Development Of Islamic Banking And Finance In Bangladesh Finance Essay - Free Essay Example

Sample details Pages: 7 Words: 2034 Downloads: 1 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? Bangladesh has a mixed banking system consist of private, nationalized, and foreign commercial banks. Bangladesh Bank is the central bank of the country and is responsible for monetary policy of the Government and all commercial banks. After the independence the Government of Bangladesh initially nationalized the entire domestic banking system and proceeded to reorganize and rename variety of banks. Don’t waste time! Our writers will create an original "Development Of Islamic Banking And Finance In Bangladesh Finance Essay" essay for you Create order In 1980s, commercial bank privatization decision revolutionize the entire banking system. At present the total banking Bangladesh system consists of four state-owned banks, four specialized banks, thirty private commercial banks and nine foreign banks. The banks financial performance evaluation is important for all stakeholders owner such as debtors, investors, government, creditors, regulators, and bank depositor managers. Bank performance provides direction to stakeholders in making decision. For example it gives direction to the investors and debtors to decide either they should invest money in the bank or invest somewhere else. Similarly, it gives direction to the bank managers whether to improve loan service or service deposit or both to improve its finance. Regulatory agencies and the government are also keen for the regulation of financial performance purposes. BACKGROUND This Islamic banking, as a new paradigm has begun in Bangladesh in 1983 with the establishment of the first Islamic bank Islamic Bank Bangladesh Limited. After that, six more banks were established in the country to achieve this welfare banking to the doorsteps of the people. In the last two years decades, it has shown a great strength in achieving the goals of Islamic Shariah. From observing the success, most of the conventional banks have been allured to open their own Islamic branches with the traditional ones. In Bangladesh, the most important development in Islamic Banking and Finance (IBF) and in the recent few years has been the entry of some conventional banks in the market and their use of Islamic modes of financing through their Islamic branches, windows, or units. Some of the giants in the banking and finance industry, Islamic banking is a necessities and can encourages that bank. Bangladesh was moving from time to time and presently 9 percent from conventional banks have opened 19 Islamic banking branches alongside their interest based branches. Thinking in devising the banking policies and framework on the basis of Islamic Shariah in the second half of the twentieth century witnesses a major shift and the end of third quarter of the century as a new system of banking called Islamic banking, this new thought finally was institutionalized. Moreover to the Islamic Banking movement, the establishment of the Islamic Development Bank (IDB) in 1975 gave momentum to that banking system. Then a number of Islamic Banking and financial institutions have been established all over the world irrespective of Muslim and non-Muslim countries since the establishment of the IDB. The most part of the operational financial resources of Islamic banks came from different types of deposits mobilized of the principles of Al-Wadia which also known as safe custodianship and Al-Mudaraba which means trust financing. Islamic banking has opened various ways for making loan conforming to Islamic Sharia by utilizing of fund under the framework. In the conventional banking, the term loan is called Investment in the Islamic banking. They have devised different types of interest- free financing devices ever since the Islamic banks cannot lend on the interest. As can be seen today, the Islamic finance has become extremely sophisticated as well as increasingly competitive. Today through Islamic subsidiaries, very large number or western financial institutions are involved in the Islamic finance. It was known as Islamic windows or can be called marketing of Islamic products. Recently, more of the new Islamic products have appeared such as Islamic bonds (called as sukuk) and Islamic derivatives. With around 135 million populations of which 90 percent are Muslim, Bangladesh became the third largest Muslim country in the world. After the OIC recommendation at its Foreign Ministers meeting in 1978 at Senegal to develop a separate banking system of their own, that give hope and aspiration of the people to run the banking system on the basis of Islamic principle came into reality. Then Bangladesh established its first bank after 5 years of that declaration which is in 1983. After that, out of 49 banks in Bangladesh, 7 from it full-fledged Islamic Banks and 19 Islamic Banking branches of 9 conventional banks were working in the private sector on the basis of Islamic Sharia. THE RECENT DEVELOPMENT OF ISLAMIC BANKING AND FINANCE IN BANGLADESH Global Islamic finance is growing rapidly making their way and gaining popularity in Bangladesh, with experts predicting that the Shari `ah compliance with industry will continue in steady steps to become the mainstream of Islamic banking system in South Asian countries. The future of the Islamic banking system is so bright, Mominul Islam Patwary, chairman of the executive committee of Islami Bank Bangladesh Limited, to IslamOnline.net. The Islamic banking in Bangladesh is seeing an impressive growth in Bangladesh. Bangladesh entered the Islamic banking system only in 1983, with the establishment of Islami Bank Bangladesh. Since then, five other private fully Islamic banks and 20 Islamic banking branches of conventional banks have been established. Patwary says that his bank is now one of the top performers in terms of bank business and profit of 48 commercial banks operating in the country. Islamic Bank Bangladesh Limited has gained first position in all private banks in term deposits, investment, export import and remittance collection. According to Bangladesh Bank (BB), the countrys central bank, the deposits of Islamic banking system is now 25 percent of all private bank deposits and investments is 30 percent. Bahauddin Mohammad Yousuf, vice chairman of Al-Arafah Islamic Bank, has an explanation for Islamic finance boom Bangladesh. He says that for a Muslim, the religion forbids any gain or pays riba, Islamic banking makes it possible to operate a business without interest. The people of this country are religious, Patwary, Islami Bank, agrees. Islam forbids Muslims from usury, receiving or paying interest on loans. Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork. Shari `ah-compliant financing deals resemble lease to own arrangements, installment payment plans, joint purchase and sale agreements, or partnerships. Bangladesh is the third largest Muslim-majority country in the world, and the Muslims who make up more than 80 percent of the countrys 148 million population. Bankers believe that Islamic banking set to progress even more, if the laws governing Islamic banking policy was introduced. If the introduction of Islamic banking, Islamic banking system though will continue to grow, said Patwary. Experts predict that the rapid rise of Shari `ah-based systems, the industry will eventually move on to become the mainstream finance in Bangladesh. Without the benefit of Shari` ah-based systems will be mainstream banking and conventional banks will become the minority in the OIC countries including Bangladesh in 2002, M Azizul Haque, a leading expert on Islamic banking in Bangladesh, told IOL. Azizul Haque, who is also chairman of the Shari `ah Council of Dhaka, believes that Bangladesh will follow throughout the world to the Islamic banking sector. He explained that the rate of growth of Islamic banking in the OIC countries for example is 15 to 20 percent, while conventional banks are 10 to 15 percent. Islamic finance is one of the fastest growing secto rs in the global financial industry. In the grounds of the credit crisis, the global Islamic finance market has grown about 15 percent in three years ago, and is now worth about $ 700 billion worldwide. At present there are nearly 300 banks and financial institutions worldwide. Assets are forecast to grow to $ 1 trillion by 2013. Azizul Haque expects that higher growth rates in the next decade will force the global financial system to Islamic banking. There is no any kind of concern about the success of Islamic banking, said renowned economist. Capital cannot solve global economic problems.The world is looking for a new economic order. Islamic economic system would be that the new economic order. Bangladeshs aspiration to conduct banking system based on Islamic principles move closer to becoming a reality in 1978, after the Organization of Islamic Conference (OIC) meeting of foreign ministers of member countries. OIC recommends its members (including Bangladesh) to develop their own system of Islamic banking. Five years after the declaration, in 1983, the countrys first sharia-compliant bank, Islami Bank Bangladesh, was established. More banks have followed including Al-Arafah Islami Bank (opened in 1995) and Shahjalal Islamic Bank Ltd in 2001. Observing the success of their Islamic counterparts, the number of conventional financial institutions has been keen to launch Islamic banking products and services with those of conventional ones. To ensure adherence with Shariah, conventional banks just like the Islamic ones, need strong Shariah supervisory board, which helps in providing model agreements, approves all new operational structure and put basic guidelines for Islamic fi nancing. Premier Bank Ltd, one of the top ten banks in the country. The Bank has maintained two parallel lines of business since 1995. Meanwhile, other banks, Premier Bank Ltd, has opened two separate, dedicated branch (in addition to those of conventional 25) operating in accordance with the principles of Shariah. Some banks, such as Exim Bank (Export Import Bank of Bangladesh Ltd.) has taken a step further and fully changed to Islamic banking. Growth of Islamic banking in Bangladesh is ongoing day by day. A remarkable shift or conversion of conventional banks and their branches into Islamic lines give banking a high signal received by the public interest in general. The Islamic banking industry continued to show steady growth in 2005 in line with economic growth, as reflected in increased market share of Islamic banking industry in terms of assets, financing and deposits of the banking system total. Islamic banks in Bangladesh started from a very limited resource base. But with the passage time, they have shown a steady performance in respect of the mobilization deposit. Total deposits of Islamic banks and Islamic banking branches conventional banks stood at Taka is so many in September 2005. CONCLUSION Analysis leads us to conclude that even if we see that we need to take lessons from the Islamic Bank, which is supposed to make the banking system less prone to problems of non-performing assets of banks, but we have a lesson that Conventional Bank should concentrate on short-term loan that is anti-growth oriented. But it is not possible to switch to Islamic banking practices become even impossible because ICBs also failed to adopt Shariah compliant banking operations. From a practical Islamic Bank Bangladesh, we can conclude that the Islamic Bank failed in general to claim yourself a pioneer for an alternative to interest-based banking system that is not based on a share as Islamic banks and finance invest nearly 80-90 per cent of their funding under the rate protected and is set to return based financing. A financial system built solely around the modes of financing cannot claim superiority over an interest-based system on the grounds of equity, efficiency, stability and growth. The questions of how to improve the recovery rate of Bangladesh Banking is still open. Perhaps, we need to find the answer is not in Islamic banking but in the regulatory framework and the legal and business risks instead of emphasizing on security risks. Analysis and comparison between Islamic and Conventional Banks revealed that no significant difference exists in the lending and financing procedures between the two banking systems. In both types of system, from approaching the Bank to finance the delivery of loan facilities and similar facilities except Bank Shariah Board exists in Islam, also known as the Religious Supervisory Board. From the comparison of our instruments found that only Mudaraba and Musharaka are financial instruments that truly Shariah-based Islam. The rest of the instruments are skillfully with the Conventional Banking System. Clearly, the returns to finance provided financial mode based on Murabaha, Ijara, and Bai-Muajjal with service charges are all set out as benefits. In Islamic banking, all modes other than the mode of financing secured ideal because there is no practical risk involved (and collateral have a structure based on short-term financing.) This enables the Bank to get their loan portfolio and take advantage of its financing instruments to make rate better recovery on Conventional Bank.