In Bangladesh, Islamic banking has emerged as a formidable entity in the financial sector, undergoing swift expansion and broadening its appeal among a vast spectrum of customers and investors. Nonetheless, despite this praiseworthy advancement, a significant deficiency persists in Bangladesh's regulatory framework-specifically, the lack of a distinct and tailored Islamic banking law. Islamic financial institutions have effectively implemented Shariah-compliant banking procedures; yet, the absence of a specific legal framework renders these practices unpredictable and risky. Therefore, a well-defined Islamic Banking law is urgently required to safeguard the sector, ensure sustainability, and offer coherent advice for all stakeholders involved.
Anomalies (or difficulties) of the Current System: Moreover, the absence of a formal legislative framework for Islamic banking in Bangladesh presents problems to operational consistency and adherence to Shariah law norms. At present, Islamic financial institutions are governed by overarching banking regulations formulated with conventional banking systems as a reference. This ambiguous concept has led to numerous obstacles, particularly with regulatory and compliance matters, with the most significant being the absence of clarity in the interpretation and enforcement of Shariah compliance throughout the industry.
Islamic banks, as entities dependent on financial intermediation within Islamic finance, are susceptible to deviations from Shariah operational standards due to a deficient legal framework and inadequately defined compliance regulations for the enhancement of legal institutions governing financial product transactions and services. The risk of non-compliance, whether intentional or unintentional, is substantial and threatens the reputation of Islamic banking, thereby diminishing public trust in its adherence to Islamic financial standards. It underscores the pressing necessity for the establishment of a suitable legislative framework to accurately delineate the norms and standards pertinent to all Islamic financial institutions.
What is the significance of a dedicated Act?: The necessity of enacting a comprehensive Islamic banking legislation cannot be overstated. This bill will establish the foundation for regulating the sector and ensuring that Islamic banks function in accordance with Shariah. An appropriate legislative framework would delineate a clear set of norms and regulations concerning several domains, including the operating mandates of Islamic banks, permissible banking finance product structures, and the responsibilities of the supervisory authority.
The process is enhanced by the establishment of legally mandated formal Shariah supervision bodies. The established committees serve a crucial function by ensuring the implementation of Islamic principles across all operational levels of Islamic banks. A specific Islamic banking law might formalize applicants and the existence of such committees while also delineating their scope, authority, and accountability, ensuring they operate the banks as an effective and integrated component of the financial system.
The law is essential in this context to offer guidance for Islamic financial institutions and clients, establishing a legal framework upon which all parties can depend. The Islamic Bank, serving as the Shariah Compliant Certifier, would assure consumers that the Islamic finance services they utilize are authentically compliant with Shariah and adhere to Islamic ethical standards, thereby bolstering public trust and promoting increased engagement in the Islamic banking sector.
Risk Mitigation for Paper-Based Systems: The most detrimental consequence of lacking a comprehensive Islamic banking regulation will be the degradation of the entire system to a "paper-based" framework. Despite banks claiming Shariah compliance, their operations frequently resemble conventional models that do not accurately represent the essential principles of Islamic financing. The cosmetic practices of banks claiming to be Shariah-compliant yet failing to uphold the ethical principles of Islamic finance may ultimately undermine the Islamic banking model.
This will, however, be precluded by a specific Islamic banking regulation that guarantees not merely the superficial demonstration of Shariah compliance, but the actual execution of Shariah compliance in every transaction. Banks must demonstrate their commitment to Islamic finance through genuine actions, providing verifiable evidence of products and services aligned with Shari'ah principles of equity, fairness, and risk-sharing, rather than mere promises. The legislation will guarantee that Islamic banking retains its authentic Islamic character by implementing stringent supervision systems and conducting continuous conformity assessments, so mitigating the risk of superficial adherence, similar to nominal Shariah compliance.
Role of Central Bank and Regulators: The implementation and enforcement of an Islamic banking law must be efficiently conducted by the Bangladesh Bank and other pertinent regulatory agencies. As the primary regulatory body of the financial sector, the central bank must be the initial entity to monitor Islamic banking firms' adherence to the stipulations of the new law. It entails oversight and the issuance of directives for the creation of Shariah-compliant financial products, operational regulations, and the execution of a comprehensive auditing and review procedure to assure adherence.
Further, the central bank must proactively ensure the effective operation of Shariah supervisory committees within Islamic institutions. These committees must possess sufficient legal and financial expertise and the capability to assess and certify the Shariah compliance of financial products. These committees can be endowed with the requisite information and best practices for effective operation through suitable training provided by the central bank, ensuring the preservation of Islamic banking standards' integrity.
Moreover, authorities must adopt a significantly more proactive approach to promote openness and accountability within Islamic banking organizations. This may encompass routine audits, the dissemination of compliance reports, and the creation of avenues for consumer complaints and comments. This regulatory transparency will foster a more robust and transparent financial system, aligned with the principles of Islamic finance, enabling the central bank to attain both safety and soundness as well as ethical reciprocity.
The enactment of a distinct Islamic banking Act is essential for Bangladesh to guarantee sustainable growth and shari`ah compliance within its Islamic banking sector. This would provide a long-anticipated framework of regulations that oversees Islamic financial institutions while ensuring their compliance with Shariah law through the provision of transparent and efficient products and services. This will enhance the credibility of the Islamic banking system and implement safeguards for consumers and investors against the risks linked to the operations of Shariah monitoring committees and their affiliations.
Bangladesh must promptly address and rectify the current legislative deficiencies within its Islamic banking sector, particularly as worldwide demand for Islamic financial services is swiftly rising. By implementing a comprehensive regulatory framework, the country may unlock the full potential of its Islamic banking sector by promoting confidence, transparency, and ethical financial practices. It is imperative for Bangladesh to enact such legislation to ensure the sustainable and Shariah-compliant growth of the country's Islamic banking sector.
The writer is a legal consultant, arbitrator, and mediator
