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.