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Is our Islamic banking sector ready tocompete on global stage?

Published : Sunday, 30 June, 2024 at 12:00 AM  Count : 643
Faruk Ahmed
What makes the Islamic banks keep their growth pace especially when the global banking sector witnessed huge M&As, big bank falls, rising bad assets and scandals of fund embezzling? The answer lies in its welfare-centric business model.  It promotes risk sharing, connects the financial sector with the real economy, and emphasises financial inclusion and social welfare.

When speculation based on fiction, not facts, about the negative growth of assets, surfaced in the countrys Islamic banking sector, reports from global research organisations, including the World Bank and Standard & Poors (S&P), forecasted that Islamic banking had taken strong root globally. According to new data from the Al Huda Center of Islamic Banking and Economics, global Islamic banking assets could hit $5 trillion by 2025, while Standard & Poors (S&P) projects that the Islamic finance sector could experience an annual growth rate of 10 per cent in 2024.The growth of Islamic financial assets between 2015 and 2021 was around $4 trillion from $2.17 trillion. As per the report, the expected rise is close to $5.9 trillion by 2026.

The growth of Islamic financial assets between 2015 and 2021 was around $4 trillion from $2.17 trillion. As per the World Bank report, the expected rise is close to $5.9 trillion by 2026. It differs from the conventional banking system, as it doesn allow Riba (usury) or speculative trading (Maisir) under Shariah. The report was published when the Bangladesh banking sectors performance showed a mixed trend with a modest reduction in the ratio of non-performing loans (NPLs) to total loans.

Unlike conventional finance, plagued by opacity and inequity, Islamic banking boasts a transparent structure devoid of intricate black boxes that demand a genius to unravel. As a result, market pundits foresee the Islamic Finance Market poised for a CAGR exceeding 10% over the next five years. This anticipated growth is expected to be particularly remarkable in Bangladesh, the second-largest Muslim country. So, the crucial question has been raised by many: Are Islamic banks ready to compete on the global stage?

A recent report published in The Daily Observer has answered. After a short shock driven by the COVID-19 pandemic and the Russia-Ukraine war, according to the report, Islamic banks in Bangladesh are poised to have a major influence on the global finance market in 2024. This is driven by rising high-quality assets, robust governance, and enhanced returns from diversified investment portfolios both central bank and commercial bankers said noting that the market share of Islamic banks in the countrys financial market is increasing day by day.

Quoting Bangladesh Bank data, the report says that Islamic banks occupied 25.35 per cent of the countrys market share in terms of deposits at the end of December 2023 while 28.92 per cent share in terms of investments. Total deposits in the Islamic banking system reached BDT 4,434.03 billion and total investment (loans & advances) at BDT 4,449.74 billion during the period when the Investment-Deposit Ratio (IDR) of Islamic banks stood at 0.93 (excluding EDF and refinance) compared to 0.91 at the end of September 2023 and 0.92 at the end of December 2022.Bangladesh Bank in its report, therefore, commented that Islamic banking has already been able to establish itself as an alternative funding source in the economic development of Bangladesh.

The share of total agricultural credit of Islamic banks accounted for 19.04 per cent among all banks during the quarter under report. Investment in agricultural sector financed by the Islamic banking system reached to BDT 22.83 billion.Total remittances mobilised by the Islamic banks stood at BDT 353.48 billion during October-December 2023. Among the Islamic banking system, Islami Bank Bangladesh PLC secured the top position (40.74%) in remittance mobilization.

In trade financing, Islamic banks are also leading the race, according to Bangladesh Bank data. Total export receipts by Islamic banks increased by 28.69 per cent, and import payments by 39.90 per cent as most Sharia-based banks had excess liquidity which increased by 43.00 per cent to BDT 111.07 billion at the end of December 2023.International trade has historically grown much faster than global GDP, nearly doubling in the 20 years before the pandemic and representing 60 per cent of global GDP. So, Islamic trade finance (ITF) presents a significant opportunity for Bangladesh.

Bangladesh is the 3rd largest Muslim nation on the planet with a populace of 161 million Muslims, so it tends to be a consideration for rehearsing and applying Islamic Finance. Currently, 34 banks are conducting Islamic banking activities of which ten full-fledged Islamic banks have 1,659 branches all over the country. In addition, 11 conventional banks have 23 Islamic banking branches and 13 conventional banks have 535 Islamic banking windows.

With the growing demand for Shariah-compliant products and services, several private sector banks are planning to convert their operations to an Islamic system. Both stock exchanges in Bangladesh have introduced a Shariah Index in the capital market. Additionally, the central bank has recently launched various Shariah-compliant products, including Sovereign Investment Sukuk, the Islamic Bank Liquidity Facility (IBLF), Mudaraba Liquidity Support (MLS), and pre-finance against CMSME.

What makes the Islamic banks keep their growth pace especially when the global banking sector witnessed huge M&As, big bank falls, rising bad assets and scandals of fund embezzling? The answer lies in its welfare-centric business model. According to a World Bank report, the reasons for this are that Islamic finance is equity-based, asset-backed, ethical, sustainable, and environmentally and socially responsible. It promotes risk sharing, connects the financial sector with the real economy, and emphasises financial inclusion and social welfare.

The business model of Shariah-compliant finance generally relies on interest-free processes aiming to generate income.Earlier, the Islamic banking business model was based on the asset and the liability sides. It was shifted later to a more debt-oriented structure through the practices, such as Murabaha (mark-up sale).Equity participation earns Islamic banks profit. In this system, borrowers don have to pay the interest on money borrowed but a share in their business profits.

Therefore, Islamic banking has emerged not merely as a religious sentiment, but as an innovative force in the global financial arena. Islamic finance has emerged as an effective tool for financing development worldwide, including in non-Muslim countries. Over 1,900 mutual funds and 560 banks worldwide adhere to Islamic principles. Major financial markets are discovering solid evidence that Islamic finance has already been mainstreamed within the global financial system - and that it has the potential to help address the challenges of ending extreme poverty and boosting shared prosperity.

Islamic banking products and services are catching up fast worldwide because of its ethical banking principles which adhere to transparency, safety, and assets-backed financing, as well as risk-averse offerings. These attributes of Islamic financial institutions promote a distinctive aura of their journey of a niche banking segment, which seems to grow at a rapid pace, making its presence noticed on a global stage.

Why is Islamic banking growing so rapidly worldwide, including in Bangladesh? The simple answer lies in its unique business model, which prioritizes societal welfare, fairness, and justice in its operations. Islamic banking relies on real assets and asset-backed supervised investments, strictly prohibiting Riba (usury) and speculative trading (Maisir) under Shariah law. It promotes risk-averse and non-speculative investments, treating money not as a commodity but as a medium of exchange. Furthermore, the relationship between the banker and the client is that of a usiness partner, rather than a lender and borrower.

To keep the growth pace, several issues need to be addressed to facilitate the growth of Islamic banking operations in Bangladesh. It is crucial to enact a separate Islamic Banking Act that incorporates all the latest developments in the Islamic financial market. Additionally, an independent Shariah Board should be established at the central bank to oversee the overall supervision of the Islamic financial system.

The writer is a senior financial journalist



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