Focus on Banking & Finance

The role of banks towards development of Bangladesh : Islamic Banking perspective

. Mamoon Mahmood Shah
Banking is a very vital part of an economy and plays very significant contribution towards socio-economic development of a country. This sector is considered to be like the life blood the economy as well. As one of the most important components of the financial system it forms the core of the money market and plays very pivotal role in mobilising resources for productive investments in a country which in turn contributes to economic development. The efficiency of the sector is very important for overall development of the country.
Bangladesh is the third largest Muslim populated country of the world with around 140 million of Muslim population. The hope and aspiration of the people of the country to run religiously compliant banking system came into reality after the OIC recommendation at its Foreign Ministers meeting in 1978 at Senegal to develop Islamic banking system in all of OIC member countries. Earlier in 1974 Bangladesh signed the Charter of Islamic Development Bank (IDB) which is the sign of its commitment towards recognising Islamic economic and financial system. Since after the establishment of Islamic Development Bank (IDB) Islamic banking and financial institutions grew fast throughout the world. In Bangladesh first Islamic bank was established in 1983 five years after the OIC Foreign Ministers meeting in Senegal in 1978.
Financial sector of Bangladesh is dominated by banks as asset of the banking sector holds more than 60 per cent share in the Gross Domestic Product (GDP) and total deposit is currently 51 per cent of GDP of the Country. As per the last year's (2011) financial records the total asset of 47 commercial banks of the country stood at Tk. 5875 billion and deposit at Tk. 4510 billion. Furthermore, during the last ten years the total asset of the banking sector has grown by 325 per cent while deposit has increased by 327 per cent which is the sign of remarkable contribution of banking sector in development of the Country.
After the inception of Islamic banking in Bangladesh in 1983 there was a consistent growth and today out of 47 commercial banks in Bangladesh 7 are full-fledged Islamic banks. In addition, 15 other regular commercial banks and two foreign banks are offering Islamic products through their Islamic banking branches/windows. Currently, the combined share of Islamic banks accounts around 25 per cent of the total banking market of Bangladesh. Thus, Islamic part of banking sector contributing greatly in the development of national economy. Special contribution of Islamic banks is the inclusion of those un-banked in the banking sector who kept themselves away from the conventional banking system because of Riba or interest. Emergence of their religiously compliant Islamic banks helped inclusion of their contribution in the mainstream economy as main principles of Islamic banking is the prohibition of interest (Riba) in all transaction.
In addition to prohibiting Riba in all transactions the two most important goals and functions necessary for Islamic financial system are to work for socio-economic justice and equitable distribution of wealth. So, the role of Islamic banking should be pro-people. So, general economic development of the mass people, not any particular group, should be the main goal of an Islamic bank. To achieve these goal Islamic banks must spread their geographical presence by opening branches or other delivery channels in the unbanked areas of the country. Deduction of Zakat payment also should be fair as it is a tool for equitable justice.
In 1972, immediate after the independence of the country, population per bank branch was 57,700. Now, throughout the period, a remarkable improvement has been occurred in the sector as population per bank branch stood at around 17,600. However, still there are ample scopes to work as many markets are still untapped and huge population still remained unbanked. If we wish to become a middle income country, as per vision set by the government, by the year 2021, the year in which nation will celebrate the 50 years of independence, we have to explore all the market still untapped in the industry and include all unbanked people. As common good, socio-economic justice and equitable distribution are important objectives of Islamic economic system Islamic banking industry of the country should positively come forward to contribute in this sector.
As corporate body banking sector has social programmes in numerous areas, such as awarding scholarship for poor and meritorious students, financial cooperation to educational institutions, warm clothes distribution among cold affected people, standing before the people during natural disasters, establishing hospitals and medical colleges etc. From the social responsibility point of view banking sector of Bangladesh has great contribution in the various segments of social activities. Corporate Social Responsibility (CSR) from the Western perspective evolved more than half a century ago. But from Islamic perspective the concept of CSR is not new. This concept would already practice in the era of Prophet Muhammad Sallallahu Alaihi Wasallam. Business without common good is not an Islamic understanding. Getting inspired by Islamic value system Islamic banks are contributing their part in the social activities to eradicate poverty and for the sustainable development of the country.
At present, banking jobs are of high demand. A large number of people are currently involved in this sector and still there are rooms for creating more employment within the industry other than those self-employed people getting finance from the industry. Banking sector is thus making noticeable contribution to the economy of the country by creating employment in Bangladesh.
Journey of Islamic banking in Bangladesh is journey through multi dimensional challenges. The most important challenge is not having necessary legal framework for Islamic banking. Since introduced in Bangladesh in 1983 Islamic banking had passed 29 years. During this long period no comprehensive law had been enacted to regulate Islamic banking except a Guideline for Islamic Banking issued in 2009 and a few amendments in the application of existing laws by the government and Bangladesh Bank. Malaysia also started Islamic banking in 1983. But Malaysia enforced Islamic Banking Act before commencement of Islamic banking business. This was an advantage for Malaysia to become an important centre of Islamic banking in the world. In the global context, recently 58 per cent of the Sukuk have been issued in Malaysia contributing a very noteworthy role in the development of the country.
Islamic banking mechanism is a completely distinguished mechanism from its conventional counterpart and religiously complaint to Muslims. But there is no befitting regulatory framework in Bangladesh regarding supervision and inspection of Islamic banks, rather an equal treatment is being followed for all banks-Islamic and conventional. However, Bangladesh Bank has given some special provisions for Islamic banks. But experts think that for smooth development of the sector Bangladesh Bank should devise regulatory and supervisory framework dedicated for Islamic banks which must include Shariah governance framework also. There should not be any confusion regarding the fact that regulating Islamic finance is not regulating religion but merely regulating commercial transactions just like any other financial transactions.
Another big challenge for Islamic banking in Bangladesh is lack of educations on Islamic finance. There is huge shortage of academic and training institutes to study Islamic finance. Consequently, there is huge shortage of talent in Islamic banking sector of Bangladesh. To overcome the situation facilitating Islamic finance education is an immediate need for the industry. To establish Islamic banking and financial system on strong ground it is very much essential to create sufficient graduates on Islamic banking and finance having full command on Shariah, Fiqh, and Islamic financial products. This is very important to strengthen the rapidly emerging market. Proper educations certainly raise standards of Islamic finance.
Last but not least, we must not disregard the fact that the banking sector is a very vulnerable, chancy and sensitive sector. It has to be encountered and absorbed various kind of shock. Moreover, due to some internal and global phenomenon country's banking sector faces multi dimensional challenges. All these challenges must be brought under good management. We must have to step forward with extreme pre-cautions. Any compromise in good governance and good management in banking sector may be fatal for the economy. Nevertheless, the sector must improve its performance in terms of trust, confidence of people and professionalism.

25 May, 2013 Saturday

Focus on Banking & Finance

The role of banks towards development of Bangladesh : Islamic Banking perspective