Islamic Financial Services: The Bangladesh perspective

According to the “Population and Housing Census 2022” done by the Bangladesh Bureau of Statistics (BBS), 91.04 per cent of the population of this country are Muslims. Despite being one of the biggest (in terms of population) Muslim-majority countries worldwide, Bangladesh’s Islamic financial services industry has not flourished along expected levels. Bangladesh’s efforts to ensure full-fledged Islamic governance in financial services have not been competitive. Though demand for maintaining Shariah compliance from the business world is rising, the concerned sector seems to have chosen to walk slowly. Islamic Financial Services Industry (IFSI)- which deals with banking, capital market, and insurance sector- needs a big push in the present situation. We must admit that Bangladesh has made some progress in Islamic banking. But, Bangladesh’s position in the Islamic capital market and Islamic insurance sector, known as ‘Takaful’ is not worthy of much praise. According to this writer, Bangladesh’s Islamic financial services industry is not focused in the right direction.

In the banking sector, Bangladesh has gained popularity in terms of providing services in light of the Shariah principle. Islamic banking means the situation of profit and loss sharing. Besides, such type of banking discourages interest (Riba) bearing income. In Bangladesh, there are ten full-fledged Islamic lenders. Furthermore, nine conventional banks have Islamic banking branches, and 14 conventional banks have Islamic banking windows. Malaysia-based Islamic Financial Services Board (IFSB) researches Islamic financial services provided globally. IFSB is an international standard-setting organization promoting the Islamic financial services industry by issuing global prudential standards and guiding principles. The Islamic Financial Services Industry (IFSI) Stability Report 2022 revealed by IFSB that Bangladesh shared only 2.70 per cent of the Global Islamic Banking Assets. According to the IFSB report, Bangladesh’s share in Islamic banking is 26.30 per cent indicating that Bangladesh ranked 8th among the top 15 countries that have more than 15 per cent share in Islamic banking assets in their total domestic banking sector assets. Iran and Sudan have 100 per cent Islamic banking.

Meanwhile, Islami banking in Saudi Arabia around 78 per cent , 58 per cent in Brunei, 51.90 per cent in Kuwait, 31.5 per cent in Malaysia, 28.1 per cent in Qatar, 25.1 per cent in Djibouti and 23.90 per cent in UAE. The Bangladesh Bank study said that total deposits in the Islamic banking system reached Tk 4123.41 billion and total investment of the Islamic banking system stood at Tk 3818.29 billion at the end of June 2022. The market shares of Islamic banks in the entire banking system stood at 26.19 percent in deposits and 28.52 percent in investments at the end of June 2022. Total remittances mobilized by the Islamic banking system stood at Tk 157.17 billion during April-June 2022. As of June 2022, the number of employees in Islamic banks stood at 48,728.

According to the IFSI stability report, the total Islamic Financial Services Industry asset was $ 3.06 trillion at the end of 2021. In 2020, the IFSI assets were $ 2.75 trillion and $ 2.44 trillion in 2019. Of total IFSI assets, Gulf Cooperation Council (GCC) accounts for 52.4 per cent, South-East Asia 23.5 per cent, Middle East & South Asia 17.4 per cent Africa 2.1 per cent and others 4.5 per cent. Share of Islamic banking in IFSI is more significant (68.7 per cent) than Islamic capital market combination of Sukuk (Islamic bond) and Islamic funds (30.5 per cent) and Takaful- Islamic insurance (0.8 per cent). The compound annual growth rate from 2014 to 2021 (CAGR) for Islamic banking assets was recorded 2.4 per cent, financing 4.4 per cent and deposits 3.7 per cent. At the end of 2021, global Islamic banking size was $ 2.10 trillion.

If viewed on Islamic insurance (Takaful) situation in Bangladesh compared to the conventional insurance sector, Bangladesh lags far behind in the affairs of Takaful. The share of the Takaful sector’s business relative to the insurance sector in Bangladesh is 14 per cent whereas Saudi Arabia, Iran, and Sudan account for 100 per cent, 46 per cent in Brunei, 39 per cent in Kuwait, 24 per cent in Malaysia. Bangladesh is not in a good state regarding the Islamic capital market that deals with Sukuk (Islamic bond) and Islamic funds. Up to 2021, Bangladesh issued Sukuk only one (1) per cent, whereas Saudi Arabia is 42 per cent- the highest in the world. Indonesia issued Sukuk 20 per cent, Malaysia 18 per cent, Kuwait 5 per cent. Intending to promote Islamic capital market, the government in Bangladesh issued a maiden sovereign investment named ‘Sukuk’ in 2020 amounting Tk 80 billion.

The investment was made to raise funds for developing an infrastructure project named ‘Safe Water Supply for the Whole Country. As of June 2022, the total amount of ‘Sukuk’ issued stood at Tk 180 billion, Bangladesh Bank sources. Another Shariah-complaint security, Bangladesh Government Islamic Investment Bond (BGIIB), was introduced in 2004. The expansion of BGIIB has been insignificant since its inception. According to Bangladesh Bank, as of June 2021, the total sale of BGIIB amounted to Tk 170.21 billion, while the total amount of financing stood at TK 12.74 billion, and its net balance stood at TK 157.47 billion.

It has been learned from Bangladesh Bank sources that investments made by Islamic banks in ideal Islamic modes like Mudaraba and Musharaka are still minimal (below 1% of total investments). Besides, there are many causes behind the insignificant share in global banking Islamic assets. The percentage of Muslim people in Malaysia, Sudan, and Indonesia are less than that of Bangladesh. Despite the low rate, these countries have come a long way by expanding their Islamic financial services.

Bangladesh’s Islamic financial services industry needs timely prudential policy and guidelines intending to keep pace with the Islamic world. The watchdog of Islamic financial services has to scale up surveillance on activities. Islamic scholars in Bangladesh will have to engage themselves in research work to develop the industry. Adequate funding for research works on Shariah issues has to be ensured from the stateside. A nation like Malaysia has emerged in Islamic financial services through research.

Besides, the Islamic banking side, Islamic capital market, and Islamic insurance (Takaful) sector need to be flourished considering the current context of Bangladesh’s economy. Side-by-side banking, the door for non-banking financial institutions will have to be widely opened to allow services in an Islamic way. In light of Shariah, the microfinance sector in Bangladesh can kick-start next to the banking industry. Though some lenders began their move to expand Islamic microfinance, their investment volume is deficient. Islamic finance should go to private sector projects that heavily rely on conventional financing. Let us follow the economies that have come a long way in scaling Islamic financial services.

The writer is an economic affairs analyst. He can be reached at [email protected]