) alone provided such loss is due to circumstances which are unavoidable, uncontrollable and unforeseen by the fund manager (Mudarib), else the loss will be borne by the fund manager (Mudarib) alone because of his default.
Bai Murabaha – Bai-Murabaha may be defined as a contract between a Buyer and Seller under which the Seller sells certain specific goods permissible under Islamic Shariah and the Law of the land to the Buyer at a cost plus agreed profit payable in cash or on any fixed future date in lump sum or by installments. The profit marked-up may be fixed in lump sum or in percentage of the cost price of the goods.
Bai Muajjal – Bai Muajjal is a deferred sale contract at a fixed price whereby the seller delivers the goods to the purchaser on spot (i.e. at the time of signing of the sale contract) while the purchaser pays the purchase price on a later date in lump sum, on different agreed future dates in known equal or unequal installment amounts or pays a part of purchase price on spot and the remaining in installments, as agreed.
Musharaka – Musharaka is a contract of partnership between two or more partners and is classified into many categories most common and popular of them are the following two: Sherkat Al Aqd (Contractual Partnership) It is an agreement between two or more parties to combine their assets (in kind or in cash) or to merge their services or future obligations and liabilities with the aim of making profit through Sharia compliant means whereas the profit is distributed between the partners as per the agreed ratios however the loss, if any, shall be borne by all partners proportionately. Sherkat Al Melk (Partnership of Ownership) It is the combination of the assets of two or more persons which results in entitlement by each partner to the profits or revenues there from persons, which results in entitlement by each partner to the profits or revenues there from, or appreciation in value thereof in proportion to the ownership of each partner and in bearing the loss accordingly, if any. A Sherkat Al Melk is formed either by events beyond the partners’ control such as inheritance or by choice such as acquisition of a common undivided share in an asset by two or more partners or by acquisition of an undivided share by one person in an asset fully owned by the other. According to bankers, the lack of Islamic teachings in the social science education has made investments by Musharaka risky in the Bangladeshi context.
Formation of the Shariah Board
The central bank regulations for the formation of Shariah boards dictate that each of the banks have their own Shariah board/council, to ensure the Shariah regulations and conformity to Islamic laws in an unanimous manner. They are also to unanimously take Fatwas (policy rules) and implement them. This is where the question of having a joint Shariah board or council, along with a central bank Shariah council.
The central bank has also formed a central council for such titled Central Shariah Board for Islamic Banks of Bangladesh. Every Islamic bank has their own Shariah council, but there is currently no regulatory body to look at those councils. For example, there have been various interest-based refunding schemes that the Islamic banks have accepted, but the central bank has also approved.
M. Mahfuzur Rahman, Executive Director at Bangladesh Bank, said that the central bank does not differentiate between traditional and Islamic banks. Every Islamic bank can form their own Shariah council. They will look into the activities and policy implementations of their respective banks. This trend began in 1983 with the formation of Islami Bank Ltd. The people of this country are religious. So in light of that, a lot of them wanted to deposit their money as per Shariah policies. Islami Bank Ltd had successfully managed to do so, and this had inspired many banks to emulate their success. Some were downright Islamic from the beginning, and some had converted their system to it. Some banks have separate branches for Islamic banking, whereas some only have separate windows for Islamic banking. So the central bank does not know the actual figures of their whereabouts, which is why the respective Shariah councils should look after all this.
He also added that Islamic banking is now a success story. Most of the banks want to emulate their successes. But they are not getting approvals from the central bank for partial Islamic banking services. Islamic banking has a significant contribution towards the economic growth of this country, especially in LCs and remittances. They even have their presence in the share market.
Shah Abdul Hannan, former deputy governor of Bangladesh Bank, said that their success is likely due to the huge response and support they received from the customers. Their socio-economic contributions have been successful on all counts, and they have also proved that they can carry out all the modern banking amenities, all despite being in the regulations of Islam.