Bangladesh Islamic Financial Services Diversification





The Islamic finance industry is rebounding strongly after a drop mainly due to the Covid-19 pandemic. It is expected to reach nearly US$5 trillion by 2025, from over US$3 trillion at present. The dynamic projection was made during the fourth Innovation Forum of the Islamic Financial Services Board (IFSB) in Doha, the capital of Qatar, two weeks ago. The council is an international standards organization that promotes the Islamic financial services industry by issuing global prudential standards and guidelines.

He defined that the Islamic finance industry includes banking, capital markets and insurance sectors. The Islamic Financial Services (IFSI) Industry Stability Report 2022, prepared and released by the Board of Directors last month, showed that the global IFSI was estimated at US$3.06 trillion in 2021 It recorded a growth of 11.30% from the value of $2.75 trillion in 2020.

The report also showed that Islamic banking occupies 69% of the global Islamic finance service. The share of Sukuk or Islamic bonds was 25%, followed by Islamic fund assets (5.0%). The remaining 1.0% went to Takaful or the Islamic insurance industry. The regional breakdown of the industry showed that 52% of the total market was concentrated in the six Gulf Cooperation Council (GCC) countries. Southeast Asia’s share was 23.5% last year, followed by 17.40% in the Middle East and South Asia and 2.10% in Africa. The remaining 4.50% was in other regions (Europe and Central Asia).

Islamic finance provides banking and other financial services in accordance with the principles of Islamic law, also known as Sharia, which strictly prohibits riba or interest. This is why Islamic banking is known as interest-free banking. This is the main difference with conventional banking where interest is key. Instead of charging fixed rate interest on loans, the concept of shared risk and reward is the main rule that forces banks to develop a clear understanding of what is being financed. Sharia also prohibits usury (exorbitant interest), uncertainty and speculation and insists on the transparency of any financial transaction. And there is a need for tangible presence of assets for any transaction, which means that the financing must be linked to real assets. There is also a spirit of partnership between the financier and the entrepreneur. Returns on investment must be linked to risks. It is also forbidden to invest or finance an immoral, unethical, harmful and problematic company. This is why Islamic finance is defined as “equity-based, asset-backed, ethical, sustainable, environmentally and socially responsible finance”. It “promotes risk sharing, connects the financial sector to the real economy and emphasizes financial inclusion and social well-being”.

A number of factors are driving the spread of Islamic financial services across the world. Changing global geopolitics, the global financial crisis, economic recessions, concentration of wealth, increasing socio-economic disparities and the spread of corruption over the past two decades have played a critical role in this regard. Conventional or Western lending and financing approaches of “using money to make money” have expanded the complex structure of earning profits only. Thus, the global conventional financial market becomes more speculative in nature, increasing the risks of return on investment. Islamic financing offers an alternative approach of low risk, low profit financial transactions with real financial transactions. Moreover, the ethical aspects and the social approach of Islamic financing also attract many non-Muslims.

Bangladesh is one of the leading countries in Islamic banking, although it still lags far behind in all Islamic financial services. Currently, the share of combined deposits of Islamic banks in Bangladesh was 26% of total deposits of the entire banking sector, according to the Bangladesh Bank’s quarterly review report on the country’s Islamic banking segment. The ratio stood at 28.50% in terms of investments or loans and advances in the country’s banking sector at the end of FY2021-22 (FY22). At present, there are 10 fully-fledged Islamic banks, nine conventional banks with some Islamic banking branches, and 14 conventional banks with Islamic banking windows. The ISFI’s Stability Report places Bangladesh in eighth place among the top 15 countries with a share of more than 15% of Islamic banking assets in their total domestic banking sector assets in 2021. Iran and the Sudan have a 100% Islamic bank, followed by Saudi Arabia. Arabia (78%), Brunei (58%), Kuwait (51.90%), Malaysia (31.5%), Qatar (28.1%), Bangladesh (26.30%), Djibouti (25.1% ) and United Arab Emirates (23.90 percent).

The report also showed that Bangladesh shared 2.70% of global Islamic banking assets last year. He also added that Islamic banking assets in Bangladesh, Pakistan and Palestine recorded improved performance of double-digit growth of 20.9%, 30.6% and 12.1%, respectively, as at last. quarter of 2021. In Bangladesh, the growth was mainly driven by strong public demand,” the report says. “Additionally, policy support from Bangladesh Bank provided opportunities for Islamic banks to participate in for infrastructure and industrial projects.”

Bangladesh, however, lags far behind when it comes to Islamic bonds. The country’s first Sukuk or Islamic bond was issued in 2020. Bangladesh Bank on behalf of the government issued the first sovereign investment Sukuk to raise Tk 80.00 billion for the implementation of the procurement project drinking water in the country. Two other Sukuk were also issued last year. The total amount of Sukuk issued reached Tk 180 billion at the end of June 2022. Unlike a non-Islamic bond, where bondholders receive fixed interest at maturity to fund capital, a Sukuk holder receives a share of the income generated by the assets. There is also a Bangladesh Government Islamic Investment Bond (BGIIB), introduced in 2004, although only Islamic banks are able to invest in this bond. The amount is still small.

Thus, the main challenge for Bangladesh is to diversify Islamic financial services by focusing on other segments of Sharia-based financing such as Islamic capital market, Islamic insurance or Takaful and microfinance. It must learn from the experiences of countries like Malaysia, Qatar and the United Arab Emirates in this regard. This will help boost the country’s share in the global Islamic financial market.

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