Islamic Banking

OCBC Bank has announced another first in Islamic Banking in Singapore, with the launch of the OCBC Treasury Mudharabah Account (OTMA), a new Shari’ah approved product that is based on the concept of ‘Mudharabah’ or ‘profit sharing’.

OTMA was specifically developed to address an increasing need for more Islamic treasury products among Muslim corporate customers, Islamic financial institutions, Non-Profit Organisations, mosques and other Islamic bodies both in Singapore and the region.

With OTMA, Muslim customers can now have access to a Shari’ah compliant product based on the ‘Mudharabah’ model, where profit sharing ratios are predetermined and mutually agreed between the customer and the Bank on the onset of the investment.

Although potential returns will depend on the customer type, investment amount and tenure, OTMA is designed to remain flexible by offering a shorter investment term starting from one month and a wider range of investment amounts and denominated currencies which include the SGD, USD, EURO, AUD and GBP.

“The introduction of OTMA is another example of OCBC Bank’s attention to customer feedback. Over the years, we have received good response to our Islamic Banking treasury products, hence the impetus for us to continually develop new Shari’ah compliant solutions to cater to the fast growing market demand,” said Haji Ismail Bin Syed Ahmad, Head of Islamic Banking Unit, Group Treasury, OCBC Bank.

To ensure that the Bank’s Islamic treasury products and services are relevant and meet the needs of customers from all market segments, OCBC Bank constantly seeks to understand the Muslim banking community better whileassessing emerging market opportunities. This is in line with OCBC Bank’s aspiration to be the forerunner in the development of relevant Shari’ah compliant products for the Muslim community in Singapore and the region. “OCBC Bank has always regarded Islamic Banking as an important segment of our market. We were the first bank in Singapore to launch Islamic depository products and facilities such as the OCBC Islamic Treasury Facility (OITF) and OCBC Ijarah Participating Facility (OIPF). These products are approved by the OCBC Shari’ah Advisory Council, giving customers the added assurance that their funds are strictly invested only in protected Shari’ah compliant assets,” said Haji Ismail who is also a member of the OCBC Shari’ah Advisory Council In 1998, OCBC Bank launched the OCBC Al-Wadi’ ah Savings and Current Accounts for both individual and corporate customers, followed by the introduction of the OCBC Al-Wadi’ah Savings Monthly Savings Account and the Zakat Auto-Deduction Facility, a first in Singapore that provides our Muslim customers with a convenient and disciplined way to save and also pay their obligatory tithe or ‘Zakat’ from their OCBC Bank Accounts to the Islamic Religious Council of Singapore (MUIS).

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By Shahli Akram

Addressing a conference in London recently, Britain’s Chancellor of the Exchequer Gordon Brown said he wanted London to become the global centre of Islamic finance. The statement assumes special significance considering that several UK banks are now offering Sharia-compliant products and services.

What is it that draws so much attention to Islamic finance these days? It is not an exaggeration to say that the one aspect of Islam that wins universal admiration and attention these days is the Islamic vision of finance and economy.

Islamic finance is a nascent model, in the sense that it began operating as a system parallel, but not strictly counter to, conventional banking only recently. However, the giant strides it has made in a matter of two decades have been phenomenal. Although it is nowhere near posing a threat to the dominance of conventional banking, more and more people are being attracted to it, Muslims and non-Muslims alike.

Despite growing at a much faster pace than conventional banking, at up to 35 per cent in some countries, its volume is comparatively negligible at the global level. Yet economic pundits these days seem to lavish attention on the Islamic model of finance. At least, none is neutral on the subject.

 What are the distinctive features of Islamic finance? One primary characteristic that distinguishes Islamic finance is the conditional linkage between real economy and finance. It leaves absolutely no room for the proliferation of speculative economic projections which render the whole economic domain vulnerable to sinister manipulations.

Islamic finance is rooted in the ground realities and is guided by a sense of ‘here and now’ coupled with certain strong ethical foundations. It is by principle asset-based, in the sense that it does not grant any intrinsic value to money. Money, Islamic finance maintains, cannot create profit, but only usury, except when it is converted into real assets. Besides, Islamic finance puts the pre-condition on some element of risk on both parties involved in a transaction.

In providing finance, for instance, it is the productivity of a project under consideration that concerns an Islamic financial institution rather than the creditworthiness of the borrower. This is because any financial transaction in an Islamic framework is a partnership, based on a combination of trust and viability, unlike conventional systems in which one-sided profit motives determine the whole deal. The solid linkage between the borrower’s payment obligation and the actual revenue accrual turns a transaction in the Islamic framework into a concrete and transparent partnership which is entirely devoid of exploitation.

The psycho-social factors that constitute econ-omic behaviour in the Islamic construct are strikingly different from conventional ones. They stipulate that human beings must care for others, without necessarily putting self-interest in jeopardy. This in turn means that any financial transaction is morally inspired and transcendentally conceived. It is not a move to take advantage of the needy by vested interests for self-aggrandisement, rather it aims at serving a commendable social function within the structural framework of business, not that of charity. Let us examine it in more detail: An Islamic financial transaction results from an agreement between two parties for instance, between a financier and an entrepre-neur that an opportunity for generating additional value exists. They come together to explore that opportunity and share the gains. Needless to say, they ought to share the losses too. The accent is on ensuring that the relationship between both parties is far from that between a predator and its prey.

Of course, there are non-sharing modes of Islamic finance too. But in those as in other Islamic transactions, the linkage with real economic activities aimed at the generation of additional wealth is the underlying factor. For example, in Islamic modes of finance such as murabaha (cost-plus), salam and istithna (prepaid orders) and ijara (leasing), which involve pre-determined returns on investments, real economic activity is at the core of the transaction.

As Mohammad Nejatullah Seddiqi, an eminent scholar of Islamic economics, has rightly noted, the demand and supply of goods and services whose exchange is financed through the above-mentioned contracts ensure that financial activity is the servant, not the master, of real economic activity.

Islamic financial institutions have shown that all market activities can be financed by using the various Islamic modes such as musharaka, mudaraba, murabaha, salam, istithna and ijara, without resorting to any stratagems.

It has also been established beyond any shadow of doubt that Islamic financial transactions are of immense comparative advantages to their beneficiaries while making good business sense for the financiers. In short, it is a non-exploitative, additional value-generating business marked by transparency, integrity and efficiency.

While acknowledging that the excessive reliance on non-sharing modes of finance in the current practice of Islamic banking is bringing a good deal of criticism to the system, I would like to affirm that it is too new to be subjected to any kind of conclusive judgment.

Islamic finance continues to evolve and, as it evolves, it demonstrates much more flexibility and resilience than conventional systems of banking and finance. Therefore, Islamic financial institutions are able to better tailor their products in consonance with the requirements of the customers and the changing rhythms of the different markets.

Last, let me state the obvious by way of conclusion: Islamic finance is opposed to the system of interest that defines conventional banking.

Many reasons are attributed to Islam’s uncompromising rejection of interest and usury, but in my view the most important of them is that Islam aims at confining and restoring money to its essential functions. In the absence of hard economic activity, money ceases to be money and becomes a source of economic tyranny and misery, precisely the villains that money is supposed to eradicate.

The writer (above) is the deputy CEO of Amlak Finance.

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After 23 years of developing and regulating an Islamic Financial system hailed as a progressive model, Malaysia recently announced key measures to enhance inter-linkages in the global islamic financial markets and expand business in its efforts to entrench itself as a global hub for Islamic Finance.

At a recent Malaysian Islamic finance forum, Central Bank Governor Tan Sri Zeti Akhtar Aziz announced the launch of the Malaysia International Islamic Financial Centre (MIFC) which will pave the way for the offering of Islamic financial products and services in international currencies from anywhere in Malaysia.

The MIFC initiatives aim to provide operational flexibility, cost-effectiveness and a conducive environment for Islamic finance business in international currencies, noted Deputy Bank Governor Dato’ Mohd Razif bin Abd Kadir.  At the same time, the liberating measures are clearly intended to augment existing business and to draw new investment.

Notably, existing Islamic banks and takaful or Islamic insurance operators can now set up International Currency Business Units within their institutions to carry out foreign currency transactions. 

New conditional licences will also be issued for the setting up of International Islamic Banks and International Takaful operators, under the Islamic Banking Act and the Takaful Act respectively, to qualified foreign and Malaysian financial institutions who want to offer international currency products and services.

For greater flexibility, offshore Islamic banks and the Islamic divisions of conventional offshore banks are now allowed to open operational offices onshore in Malaysia to conduct non-ringgit business, while maintaining their presence in the Malaysian offshore financial centre of Labuan.

Further tax incentives for the Islamic finance industry are in the pipeline as a sweetener to enhance the country’s competitiveness against rivals like Singapore and Dubai.

Courtesy: ‘Accounting & Business’ - September 2006 - Volume 9 No.8 - Page 6 

BY: MY KHAN

The Reserve Bank of India has appointed a committee to examine the feasibility and possibility of facilitating Islamic banking in India.

Islamic banking is a recent concept, which is slowly replacing interest-based banking in many parts of the world. The Islamic finance is based and functions on the basis of a model which does not involve interest on lending as well as on deposit, and financial institutions like banks share both profits and losses from the business. The modus operandi of these banks are worth considering for an economy whether it is a secular or Islamic state.

Islamic banks use the principle of Almudarib-udarib, which means they mobilise financial funds on the basis of profit sharing and extend the same to the users on the same basis. There are two broad instruments for mobilising deposits and extending finance, viz. Mudarabah and Musharakah. In case of these instruments, the return cannot be fixed in advance and it is determined ultimately by the profits earned by the business. Whether they are depositors or bankers, they have to share profits as well as losses. Uarze-hasna is another instrument for deposit mobilisation and for extending finance. On this instrument, the bank does not pay dividend. They are like current deposits. In addition to deposits, an Islamic bank can raise resources by issuing equity shares. Equity shareholders participate in the management of Islamic banks.

Let us have a little more explanatory analysis on Islamic instruments and their modus operandi to make the readers of an alternative model of banking.

As mentioned above, Mudarabah, an instrument in Islamic banking is a contract between the bank and the entrepreneur (manager) or user of the capital. The bank in this case does not participate in the business and the profit is distributed between them, according to the ratios fixed in the agreement between both parties. The financial loss is borne by the bank and the entrepreneur (manager) bears the loss by not getting any return in compensation for the opportunity cost of his own labour and managerial work.

Musharakah is a contract between the bank and entrepreneur. Here, the financier (bank) participates in the management and also shares the profit and loss. While profits are distributed according to an agreed ratio, the loss is borne in proportion to the share of each in the total capital.

Murabahah is a sale contract with a profit mark-up. The client purchases such commodity from the bank at a deferred price, which includes an agreed profit margin or mark-up.Here, the transaction consists of one agreement between the Islamic bank and supplier of the commodity and a second agreement between the bank and the client who placed the order with the bank for a commodity.

Ijarah (leasing finance) is a contract to supply assets like machinery, air-planes, ships or trains on lease. The asset purchased by the bank as per the requirement of client (lessee) and sold at a pre-determined price to lessee but the lessor (bank) keeps the ownership of the assets with all the rights as well as responsibilities, which is an integral part of the ownership.

However, Islamic banks in India do not function under banking regulations. They have been working as NBFCs or credit co-operative societies. The Islamic banks if set up cannot maintain cash reserve and SLR since these involve interest. They cannot be treated as scheduled banks and cannot avail facility of settlement and clearing system and therefore they cannot issue cheques.

Other constraints are inability to maintain capital adequacy and would be unable to interact with interest based banks and money market in India. The RBI can think of setting up a single window in some banks like State Bank of India to do Islamic banking. Malaysia also started Islamic banking by opening Islamic banking sections or Islamic banking windows attached to the existing banks. Moreover, Islamic banking will require a new legislation to start Islamic bank.

The author is former economic advisor to Securities and Exchange Board of India Ltd

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SINGAPORE : Some of the top bankers from the Gulf are in Singapore to encourage Asian countries to take advantage of the growth in Islamic banking.

Arab bankers want to tap into Asia’s experience. A special Arab Asia Financial Forum was held on the sidelines of the IMF/World Bank meetings.

Unlike conventional banking, Islamic law prevents the collection of interest payments or trading in financial risk, which is seen as gambling.

And it is big.

According to the Union of Arab Banks, there are some 470 Arab banks managing assets worth more than US$1 trillion, US$632 billion of which are deposit-based.

While growth in this sector is healthy in the Gulf states, banks there are looking to expand beyond the Arab world and Asia is one destination.

Dr Joseph Torbey, President of the Union of Arab Banks, said: "Also let me take the opportunity to express the Union of Arab Banks’ willingness to further cooperate in the future with international organisations to enhance the cooperation between Asian and other organisations, and contribute effectively and increasing the volume of economic exchanges between Asian countries and the Arab world."

Resource-rich states like Qatar are looking beyond just refining crude oil in Singapore.

Mr R. Seetharaman, Deputy Chief Executive of Doha Bank, said: "We need professional intermediaries, knowledge-based by collaboration. Also, billions of dollars have been going on capital expenditure for infrastructure creation as well as industry expansion from Qatar. Singapore banks can participate in the project financing opportunities."

But the synergies, knowledge transfer, and investments cannot flow if challenges are not tackled.

Islamic bankers say upgrading Islamic banking to international standards is one key factor in making the sector flourish.

Dr Torbey said: "Today some Arab markets specifically Bahrain, Qatar, Saudi Arabia, and UAE, are in the process of building comprehensive financial hubs to attract most Arab and international capital as well as international financial and banking institutions."

Mr Seetharaman added: "Singapore has been the third largest partner for Qatar. You look at its objective. Qatar is a huge reserve of oil and gas, and you have a refinery here. Singapore is in between Japan and Qatar, the largest trading partner for Qatar is Japan.

"As a financial centre, it can add value. We need Islamic finance, we need professional intermediaries knowledge-based by collaboration. Also billions of dollars have been going on capital expenditure for infrastructure creation, as well as industry expansion from Qatar. Singapore banks can participate in the project financing opportunities." - CNA/de

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An Islamic Banking Seminar held in Mumbai highlights on how India can benefit from a re-direction in the flow of petro dollars from West Asia.

Jamaat-e-Islami Hind (JIH), one of the leading Muslim organisations based in Delhi, will make a detailed presentation to the Finance Ministry and the RBI on the need to amend the RBI Act and kickstart Islamic banking in India.

“The central bank should allow the Islamic bank to have no-fixed rate regime as Islamic banking is based on participatory, co-operative and investment banking,” said Mohammad Talha, first manager, Qatar International Islamic Bank and one of the speakers of the national seminar on Islamic banking organised by JIH here. The RBI has already set up a working group on Islamic banking headed by Anand Sinha.

“After 9/11, petro dollars are going to Southeast Asia instead of Europe and the US. We aspire to channelise petro dollars to India. If it is allowed, Islamic banks in India with its network in other countries and syndication can facilitate investment by equity funds and high networth individuals in India, which would prefer an Islamic banking set-up,” Talha said, adding that once Islamic Banking is launched in India, it can also help domestic firms raise bonds in West Asia.

A Bahrain-based private equity fund, with a corpus of $1 billion, wants to start a India-specific fund. Also firms like Abu Dhabi Investment, Qatar Investment Authority and Islamic Bank Finance House are looking at investing in India. “Indian Islamic Banks can definitely help channelise these funds properly. Islamic banks can effectively tap property worth billions under the control of Awqaf and Zakat,” opined H. Abdul Raqeeb, member of JIH and convenor of the seminar.

Explaining the working of Islamic bank, Raqeeb said it is a interest-free banking based on Islamic law, Shariah. In this system, the depositor and bank will come to an agreement wherein both the parties will share the profit or losses at the end of the year. The bank will invest in stocks, bonds, infrastructure projects and so on. If the loss arises, the shareholders of the bank will absorb the loss. In the case of lending, the banks will not charge any interest but levy a service charge. Overdrafts are provided, subject to a maximum, free of charge.

“Islamic banking can revolutionise the micro-finance sector in the country and become a boon for the debt-ridden farmers in Maharashtra,” said Dr Ausaf Ahmed, a retired official of Islamic Development Bank, Jeddah.

Commenting on the international scenario, Talha said Islamic banking across the world is a $300 billion industry spread over 35 countries. MNC banks like Citibank, Grindlays, HSBC, ABN Amro and Sache banks are offering Islamic banking products. Even home-grown banks like ICICI and Kotak Mahindra Bank are offering Islamic banking products in the West Asia.

Islamic Market Index of Dow Jones has launched over forty Islamic indices. FTSE, London also offers Islamic indices in US, Europe, the Pacific and South Africa.

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The government-backed JBIC said it was studying the possibilities of issuing Islamic bonds to help Japanese businesses diversify their fund raising.

Japan is looking to become the first major industrialized nation to issue Islamic bonds in hopes of attracting money from oil-rich Muslim countries, a bank official said yesterday.

Islamic financial practices ban the payment or receipt of interest or any transactions that include alcoholic beverages or gambling, which are banned by the Koran.

"The bank is studying the possible issuance of the bond with Malaysia," said Hiromi Inukai, a spokeswoman of the government-backed Japan Bank for International Cooperation (JBIC).

"The bank has had talks with the central bank of Malaysia with the intention to attract ample petro-dollars not only to Japan but also to the whole of Asia," she said.

She declined to give further details such as how much of the bond JBIC officials, with the support of the finance ministry, would place with Bank Negara Malaysia, the Malaysian central bank, and when.

Japanese news reports have said that the JBIC has formed an advisory board of Islamic legal scholars to study Islamic financial practices. Britain’s Financial Times said the bond would be valued at US$300 million to US$500 million and launched around January.

First G7 nation

Japan would be the first G7 nation to issue the Islamic bond, called sukuk, bond on a national basis, although companies in the developed world have already done likewise.

Japan would be the first G7 nation to issue the Islamic bond, called , bond on a national basis, although companies in the developed world have already done likewise.

Hideki Nukaya, a researcher at the Institute for International Monetary Affairs, said JBIC’s envisaged Islamic bond placement would help diversify funding sources for many large Japanese businesses.

"Japan and its companies could get a foot in the door and become more active players in Islamic financing by gradually making progress and learning the methods," Nukaya said.

"Once JBIC places the sukuk bond and learns the methods, Japanese companies would be able to have more options for financial resources when they need a bulk of money, not only through conventional but also through Islamic bond issuance," he said.

"But compared with conventional projects, Islamic banking requires more preparation, which the Japanese financial institutions are doing right now," Nukaya added.

Japanese companies will likely need to study up on religious regulations, such as rules on interest, as the country has a miniscule Muslim community.

Demand for Islamic financing is growing in countries with significant Muslim populations, particularly in the Middle East.

Largely Muslim Malaysia is the current Asian leader in Islamic banking after introducing services in 1983.

Leading position

To cement its leading position, the country is liberalizing its Islamic financial system and promoting itself as a center for education about Islamic finance.

To cement its leading position, the country is liberalizing its Islamic financial system and promoting itself as a center for education about Islamic finance.

Total worldwide assets of Islamic financial institutions exceed US$250 billion and are growing 15 percent annually, according to the IMF.

In 2003, the Islamic Bank of Britain opened in London and last year Britain’s fifth-largest bank, Lloyds TSB, said it would introduce personal bank accounts compatible with Islamic law.

In 2004, the impoverished eastern German state of Saxony-Anhalt became the first in Europe to issue an Islamic bond in hopes of finding new sources of financing.

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This article critically discusses the ‘ethical’ discourse of the Islamic Banks and examines the ‘ethical’ approach of a mainstream bank.

Islamic banks often describe themselves as being providers of ethical financial services, but they do not attempt to make the link between what is ethical and the specific methods of conducting their financial transactions according to Islamic tenants.

Although Islamic banks and Western ethical institutions such as the Co-operative Bank have dissimilar values and aspirations and they are operating in different environments, there are numerous lessons that each can gain from the other’s experience.

Therefore, this paper examines the ‘ethical’ aspect of the Co-operative bank, and attempts to establish similarities in the objectives of a conventional bank and the Islamic Banks, and identifies potential areas of learning from each other’s experience.

To read more…

Thailand’s Stock Exchange is studying the feasibility of introducing "Islam Index" to draw Muslim investments into the local bourse, the Bangkok Post reported Monday, July 24.

Stock Exchange of Thailand (SET) President Patareeya Benjapolchai said a committee would be set up to study the introduction of "Islam Index".

She said the proposed Index would comprise listed companies whose activities are in compatible with Islamic teachings.

Islam Index is expected to comprise between 50 to 80 Thai securities.

Thailand is a predominantly Buddhist country with Muslims making up five percent of the population and mostly live in the five southern provinces bordering Malaysia.

Thai Muslims have long complained of discrimination in jobs, education and business opportunities.

Several international and local rights groups have condemned the government’s heavy-handed policy in the south.

Consultation

Benjapolchai said SET would consult with MFC Islamic Fund of the MFC Asset Management to work out the Islam Index.

It is prohibited for a Muslim to establish a company that indulges in prohibited activity and consequently, it is also prohibited to issue its stocks and offer them to the public for sale.

It is also prohibited to buy and own such a stock because by doing so the owner becomes a partner in the company whose management take up prohibited activities on behalf of all its owners as their deputed officers.

The Islamic banking industry, which began almost three decades ago, has made substantial growth and attracted the attention of investors and bankers across the world.

There are an estimated 300 Islamic banks and financial institutions worldwide holding $300 billion in assets predicted to grow to $1 trillion by 2013.

The fastest growing region has been the Gulf Cooperation Council, a region seeing windfall oil revenue, with 60-70 percent of new deposits there going into Islamic banks.

Europe’s giants like Britain and Germany expanded over the past three years in producing banking services and products aimed at the Muslim clients.

Japan is planning to introduce Shari`ah-compliant dealings into its beefy banking system in a bid to attract lucrative Middle Eastern oil money.

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By Zahid Zamir

THE recent measures taken by Bangladesh Bank with regard to Islamic banks are indeed unprecedented and absolutely uncalled for. While it is true that ever since the inception of Islamic banking system in Bangladesh, there was no expert group in Bangladesh Bank to monitor the activities of Islamic banks in Bangladesh, Islamic banks operating in Bangladesh have formed their own Shariah council to look into whether Islamic banking as a whole is in compliance with the Islamic principles.

A central shariah council has also been formed. Although Bangladesh Bank has made a focus group, consisting of members of Shariah council and Islami bankers, to formulate detailed guidelines for the Islami banks on the basis of the Banking Company Act, Bangladesh Bank utterly ignored the report that has been finalised by the focus group.

There are currently six commercial banks operating under Islamic principles. They are: Islami Bank Bangladesh Limited, Al-Arafah Bank, Social Investment Bank Ltd, Exim Bank Ltd, Oriental Bank Ltd, and Shahjalal Islami Bank Ltd. apart from some other banks that also provide Islamic banking services in some of their branches.

Conventional banks in many western, as well as eastern, countries after realising the huge benefit of the Islamic banking system have opened Islamic banking windows that run parallel with interest-based windows. Very recently the Reserve Bank of India and Japan have shown their interest to offer Islamic banking system to their customers, not only for their respective countries, but also to woo customers from Muslim majority Middle Eastern countries.

Virtually all major banks around the world have opened interest-free banking windows. In fact, those conventional banks that have opened interest-free windows are able to entice many non-Muslims in non-Muslim majority countries. The basic tenet of Islamic banking underlines its commitment to equitable and fair distribution of money resources.

There are more than 300 Islamic banks operating all over the world — from Africa and Europe to Asia and America. The Islamic banking industry is worth more than $200 billion and is growing at 15 percent annually, a rate much higher than that of conventional banking.

According to new proposed guidelines formulated by Bangladesh Bank, a commercial bank may form a separate company with Tk 100 crore paid up capital for providing Islamic banking services. The subsidiary company will need to off-load 49 percent of its share while the parent company may own the remaining 51 percent. As for the new Islamic banks, the proposed guidelines state that the sponsors will have to off-load 50 percent of the bank’s shares and sponsor directors will not be allowed to own shares worth more than Tk 2.5 crore.

It seems that Bangladesh Bank is creating unjustified trouble for the Islamic banks in the country and at the same time strongly discouraging other commercial banks to have separate Islamic, or interest-free windows that can run parallel with conventional windows. Onerous laws could not only act as hindrance for the growth of Islamic banks in Bangladesh but for the economic growth of the country as well.

Innovation is fuelling the development of the Islamic banking sector. In fact there are limitless horizons for innovation which are not available to conventional banks due to their limited and fixed mechanisms. The modes of mudarabah, musharakah, istisna and other modes combining capital wide effort, experience and craftsmanship, open wide spheres of innovation, and are paving the way for the introduction of new finance instruments following Shariah guidelines.

Islamic financial institutions are becoming resourceful. In spite of facing mounting competition in the banking industry, and the global number of groundbreaking deals, further development of Islamic financial institutions depends on how successfully the existing Islamic banks can focus on developing their ability to find solutions to their shortcomings.

But the onerous laws proposed by Bangladesh Bank could make the industry slow on the uptake. Instead of being a stumbling block to the growth of Islamic banks, Bangladesh Bank, as the central bank and guardian of all the commercial banks in the country, can formulate laws that could help smoothen the growth of Islamic financial system, thereby making Bangladesh an Islamic financial centre.

With the opening up of the economy and gradual removal of barriers, governments and regulatory bodies should cooperate in making the Islamic financial industry a part of the mainstream industry. Bangladesh Bank can encourage Islamic banks to strengthen their financial positions through merger, acquisition and strategic alliance with other Islamic banks. There is a need for Islamic financial institutions to work rapidly in the face of rapid economic development.

Mergers reduce cost of services and provide financial synergies. Islamic banks should be required to adopt rules for adequate disclosure. Bangladesh Bank, instead of making the operations of Islamic banks untenable by its onerous policy and by scrapping the Shariah councils, should closely study other central banks in the Muslim countries to see how they are monitoring the activities of interest-free banks in their respective countries. Central banks of Malaysia and Sudan are the two best examples that can help Bangladesh Bank pave the way for smooth functioning of Islamic banks.

A few years ago the central bank of Sudan, for example, successfully launched the Central Bank Musharaka Certificates (CMCs). This certificate is an equity-based instrument which is issued against Bank of Sudan (BOS) ownership in commercial banks. It is used by BOS as an indirect instrument to regulate and manage liquidity within the banking system.

In 1999 the Ministry of Finance (MOF) launched another instrument called Government Musharaka Certificates (GMCs), which are also equity-based instruments that are issued against MOF ownership in some profitable public and joint-venture enterprises in order to regulate and manage liquidity within the economy as a whole. The successes of these two instruments, and their wide market acceptability, have encouraged the Bank of Sudan to develop second generation of Islamic financial instruments.

There is a conspiracy to besmirch the reputation of interest-free institutions that have always been good citizens of the country. It is not a question of morality only but also of the protection of the interests of investors who like to see their money mobilised and invested in an Islamic way.

Terrorists have no religion. They can have accounts in any bank. But because of some ruthless and unscrupulous individuals entire institutions cannot suffer. As the chairman of the Jeddah based Dallah Albarakah Group and of the Bahrain based General Council for Islamic banks and Financial Institutions (GCIBFI) Saleh Kamel said: "Islamic banks are neither merely charities nor at all terror facades. Islamic banks should be operating under the supervision of central bank, receiving clients’ deposits and investing them … there is no surplus funds to finance terror, nor do they corridors for circulation of funds among terrorists."

There is an immense need for Bangladesh Bank to have a group of Islamic bankers and Shariah experts of its own who can properly monitor and formulate guidelines for all Islamic banks and Islamic banking windows in the conventional banks.

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