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Emerging Islamic banking in Bangladesh

The rapid growth of Islamic finance has drawn the attention of national policy makers. There is growing acknowledgement of the contribution that Islamic finance can achieve the object of economic and social development. The expanding size of the Islamic banking sector marks the significance of a strong policy point to ensure that legal and regulatory frameworks are sufficient to ensuring orderly growth.

These of issues have direct application to Bangladesh, which has a large and growing Islamic finance industry. For Bangladesh Islamic finance sector is a social infrastructure that supports economic development and job creation.

Muslims and non Muslim countries are observing the increasing use of Islamic financial instruments to finance long-tenor public infrastructure investments using a variety of Shariah-compliant structures.

The uses of Sukuk to finance them are becoming increasingly important to driving growth in both Asia and the Gulf Cooperation Council countries (GCC).

These investments have been achievable by the development of Islamic capital markets, most prominently in Southeast Asia and in the Middle East.

Bangladesh has experienced phenomenal growth in Islamic banking following strong public demand of Bangladeshis for the system. Since its establishment in 1983, Islamic banking industry has recorded vigorous performance and the industry now accounted for more than 20 percent market share of the entire banking industry in Bangladesh.

Though Islamic banking industry in Bangladesh has achieved more than 20 percent annual growth, the industry has immense prospective for further expansion. Bangladesh is a Muslim-majority country with a sound economy of 6 percent real economic growth over the last ten years. To exploit the full prospective of Islamic banking, it is necessary to assess the present status of Islamic banking industry in Bangladesh.

Islamic banking is growing speedily in Bangladesh with a market share of about 20 percent. The country does not have a full-fledged law for the sector, according to a research. “Islamic banking is profitable from all aspects,” said the research paper of the Bangladesh Institute of Bank Management (BIBM).

The paper was shared at a workshop on ‘Islamic banking operations of banks’ at the institute in Dhaka. The research showed that the net profit margin for conventional banks was 1.9 percent in 2016 against 3.6 percent for Islamic banking.

The incomes against all assets were 5.5 percent for general banking and 7.3 percent for Islamic banking. The default rate on loans is also low in Islamic banking. The default rate on loans for general banking was 9.2 percent, but it was 4.3 percent for Shariah-based banking.

According to a statement of BIBM, Bangladesh ranked 10th in the world in terms of Islamic banking. The lack of extensive Islamic banking laws and service diversification, and an absence lack of skilled workforce are also major challenges confronting Islamic banking in Bangladesh.

More and more banks are showing interest in converting into full-fledged Islamic banks but the central bank is not giving new licences for the expansion of the shariah-compliant finance.

The reason is the absence of a regulatory framework that would enable proper monitoring of the Islamic banking industry. The Bangladesh Bank (central bank) has long been working on a uniform Shariah law framework but could not finalize.

Three conventional banks — Standard, Jamuna and IFIC — had applied to the Bangladesh Bank several years ago to switch to Islamic banking but they did not get the any suitable reply. Islamic banks are showing steady growth over the last couple of years in terms of assets, deposits, and loans and advances.


In 2016, Islamic banking assets increased 13.2 percent, loans and advances grew 17.5 percent and deposits 14.7 percent. In contrast, the banking industry’s deposits rose 12.8 percent last year and loans and advances 15.3 percent, according to data from the central bank. Net profit of the Islamic banking sector increased 18.1 percent in contrast to 4.9 percent registered by the conventional banking industry.

Islamic banks enjoy regulatory facilities such as maintaining lower reserves in the form of liquid assets. The central bank is reluctant to expand Islamic banking as it does not have enough resources and manpower to regulate the Islamic banking industry. The bank, however, applied for permission to open 16 such windows but got the yes for only six.

Bangladesh Islamic financing is growing alongside conventional banking. Its growth has been quite satisfactory in almost all key markets. Bangladesh government and regulators are supporting the promotion of Islamic banking globally.

Taking on that from the UAE, Dubai, Malaysia and Pakistan Bangladesh sees that the demands for Islamic products are increasing. Bangladesh is no exception to the challenges that have globally.

Human capital is one of the biggest challenges because the market is expanding in a way that not enough Islamic bankers are available. Even then Bangladesh in fact has the universities programmes and certification for Islamic experts.

The Standard Chartered Bank is providing international standard products and services in Bangladesh. The quality services, control and governance are very important. Bangladesh is regulated by the global key entities around the world.

Bangladesh Islamic products are for everybody. A customer has multiple needs and is not restricted by religious beliefs or ethnicity. Bangladesh banking is open for everybody. A customer who wants to have Islamic facilities could come from any background.

Bangladesh future growth will depend on how the local banking sector and the economy channels this into more productive uses, as well as the level of support from the regulator. Religious belief is an important part. But over the years the system and the products have become on par with conventional offerings, so now it is an alternate way of doing business or making profits.

There is Islamic liquidity out there. So lots of entities look for diversifying their borrowings and their banking needs. In this way the Islamic liquidity is coming into the system. There is a natural training process happening in retailing. Bangladesh is catering its people adequately. They are fully trained in Islamic banking procedures.

Islamic banking has expanded three times from 2007 to 2017 in Bangladesh, with a Compound Annual Growth Rate (CAGR) of 11.6 percent. The Takaful sector has grown five times with a CAGR of 19.34 percent during this period.

Less than two to three percent of total banking in Bangladesh is Islamic banking. The global market size is about $2 trillion and projected to grow to $3 trillion by 2020.

Islamic banking, based on a frame within the Shariah principles, has been initiated aiming to provide economically viable financial intermediation alternatives to conventional banking.

Islamic banking was first introduced in Bangladesh in 1983 by foreign investors from Saudi Arabia and Kuwait. Currently, eight full-fledged Islamic banks are operating with 1,068 branches in the country, says the latest data of Bangladesh Bank (BB).

The banks in Islamic business in Bangladesh includes Islami Bank Bangladesh Limited (IBBL), Al-Arafah Islami Bank Limited, Social Islami Bank Limited, Export Import Bank of Bangladesh Limited (EXIM Bank), Shahjalal Islami Bank Limited, First Security Islami Bank Limited, ICB Islamic Bank Limited and Union Bank Limited.

Moreover, 19 Islamic banking branches of nine commercial banks and 25 Islamic banking windows of eight commercial banks are also providing Islamic financial services. With a workforce of 30,336 people, Islamic banking covers 22.72 percent market share of the country’s entire banking sector in terms of deposits and investments.

As of June 30, the total number of deposits and investments in Islamic banking was Bangladeshi taka 199,424.90 crores and taka 185,244.93 crores respectively.

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