The resilience and growth of Islamic Banking in Bangladesh

Islamic banking has played a pivotal role in creating employment opportunities for the 120 million individuals in Bangladesh.

In recent years, Islamic finance has emerged as an influential instrument for funding economic endeavors on a global scale. Bangladesh, in particular, has witnessed significant growth in the Islamic banking sector, which has played a substantial role in sustaining the nation's economic landscape. These Islamic financial institutions are pivotal in facilitating agricultural financing, thereby enhancing food security, fostering the growth of the financial sector, and promoting broader financial inclusion.

This comprehensive review of 2023 highlights the remarkable strides made by Islamic banking in Bangladesh, shedding light on its market presence, impact on employment, and contributions to the nation's reserves.

Evolution of Islamic Banking in Bangladesh
Over the span of four decades, Islamic banking in Bangladesh has made remarkable strides, securing a substantial market presence. Shariah-based banking commands significant market shares in various sectors, with a breakdown as follows: 26% in deposits, 26% in imports, 24% in exports, 39% in remittances, 27% in industrial finance, 17% in agricultural investment, and 38% in Cottage, Micro, Small, and Medium Enterprises (CMSME) investment.

These impressive market shares underscore the growing preference for Islamic financial products and services in Bangladesh. It reflects the trust placed in the principles of Shariah compliance, which not only align with religious beliefs but also offer financial stability and ethical investment opportunities.

Contribution to Employment
Islamic banking has played a pivotal role in creating employment opportunities for approximately 120 million individuals in Bangladesh. This is a significant social impact, as employment generation is vital for the country's economic development and poverty reduction. The Islamic banking sector has become a significant contributor to job creation, which is a testament to its broader socio-economic significance.

Notably, Islami Bank Bangladesh Limited (IBBL) stands out with its remarkable contribution of US$12 billion to the nation's reserves since its establishment. This demonstrates the financial strength and stability of Islamic banks in the country, which is essential for maintaining economic resilience and growth.

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Corporate Social Responsibility (CSR)
Within the banking sector, Shariah-based banking accounts for a significant 50% share of Corporate Social Responsibility (CSR) initiatives, with IBBL alone contributing an impressive 29% to this noble cause. This reflects the commitment of Islamic banks to give back to society and support various community and welfare programs.

These CSR efforts encompass a wide range of activities, including education, healthcare, poverty alleviation, and environmental conservation. By actively engaging in these initiatives, Islamic banks are not only contributing to the well-being of the community but also fostering a positive image of the industry.

Market Share Growth
Presently, Islamic banks command a substantial market share, accounting for 25.81% of total deposits and 29.20% of investments. According to data from the Bangladesh Bank, these figures have shown significant growth since 2017 when they were 23.13% and 23.81%, respectively.
This steady growth is a testament to the increasing popularity and acceptance of Islamic banking in Bangladesh. It reflects the confidence that individuals and businesses have in the principles of Shariah-based finance. The growth in deposits and investments also indicates the sector's resilience and stability in the face of economic challenges.

Potential for Further Expansion
The central bank's report on Shariah-based banks highlights the potential for the broader Islamic financial industry, including the Islamic capital market, Takaful (Islamic insurance), and the microfinance sector, to thrive systematically if supportive policies are adopted and effectively implemented.

Bangladesh Bank's initiatives, such as the Mudarabah Liquidity Support (MLS) program and the Islamic Banks Liquidity Facility (IBLF), are crucial for ensuring the stability and resilience of Islamic banks. These measures address liquidity management and bolster the financial system of Shariah-compliant banking.

Government Support and Policy Initiatives
In response to the growing public demand for Islamic finance, the Bangladesh government and regulatory authorities have implemented various Islamic monetary policy tools to effectively manage liquidity within the Islamic Banking System.

One noteworthy initiative is the 'Bangladesh Government Islamic Treasury Bill (BGITB)', which has been introduced to facilitate funding for Islamic finance, with Bangladesh Bank acting as the government's representative.

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However, it is imperative that the central bank prioritizes the establishment of separate legislation for Islamic banking. The absence of dedicated legislation is a gap that needs to be addressed to provide a robust legal framework for the industry's growth.

Non-Bank Financial Institutions (NBFIs)
Bangladesh boasts 35 Non-Bank Financial Institutions (NBFIs), with some of them, including Islamic Finance and Investment, Hajj Finance, and Aviva Finance, operating with full-fledged Shariah-based operations. Additionally, several other NBFIs, such as IDLC Finance, DBH Finance, and Strategic Finance & Investments, have obtained approval to establish Islamic windows within their operations.
This expansion of Shariah-based operations within NBFIs is a positive development, as it widens the reach of Islamic financial products and services. It caters to a broader spectrum of clients who seek ethical and Shariah-compliant financial solutions.

The Ethical Essence of Islamic Banking
The essence of Islamic banking lies in its capacity to provide tailored and socially beneficial financial solutions. This banking system actively promotes ventures that benefit society while discouraging those with negative social implications, thereby fostering sustainability in the banking sector.

A notable advantage is its asset-based and asset-backed sustainable financing mechanism, which contributes to the advancement of the green economy. Islamic banking seeks to maximize overall welfare and encourages stakeholders to contribute to the well-being of both themselves and society, thus alleviating discrimination and poverty.

Regulatory Framework and Challenges
To fortify the Islamic banking sector, the establishment of a regulatory authority with a robust legal framework is crucial. This should encompass distinct laws for Islamic banks, appropriate licensing criteria, prudential regulations, minimum capital and liquidity standards, and methodologies for risk-weighted asset classifications.

Islamic banks in Bangladesh also grapple with the challenge of managing relationships with foreign banks and conducting international operations. This necessitates the creation of financial instruments that align with Islamic principles and are acceptable to interest-based banks, including foreign counterparts.

Investment Diversification
Islamic banks should redirect their investments towards socially beneficial sectors, with a particular focus on agriculture and small businesses. Currently, investments in ideal Islamic modes like Mudarabah and Musharakah remain minimal. To address this, Islamic banks should prioritize the development of comprehensive guidelines and policies to promote investments under the Mudarabah and Musharakah modes.

Furthermore, Islamic banks can explore untapped customer segments by engaging in microfinance projects, supporting women entrepreneurs, and catering to the financial needs of government agencies that are not currently served by conventional banks. These initiatives would provide Islamic banks with a significant advantage for growth. To fully utilize the excess liquidity held by Islamic banks, there is a need to introduce a broader range of money market and capital market products.

Key Challenges and the Way Forward
Key challenges in the Islamic banking landscape encompass a shortage of skilled personnel, the absence of a well-defined research and development framework within the country, and a lack of Islamic banking literacy among the populace. The existing 2009 guideline from the Central Bank governing Islamic banking in the country is outdated and needs alignment with contemporary developments. Ensuring uniformity in Islamic banking practices is equally important.

The future holds the promise of legal frameworks that address Islamic contracts and financial transactions, equitable taxation policies for Islamic financial products, and mechanisms for resolving disputes specific to Islamic banking. Encouraging collaboration between Islamic banks and conventional financial institutions, both domestically and internationally, is also advised. Such partnerships, joint ventures, and cross-border cooperation can broaden the accessibility and availability of Islamic banking services.

Enhancing the performance of Islamic banks hinges on upgrading the quality of their human resources through increased investments in research and training. This investment should be aimed at preparing a skilled workforce of Islamic banking professionals capable of effectively addressing Shariah compliance issues in the Islamic financial industry. Islamic banks must prioritize these initiatives to meet the evolving demands of creating new Islamic financial instruments and improving existing ones. Consequently, a strong emphasis on employee skills and knowledge development, achieved through scientific research and training, is essential.

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Additionally, Islamic banks should intensify their professional efforts to enhance competitiveness, both in the local and global financial markets. In line with the Bangladesh Bank's efforts, Islamic banks, branches, and windows should embrace technological innovations and digital banking to achieve deeper financial inclusion and advance towards a cashless society in Bangladesh.

For the Islamic banking sector to reach its full potential, Bangladesh needs to enact comprehensive Islamic banking laws that provide a legal framework commensurate with the industry's growth. Effective implementation of laws and regulations, the cultivation of a culture of compliance, the practice of good governance, and ethical transactions are all essential for maintaining dynamic leadership in the sector. Given that Islamic banking already constitutes a significant portion of the overall banking business, its continued growth and demand underline the importance of these measures.

Conclusion
The growth and success of Islamic banking in Bangladesh in 2023 are undeniable. This financial system has not only secured a significant market presence but has also made substantial contributions to employment, CSR initiatives, and the nation's reserves. The ethical and sustainable essence of Islamic banking, coupled with its potential for further expansion, makes it a vital component of Bangladesh's economic landscape.

However, addressing challenges such as regulatory frameworks, investment diversification, and human resource development is essential to ensure continued growth and sustainability. The future of Islamic banking in Bangladesh holds promises of further legal frameworks, collaborative opportunities, and technological advancements, all of which will contribute to the sector's resilience and growth. As Islamic banking continues to gain prominence, it remains a driving force in the economic prosperity of Bangladesh