Bangladesh seeks sukuk rule amendments, sovereign issuance

Bangladesh's central bank is seeking to amend rules on its existing Islamic bond (sukuk) programme to broaden its use and allow for a sovereign issuance by the government, enhancing the prospects of Islamic finance in the country.

Bangladesh, a majority-Muslim country of 160 million, has developed Islamic finance with marginal regulatory support but a lack of Islamic capital market tools are limiting the industry's expansion.

A request for the amendments was now being considered by the finance ministry, which would allow sukuk to be used as a money market as well as a fiscal instrument, the Bangladesh central bank governor's spokesman A.F.M. Asaduzzaman told Reuters.

"Issuance of sukuk by the government is one of the major considerations in the proposed amendment," Asaduzzaman said.

The central bank has a small sukuk programme backed by legislation dating back to 2004, which issues short-term paper to help Islamic banks manage their liquidity, but a wide range of tenors is not available and there are no corporate sukuk.

The proposal comes after a report by the Malaysia-based Islamic Financial Services Board (IFSB) highlighted the need to develop sharia-compliant funding instruments such as sukuk in the south Asian country.

The IFSB report said a sharia-compliant lender of last resort facility and an Islamic deposit insurance should be developed in Bangladesh to support an Islamic finance industry which has doubled in size in the past four years.

The central bank is currently developing a lender of last resort framework for the entire banking sector which is expected by December of this year, with a sharia-compliant equivalent to be developed afterwards, Asaduzzaman said.

Islamic deposit insurance, however, was not under consideration with Islamic banks currently covered under the existing scheme managed by the central bank, he added.

The IFSB lists Bangladesh as one of a handful of countries where Islamic banking has systemic importance, an industry which follows religious principles such as a ban on interest and monetary speculation.

The country was gripped by political turmoil leading up to an election in January, with economic growth expected to slow to less than 6 percent in the financial year. In the previous year, the economy grew by 6 percent. 

(Reuters / 03 June 2014)

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Sukuk the missing link in Bangladesh Islamic finance sector

Bangladesh has developed a sizeable Islamic finance industry but a lack of sharia-compliant instruments such as sukuk is limiting further growth of the sector, a report by a standard-setting body found.

With a predominantly Muslim population of 160 million, Bangladesh has developed Islamic finance with only marginal regulatory adjustments; the industry has doubled in size in the past four years.

The central bank has a small short-term sukuk (Islamic bond) programme which issues six-month tenors to help Islamic banks manage their liquidity, but a wide range of tenors is not available and there are no corporate sukuk.

Sukuk would help to diversify funding sources and make up for the limited scope of the Islamic money market, but issuance of sukuk would require more specific rules, said the report by the Malaysia-based Islamic Financial Services Board (IFSB).

"The larger policy issue in Bangladesh is the adequacy and scope of the legal and regulatory framework in providing an appropriate enabling environment," it said.

Islamic banks, which follow religious principles such as a ban on interest payments, now represent 18.9 percent of total bank deposits in Bangladesh, the report said. Bank deposits, excluding interbank deposits, totalled 6.33 trillion taka ($82 billion) in March this year, according to the central bank.

The banks include Islami Bank Bangladesh Limited (IBBL) , set up in 1983 as the country's first Islamic bank and its largest privately owned commmercial bank.

But Islamic banks ran into liquidity constraints in 2010 when their combined advances-to-deposit ratio exceeded a ceiling set by the central bank, prompting the regulator to monitor their liquidity profiles to detect maturity mismatches.

This problem was addressed in 2011 when the central bank launched an Islamic interbank money market, but the dominant share of IBBL limits the market's efficiency, the report said.

"Its relative size may impact on the effectiveness of the interbank market, and the central bank should take a further look at this issue."

The central bank has set statutory liquidity requirements for Islamic banks at half of what is required for conventional banks, boosting their profitability but leaving the core issue of the money market's depth unaddressed.

"This privilege has the critical flipside that the instruments of Islamic banks for their liquidity risk management are very limited. In cases of sizeable and unexpected deposit withdrawals, Islamic banks may face a liquidity crunch."

The report also said a sharia-compliant lender-of-last- resort facility and Islamic deposit insurance should be developed by regulators.

The central bank, which did not respond to Reuters queries about its Islamic finance strategy, has said it plans to expand its short-term sukuk programme.

"Introduction of another similar instrument of three-month tenor for further facilitation is at the final stage," central bank governor Atiur Rahman said in a speech in April.

(Reuters / 02 June 2014)

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Bangladesh: IFIC to become Islamic bank

IFIC Bank, a first generation conventional private commercial bank, has decided to become a full-fledged Islamic or Shariah-based bank.

“Our board recently approved the proposal. The government, being the bank’s majority shareholder, has also given clearance,” said Shah A Sarwar, managing director of the bank.

“We are now approaching the regulators for necessary permissions. We will then start the conversion process by appointing world-class consultants. But it is subject to approval from different regulators,” he said in an interview with The Daily Star.

“There is a strong demand from customers and shareholders,” said Sarwar.

In addition, non-Muslims can also take the service and that “is the beauty of the Shariah-based banking.”

Sarwar who joined the bank in December last year could not give a definite time on how long the conversion process would take.

“The conversion is not a day’s job. We have to change the computer systems and business processes and we have to run parallel for the time being.”

The globally-booming Islamic finance is making strides and gaining popularity in Bangladesh, with experts predicting that the Shariah-compliant industry will continue in steady steps to become the mainstream banking system in the Muslim-majority nation.

Bangladesh entered the Islamic banking system in 1983, with the establishment of Islami Bank Bangladesh Ltd.

Since then, eight more full-fledged private Islamic banks and 23 Islamic banking branches of conventional banks have been established. Currently, Islamic banks hold 24 percent of total banking deposit and have around 10 percent of the total bank branches.

The combined share of Islamic banks (excluding Islamic banking branches/windows of conventional banks) is 16.85 percent in assets, 19.85 percent in investments (loans), 14.3 percent in equity and 17.1 percent in liabilities as of December 2012, according to the Financial Stability Report-2012.

International Finance Investment and Commerce Bank Ltd (IFIC Bank) was set up in 1976 as a joint venture between the government and sponsors in the private sector with the objective of working as a finance company within the country and setting up joint venture banks/financial institutions aboard.

In 1983, when the government allowed banks in the private sector, IFIC was converted into a full fledged commercial bank.

The government holds 32.75 percent of the bank, directors and sponsors 11.31 percent, institutions 33.91 percent, foreign investors 0.28 percent and the rest 21.75 percent is held by the general public, according to the DSE website.

(The Daily News / 21 Nov 2013)

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Bangladesh: Islamic finance bears vow of playing beneficial role in socioeconomic dev

Bangladesh Bank (BB) Governor Dr Atiur Rahman has said Islamic finance bears the promise of playing a major beneficial role in the country's socioeconomic development.

"With its ethical, inclusivity promoting and stability enhancing attributes, Islamic finance undoubtedly bears the promise of playing a major beneficial role in our socioeconomic development," the central bank chief said while speaking at a seminar held in a local hotel Monday. 

The two-day-long seminar on 'the prospects and challenges in the development of Islamic finance for Bangladesh' was organised jointly by the Islamic Financial Services Board (IFSB) and the BB. 

Dr Rahman said Islamic finance market participants must exercise utmost caution in steering clear of any involvement with extremist dogma driven influences aiding or abetting terrorism; meticulously adhering to anti-money laundering (AML) compliance routines prescribed by BB's financial intelligent unit (FIU).

Islamic finance commenced in Bangladesh in early 1980s with just one Islamic commercial bank. By now there are eight Islamic banks run wholly on Shariah principles. 

Besides, as many as 17 conventional banks, including one globally active foreign bank, are running Islamic banking branches or windows side by side with their conventional banking, according to the central bank statistics. 

"Â….approval requests of a number of conventional banks for their conversion into wholly Shariah-based Islamic banks indicate robust customer demand in Bangladesh for Islamic financial services," the BB governor noted. 

He also said the BB has taken a move for structuring some appropriate Shariah-compliant small and medium enterprises (SME) refinance support line for the Islamic banks. 

"Apart from Islamic banking, Takaful or Islamic insurance is also now gaining ground in our financial market," the central bank governor said. 

Barring one exception of a small sick Islamic bank in process of restructuring, the Islamic banks in Bangladesh generally have higher capital adequacy ratios and lower non-performing loan ratios than their conventional banking counterparts, according to the BB governor. 

He also said aggregate assets and deposits of Islamic banks in Bangladesh have nearly doubled in the last four years; by end of 2012 aggregate assets and deposits both crossed the trillion taka threshold, comprising around a fifth of total banking sector assets and liabilities. 

"This share of Islamic banking looks set to grow further with time, given its faster growth than conventional banking," the BB governor said.

Speaking on the occasion Secretary General of the IFSB Jaseem Ahmed said Islamic finance is contributing to the deepening and widening of the global financial system through the use of innovative, Shariah-compliant, contractual forms. 

"Priority must be given to the creation of an enabling financial infrastructure consisting of common international standards for supervision and regulation, as well as for transparency and disclosure," Mr Ahmed noted. 

A collaborative effort between the supervisory authority, policy-makers and market players is the key to maintaining the balance between strong regulation and the market's ability to grow, according to the IFSB secretary general.

"At the end of day, we must be guided, in promoting Islamic finance, by the recognition that an enterprise has value only if it helps to transform the lives of ordinary human beings," he noted. 

Kuala Lumpur-based the IFSB was officially inaugurated on November 3, 2002 and started operations on March 10, 2003. 

It serves as an international standard-setting body of regulatory and supervisory agencies that have vested interests in ensuring the soundness and stability of the Islamic financial services industry, which is defined broadly to include banking, capital market and insurance.

Currently, 187 members of the IFSB comprise 57 regulatory and supervisory authorities, eight international inter-governmental organisations - such as the World Bank, the International Monetary Fund (IMF) and Asian Development Bank (ADB) - and 122 market players, professional firms and industry associations operating in 43 jurisdictions.

(The Financial Express/ 24 Sept 2013)

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Bangladesh: Centralised zakat collection urged

Zakat funds should be collected centrally and then dispensed through social safety net programmes to alleviate poverty, speakers said at a seminar yesterday.

“A centralised zakat collection system could raise as much as Tk 200 billion, which could then be used properly to fulfil the purpose of zakat, which is eliminate poverty,” said Mohammad Sabur Khan, president of Dhaka Chamber of Commerce and Industry (DCCI), citing a 2011 study of ex-Bangladesh Bank executive director Abdur Raquib.

This is approximately two percent of the gross domestic product (GDP), he added.

“If everyone pays their zakat dues, the collected amount could total up to 4.3 percent of the GDP,” said Dr Mohammad Ayub Miah, chief executive officer of the Centre for Zakat Management (CZM).

The zakat funds raised are below the potential because there is a lack of awareness about the methods to calculate how much zakat a person should pay, the speakers observed at the event organised by DCCI and CZM on DCCI premises in the capital.

“We have to start thinking about how zakat can make the maximum impact, since the responsibility does not end in just giving it,” said Sabur Khan.

(The Daily Star / 30 July 2013)

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Bangladesh: Islamic funds gain stronger foothold

Bangladesh can improve its weak infrastructures by utilising Islamic funds available globally, said a senior official of a foreign bank.

The country's stable economy can help attract more Islamic funds from international financiers, said Afaq Khan, chief executive officer (Islamic banking) of Standard Chartered Bank.

Khan was sharing his views on the prospects of Islamic banking in an interview with The Daily Star at Sonargaon Hotel recently.

“The total size of the world's Islamic funds is estimated at $1- $1.3 trillion, which is growing at 15-20 percent on average annually,” said Khan, who came to Dhaka to launch the bank's Shariah-based product Saadiq for its corporate clients in the country.

Most shariah-based financiers in the world are eager to invest in large infrastructure projects, he said. Bangladesh can attract these investors, thanks to a positive economic outlook of the country.

“All the ingredients are here to attract the Islamic financiers as you have a stable economy, stable regulations and fast economic growth,” said Khan.

The country needs to tell its success stories and future plans to the Islamic investment community globally, he added.

Standard Chartered Saadiq is ready to cooperate with the government in the processes of bringing in the Islamic investors to the country by utilising its global network, said Khan.

Islamic banking is now an issue of great interest for many, including the western non-Muslims, as the system remained almost unhurt during the global financial crisis, said the official.

Shariah-based banking is growing much faster than conventional banking, he said. Currently, the banking giant has Islamic banking operation in six countries -- Indonesia, Malaysia, UAE, Bahrain, Pakistan and Bangladesh.

Of the countries, Indonesia has the highest annual growth rate at 45 percent, followed by Bangladesh at 25-30 percent, said the 50-year-old official.

“Conventional banking is riskier than Islamic banking because it deals with debt trading and keeps itself involved in market speculations, which the European and American banks experienced,” he said.

“At present 19 percent of the industry assets and 16 percent of the industry deposits are Islamic. So, there is an accelerated demand for Islamic banking products in the market,” said Khan.

The London-based bank started its Islamic banking operation in Bangladesh in 2004 with consumer banking products under the bank's group branding Saadiq.

“Islamic banking operates in real economy. This banking has no room for gambling, speculation, excess leverage, or the greed for windfall profit,” said Khan.

He joined StanChart in 2003 with a mandate to launch the Islamic business division for the bank. Since then, he has been responsible for the strategic build-up of a global Islamic banking business covering retail, corporate and investment banking with a wider product capabilities and award winning solutions.

Khan, who has 22 years of banking experience, believes Bangladesh could be a big market for the Islamic banks. “Around 90 percent people here are Muslims. So, the country has an immense potential for the growth of Islamic banking.”

But he feels the business prospect would depend on diversification of products, services and adequate training of the officials.

"Saadiq" is the brand of this bank's Islamic banking, which has rolled out more than 250 products and solutions relating to consumer and wholesale banking.

An Islamic bank traditionally generates its profits from Sharia-compliant investment activities. This profit is shared back with the bank's customers at a pre-agreed ratio. An account holder is entitled to a share of these profits according to the funds he holds in his account.

Khan said Islamic banking differs from conventional banking, primarily because it does not look to charge or deliver interest.

In Islamic banking, profit is generated through investment and trading, said Khan, who did an MBA from the University of Western Illinois in the US.

The official said this return rate has to match the level of return provided by interest levels of conventional banking.

Islamic banking in Bangladesh continues to show strong growth since its launch in 1983.

At present, out of 47 banks, seven private commercial banks are operating as full-fledged Islamic banks. Besides, 16 conventional banks are engaged in Islamic banking, according to Bangladesh Bank's annual report for 2010-11.

The total deposits with Islamic banks and Islamic banking branches of the conventional banks stood at Tk 67,580 crore by the end of December 2010. This deposit accounts for 17.5 percent of the deposits with the total banking system, according to BB Data.

Total credit of the Islamic banks and the Islamic banking branches of the conventional banks stood at Tk 62,870 crore by the end of December 2010. This was 19.1 percent of the credit of the total banking system.

The global banking giant targets Bangladesh as one of the potential markets for its Islamic financial products and services.

As part of the move, the bank launched its Shariah-based wholesale banking product Saadiq for its corporate clients on August 2. Earlier the product was for retail customers only.

The Saadiq brand will offer a core comprehensive suite of products related to cash management, trade, term and working capital financing for corporate clients to fulfil their banking requirements in a Shariah compliant way.

(The Daily Star / 26 August 2012)

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Bangladesh launches Islamic interbank money market

(Reuters) - Bangladesh has launched an Islamic interbank money market, aiming to help sharia-compliant banks manage their short-term funding.

Central bank governor Atiur Rahman told Reuters that the market would provide Islamic banks with a channel to use surplus money. Islamic banks account for over 15 percent of the country's banking sector.

"Now the banks who practice Islamic sharia will be able to overcome any funding crisis like the conventional banking system. For the past several months, we took initiatives to bring them into a system..." Rahman told Reuters.

A central bank official, who declined to be named, told Reuters that the new market, launched on Sunday, "is a blend, a mixed model". He added that money market solutions from Indonesia, Malaysia and Saudi Arabia were studied while developing the Bangladeshi platform.

The central bank will act as custodian in the market. Interbank transactions, limited to overnight tenors, will be based on a pre-determined profit-share ratio that will be decided by a central bank committee using Islamic banks' deposit rates as a starting reference.

Three to four banks have placed bids in the market ranging from 10 million to 55 million taka ($122,000 to $671,000), the central bank official said.

The country's Islamic banks maintain liquid assets above statutory requirements and well above levels held by conventional banks, but limited money market tools have made it difficult to manage this excess liquidity.

SUKUK

The central bank official also said amendments to Islamic bond regulations were under consideration by the ministry of finance, as part of efforts to increase the activity of Islamic banks in the capital markets.

The proposals include a sukuk programme that would be issued by the central bank, and might be ready in two to three months, the official said.

In the long term, the sukuk could be used as collateral for interbank transactions, according to the official, lowering costs for Islamic banks by reducing counterparty risk in deals.

(Reuters / 05 June 2012)

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IB TIMES 1000: Islamic Finance, Good Economy, Cash From Abroad Driving Growth in Bangladesh Banks

A growing economy, an historically innovative banking sector and a large expatriate population looking for a trusted envoy to handle their money back home combined to make Bangladeshi banks amongst the fastest growing companies in the world.

Three banks in the country -- First Security Islami Bank, Social Islami Bank and Mercantile Bank -- all make the IBTimes 1000 list of the fastest-growing publicly traded companies in the world, with those financial concerns noting compound annual growth rates of 71, 43 and 26 percent, respectively, over three years.

The IBTimes 1000 is an annual compilation, proprietary to the International Business Times, of the fastest growing publicly traded companies based on their compound annual growth rate as calculated over three years.

A big reason for the rise: the surging interest in Islamic finance, as more people have begun to bank on a system that withstood the global financial crisis of 2008 more robustly than the conventional standard.

"There's much more self-confidence within the Islamic finance sector, because it's weathered the crisis better," said Ibrahim Warde, an adjunct professor of international business in the Fletcher School of International Affairs at Tufts University.

"Prior to that, the criticism for Islamic finance was 'Why re-invent the wheel? We have a perfectly good system out there.' That is clearly not heard anymore," Warde added

That self-confidence has resulted in impressive revenue growth for the banks, as an increase in the depositor base and the business opportunities that come with that has led all three banks to increase both their investment and fee income since 2008.

In its last reported full-year statement, for example, First Security Islami Bank saw net investment income, the difference between profits earned in investment and those paid to depositors, jump over 400 percent, from 202 million taka ($2.46 million) to 1.01 billion taka. Income from fees was up 45.9 percent

Innovative products

At least two of the Bangladeshi banks in the IBTimes 1000, First Security and Social Islami, seem to have seen a lot of their deposit base growth result from the introduction of financial products devout Muslims feel don't go against their religious prohibition on "riba," a term that denotes excess compensation but is commonly understood as conventional interest.

The last full-year statement for Social Islami Bank, for example, shows the growth in term mudaraba deposits, which the bank uses for a special kind of shared-risk limited-partnership investments, of over 56 percent. Deposits into cash waqf fund accounts, which invest in certain kinds of socially beneficial enterprises and provide bank customers with a certificate of deposit, grew 58.9 percent at the bank.

A lot of those new deposits and loans are tiny in nature, the result of a country where the banking system in many ways served as a cradle to modern micro-finance during the late 1970s and 1980s with the rise of benchmark Grameen Bank.

"The whole idea of Islamic banking was looked at in terms of what Grameen Bank was doing," Warde, the Tufts professor says about the way new financial products have been developed in Bangladesh.

Remittances drive growth

Interestingly, Bangladeshis abroad sending money back to home banking institutions form a large part of the growth story for banks. Part of it is due to the fact banks in the country have historically controlled remittance transfers from abroad: international giant Western Union, for example, didn't have a deal to operate offices in the country until 2008.

Part of it is interest-rate arbitrage, as banks in the country pay double-digit returns on deposit. With many savings account in Western banking systems paying almost nothing, some Bangladeshis have decided it's worth it to put their money in banks back home, even if it is subject to foreign exchange and volatility risks

"These days, with interest rates in developed financial markets being at near zero, the relatively high returns in domestic banks and financial institutions should attract resources parked outside the country to be ploughed back in," Zaidi Sattar, chairman of the Policy Research Institute of Bangladesh, wrote in the country's Financial Express.

The influx of monies has had a marked effect. Bangladesh's savings surplus, the amount of currency deposited in the country's financial system minus the amount invested domestically, averaged 5 percent of total GDP between 2006 and 2009, for example.

Healthy growth

The final factor helping Bangladeshi bank growth: a healthy economic environment that barely nudged down as much of the rest of the world was mired in the Great Recession. GDP growth, according to theInternational Monetary Fund, has been constantly around the 6 percent mark, with the slowest growth rate, of 5.91, occurring in 2009.

That has helped the investment growth of many banks, like First Security Islami, which has 38.7 billion taka invested in domestic industry, mostly in import, trading and finance.

Those investments seem to jibe with the bank's mission statement, noted in its website to "above all, to add effective contribution to the national economy."

(IBT1000, 06 March2012)

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