Saturday | 18 January 2025 | Reg No- 06
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Saturday | 18 January 2025 | Epaper

Some key proposals for our Islamic banking reforms 

Published : Saturday, 7 December, 2024 at 12:00 AM  Count : 702
M A Masum
Islami Bank Bangladesh Limited is the largest commercial bank of Bangladesh. It is the first Shariah-based Islamic bank in the South-East Asia established in March 1983 with the slogan "Pioneer of Welfare-Oriented Banking". Over the past four decades, Islamic banking has firmly established itself as a significant financial sector in Bangladesh, operating in accordance with Islamic principles and providing a secure platform for transactions. Islamic banking in Bangladesh has emerged as a formidable sector since its inception, playing a pivotal role in mobilizing deposits and financing various economic activities.

At present, 10 full-fledged Islamic banks are providing services through their 1,687 branches, 1,011 sub-branches, and 4,172 agent banking outlets in the country. Additionally, about 30 conventional banks are conducting Islamic banking activities through 33 branches and 16 conventional banks maintain 688 windows. The market share of Islamic banks in the total banking industry stood at 26.23 percent in terms of deposits and 28.24 percent in terms of investments, while their total asset share is 23.65 percent. Islami Bank is at the top in terms of import-export and remittance collection. In addition The UK-based economic magazine The Banker listed Islami Bank as one of the top 1,000 banks in the world for 10 consecutive years since 2012 - the only Bangladeshi bank to have achieved that. 

Malaysia has achieved great success in Islamic banking in the last four decades. The role of Shariah-based banking system in laying foundation of the country's modern economy was groundbreaking. Islamic banking quickly became popular in Bangladesh, as it did in Malaysia. But before it can play its desired role in the economy, Islamic banking is facing a crisis of confidence.
  
Now, Bangladesh Bank has taken the initiative to formulate 'Islami Bank-Company Act, 2024'. A bank will not be able to do Islamic banking business along with conventional banking at the same time, according to the draft 'Islami Bank Company Act-2024', as the central bank looks to level playing field for Shariah-based banks. If the conventional banks are allowed to do Islamic banking, then there will not be a level playing field as the Islamic banks do not have the opportunity to do conventional banking, said the head of the committee that prepared draft.

I would like to put forward several proposals for the reform of Islamic banks: (1) Not more than one Islamic bank can be operated by a single person, member of his family, or owned by any group or organizations. (2) The board of directors should not interfere in operational activities of the bank. (3) Each director will personally abide by the Shariah, will not accept interest-based banking transactions, loans through any other bank or financial institution, and will not be able to take any action against Shariah-based banking. Breach of such an undertaking shall be deemed to be disqualifying for a directorship position. (4) The fundamental difference between conventional and Islamic banking is interest. Shariah-based banks share profits. There should be an obligation not to transact interest in any way in Islamic banking activities. (5) There are separate Islamic banking department of central bank operates in different countries of the world, including Malaysia, Indonesia, Brunei, Pakistan and Oman. A dedicated Islamic banking department should be established under a deputy governor or equivalent rank with adequate infrastructure and experienced manpower for close supervision/monitoring of the Islamic finance. Audit, research and training, issuance & publishing of regulatory circulars, guidelines from time to time should be under the said department.  
 
(6) A 'Central Bank Shari'ah Board' should be operated under Bangladesh Bank which shall control Shari'ah Board of all Islamic Banks of the country. (7) An 'Islamic Bank Recruitment Committee (IBRC)' can be formed with the coordination of all Islamic banks under which meritorious employees can be recruited from all over the country through a transparent and accountable selection process. (8) Conventional and Islamic banking activities should not be mixed together. However, in case of a conventional bank branch or window, affiliated bank must have a strong and independent Shariah board and Shariah-based audit team. (8) The Islamic money and capital market should be strengthened with the help of central bank and securities exchanges commission. (9) Creation of the Governing Board of Structure of Islamic Banking. In addition, the law should clearly state the qualifications required to become a member of the Shariah Board. If the existing members do not have those standards or qualifications, they can be changed or provided with the necessary training. (10) Although various Islamic financial sectors, including Sukuk, have played a huge role as investment tools from Islamic banks around the world, this is a completely new area for the financial sector of Bangladesh. There are still fundamental infrastructural weaknesses. Therefore, activities of sukuk should be expanded. (11) In fact, bank has no owner, can be a shareholder or stakeholder. So the word 'bank owner' needs to be deleted permanently from any regulatory law, rules, papers, guidelines etc. (12)  There shall be at least four (4) directors from amongst the actual depositors. (13) The maximum tenure of a director shall be 3(three) three years and may be held for a maximum of two terms. (14) In the case of investment, single organization and group limit should be determined separately. There is a provision to appoint an agent to ensure purchase and sale in the case of investment. Qualifications and experience of such agent should be defined & standardized (15) There should be clear instructions for Islamic banks regarding import and export of services, especially software. (16) There should be a recommendation of Bangladesh Bank to establish 'Islamic Defaulter Investment Settlement Court' to settle case of defaulted loans in fastest possible time. (17) A unique ID (may be NID) of all customers which will be under control of Bangladesh Bank and all bank accounts can be opened against the said ID. No customer can open more than one homogeneous account in a bank. Then it will be easy to prevent fraud, irregularities and establish control by Bangladesh Bank. (18) Recently, under pressure from unscrupulous owners, many banks have been accused of manipulating software to reduce or not determine interest/profit rate, regularize defaulted loans/ investments, and even delete/omit transactions in many cases. Therefore, all Islamic banks under the supervision of Bangladesh Bank should have a unique software on which Bangladesh Bank will have a strong control & supervision. Of course, there are doubts about how much benefit will be available if Bangladesh Bank is corrupt. (19) Strict measures should be taken against smugglers and defaulters. Actual figure of loan/investment should be published regular basis. Names and addresses of the defaulters should be published in various media, Bangladesh Bank website and their passports should suspend and they should be deprived of state privileges. (20 Since the Islamic banking system is completely different from the traditional banking system, it is very difficult to maintain transparency and consistency in its management without full adherents and believers in the Islamic banking system along with banking skills and moral training. 

Despite the immense opportunities, the Islamic banking and finance industry in Bangladesh continues to face key structural impediments. These include the absence of appropriate Islamic Banking Act/rules/norms, gaps in human capital development, a lack of unified Shari'ah rulings, the absence of a secondary securitization market, the non-incorporation of subjects related to Islamic finance in the curriculum even at university levels, a lack of syndication efforts to finance public projects in a completely Shari'ah-compliant manner, insufficient budgets for research and development to come up with innovative products, the absence of an Islamic money market, and the implementation of a comprehensive Shari'ah governance framework that requires updating which should be improved urgently. 

The writer is banking analyst and First Assistant Vice President, 
Islami Bank Bangladesh PLC, Foreign Trade Processing Division, Head Office



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