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The curious rise of Islamic banking in Bangladesh

Jamuna becomes the latest lenderto jump on the bandwagon
AKM Zamir Uddin
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Conventional banks have to maintain 18.5 per cent statutory liquidity ratio (SLR) and cash reserve requirement (CRR) of their total clients’ deposits. They must also maintain a maximum 85 per cent loans-deposit ratio.
But the regulatory requirements are much lax for Islamic banks: they have to keep a combined SLR and CRR of 11 per cent and their loans-deposit limit is 90 per cent.
And it is for these reasons that lenders are jumping on the Islamic banking bandwagon.
Jamuna Bank got the approval from the central bank yesterday to become a full-fledged Islamic lender, following the lead of Standard Bank and NRB Global Bank, who became Shariah-based lenders on February 9.
This takes the tally of Islamic lenders in Bangladesh to 11.
And IFIC Bank, another conventional lender, is waiting to get the central bank’s nod to become an Islamic lender.
But, there are questions on whether the Islamic lenders in Bangladesh actually follow the Shariah rules and regulations in the absence of strict monitoring by the Bangladesh Bank.
“The central bank does not have enough prudential guidelines to monitor Islamic banks,” said Ahsan H Mansur, executive director of the Policy Research Institute.
They frequently violate the Shariah rules while setting profit-sharing method for both deposits and investments, said Yasin Ali, a former supernumerary professor of the Bangladesh Institute of Bank Management.
Islamic lenders usually set a provisional profit rate before mobilising deposits and giving out loans.
“But the country’s Islamic lenders hardly change the profit rate at the end of the year, which is fictitious in true sense. This cannot happen if they follow the actual Shariah rules.”
The country’s Islamic lenders had earlier confessed the issue after the researchers unearthed the topic, said Ali, also a former executive director of the central bank
This means the Islamic lenders fix the profit rate like the interest rate setting by the conventional banks.
The country’s existing eight Shariah lenders and Islamic windows of the conventional banks have given out loans at less than 2 per cent of their total lending portfolio as per the different research works.
“No bank in the globe has yet to start a full-fledged Islamic banking.”
Only Malaysian and Turkish banks have got a bit success in replicating Islamic banking. But even then they are not Shariah banks in the truest sense, Ali added.
“One section of people are using Islam for politics and some businessmen are using exploiting people under the guise of Islamic banking,” said Khondker Ibrahim Khaled, a former deputy governor of the central bank.
There was no banking system in seventh century when people embraced Islam as religion. Islamic banking started its journey in the 70s.
The central bank should strengthen its monitoring on the lenders with a view to ensuring the discipline in the banking sector.
He suspects conventional banks are switching to Islamic banking to circumvent the interest rate bounds of 9 per cent and 6 per cent for lending and deposit respectively.
“Since the Islamic lenders do not follow the interest rate module, they could take undue facilities from the central bank’s initiative,” he added.
But a BB high official said the 9-6 per cent interest rate bound will also be applicable for Islamic lenders.
When his attention was drawn on the central bank’s claim, Khaled said that such embargo would not be eligible for Islamic lenders due to the Shariah norms.
Mansur echoed the same as Khaled.
“The spree of conversion has become a matter of concern. The central bank should take decision cautiously to this end,” he added.