Central bank updating guideline

Against the backdrop of various irregularities in Islamic banks revealed recently, the Bangladesh Bank is now updating the Islamic banking guideline to ensure good governance in such banks.

The updated guideline is likely to be published within two to three months, said a top central bank official.

Updating the guideline will also ensure the Islamic banks’ proper compliance with the Sharia law and improve their risk management capacity.

Sources at the central bank said the new guideline’s introduction will ensure all products of Islamic banks comply with the Sharia law. Moreover, licencing requirements and the qualifications needed to be Sharia committee members will be made clear.

Besides, the updated guideline will state how many banks a Sharia committee member can be involved in. The responsibilities of the management and the board of directors will be clarified as well.

A central bank official said the Islamic banking guideline is being updated in line with the Islamic Financial Services Board as well as the Accounting and Auditing Organisation for Islamic Financial Institutions standards.

Good governance in Islamic banks is expected to increase after the update, he said.

Spokesperson for the central bank Mezbaul Haque told The Business Post the banking regulator always updates various guidelines when needed.

“Updating the Islamic banking guideline is part of that process. Hopefully, the update will be completed in due time.”

Md Alamgir, an associate professor at Bangladesh Institute of Bank Management, has been researching Islamic banking for a long time. He said non-compliance with the Sharia law will reduce once the guideline is updated.

Banks will also be more aware of their operations after the new guideline is published, he added.

No Islamic banking law

The journey of Islamic banking in Bangladesh started four decades ago following the examples of Muslim-majority countries, including Saudi Arabia, Pakistan, Malaysia, Indonesia, and Egypt.

Although these countries have separate laws, departments, and adequate manpower for Islamic banking, Bangladesh does not.

The share of Islamic banking in Bangladesh’s banking sector is increasing day by day, but it is still regulated by the conventional banking laws and systems.

Deposits and loans in Islamic banks accounted for 26.8 per cent and 28.98 per cent of the total deposits and loans respectively till September last year. Islamic banks describe loans as investments.

Meanwhile, there is no central Sharia board, which can give advice, opinions, and guidance on whether Islamic banks and financial institutions are complying with the Sharia law.

There is also a shortage of skilled manpower at the Bangladesh Bank who has expertise in Islamic finance and accounting. Only two or three officials at the central bank formulate Islamic banking policy. Moreover, there is no expert panel to review the policy.

Although two departments of the central bank do supervision, there is a shortage of inspectors who have a better understanding of the Islamic banking system, said sources at the banking regulator.

Apart from this, due to a shortage of skilled manpower, it is not possible to properly verify whether there is any kind of inconsistency in the financial reports of Islamic banks and financial institutions.

A top official of the central bank told The Business Post it is not possible to have a separate department like other countries because there is no separate law for Islamic banking in Bangladesh.

“However, if the guideline is updated, many things will be clarified, and many of the existing complications will be gone.”

Alamgir said along with updating the guideline, the authorities should start formulating an Islamic banking law.

“If the law is passed, the accountability of Islamic banks to the central bank will increase,” he said.

However, Mezbaul said, “At the moment, the central bank does not feel like a separate Islamic banking law is needed.”

Legislation will be formulated if the need to do so arises, he added.

Independent Sharia committee

Sources at the central bank said an independent central Sharia committee for Islamic banks is being created. The committee members will include people with knowledge of Islamic banking, university teachers, and former members of Islamic banks’ Sharia boards.

The top official of the central bank said the committee will not be under the banking regulator and will rather work independently.

It will resolve Sharia-related disputes, he said.

When asked about the lack of Islamic banking skills among the central bank officials in charge of inspections and supervisions, he said it is not necessary.

“It is the responsibility of the Sharia board of a bank. Officials at the central bank will only see whether Islamic banks are following the guideline properly.”