University of Dhaka

Assignment On
Islamic Banking and Products in the Economy of Bangladesh
Course Name: Comparative Economic system (ECO- 2308)

Prepared For:
%a"ina &esmin

'ect$rer( University of Dhaka

Prepared By: Jakir Hossain ID: 201030420 Batch: 1

th

De!artment of "anking an# Ins$rance University of Dhaka

Introduction
Is)amic "anking as a ne* !ara#igm starte# in Bang)a#esh in 1+,3 *ith the esta")ishment of the first Is)amic "ank -Is)ami Bank Bang)a#esh 'imite#-. After that( more "anks have "een esta")ishe# in the co$ntry to reach the o$tcome of this *e)fare "anking to the #oorste!s of the !eo!)e. In the !ast t*o #eca#es( it has sho*n its great ro"$stness in achieving the goa) of Is)amic %hariah. O"serving the s$ccess( many conventiona) "anks have "een a))$re# to o!en their o*n Is)amic "ranches *ith the tra#itiona) ones. /or a contin$e# e0!ansion of the Is)amic Banking system( ho*ever( a n$m"er of iss$es that !ose serio$s !ro")ems for Is)amic "anks *i)) nee# to "e caref$))y a##resse#. 1his !a!er #isc$sses an# makes recommen#ations on the more !ertinent of these iss$es( vi2.( the #eve)o!ment of an Inter3Bank Is)amic 4oney 4arket( activation of %hariah %$!ervisory Boar#s( enactment of a f$))3f)e#ge# Is)amic Banking Act( #eve)o!ment of 5e* /inancia) 6ro#$cts in )ine *ith the Is)amic %hariah( an# e0tension of investment in )ine *ith 6'% frame*ork( es!ecia))y "y constit$ting consorti$m or syn#ication "y the Is)amic "anks. 1he !a!er s$ggests that micro( sma))( an# me#i$m enter!rises 74%48s9 sho$)# get !riority in the investment #ecisions of the Is)amic "anks. 1he !a!er a)so o"serves that the !erformance of the Is)amic "anks co$)# "e f$rther im!rove# "y $!gra#ing the :$a)ity of man!o*er "y enhance# ;<D s!en#ing an# !ro3!oor investment #ecisions. Is)amic "anks

Date of Submission:03.11.2013
in Bang)a#esh are !erforming very *e)) in #e!osit an# f$n# mo"i)i2ation activities. 1he

economic efficiency has "een $!ho)# "y the Is)amic "anking activity an# the !itfa))s of conventiona) "anking are "eing re#$ce# "y the Is)amic "anking

Back ground
Bang)a#esh is the thir# )argest 4$s)im co$ntry in the *or)# *ith aro$n# 13= mi))ion !o!$)ations of *hich +0 !ercent are 4$s)im. 1he ho!e an# as!iration of the !eo!)e to r$n "anking system on the "asis of Is)amic !rinci!)e came into rea)ity after the OI> recommen#ation at its /oreign 4inisters meeting in 1+?, at %enega) to #eve)o! a se!arate "anking system of their o*n. After = years of that #ec)aration( in 1+,3( Bang)a#esh esta")ishe# its first Is)amic "ank. At !resent( o$t of 4+ "anks in Bang)a#esh( ? f$))3f)e#ge# Is)amic Banks an# 1+ Is)amic Banking "ranches of + conventiona) "anks are *orking in the !rivate sector on the "asis of Is)amic %hariah. Is)amic "anks in Bang)a#esh since their ince!tion have "een gaining !o!$)arity in s!ite of some !ro")ems in their o!eration. 1he secon# ha)f of the t*entieth cent$ry *itnesse# a ma@or shift of thinking in #evising "anking !o)icy an# frame*ork on the "asis of Is)amic %hariah. 1his ne* tho$ght *as instit$tiona)i2e# at the en# of the thir# :$arter of the cent$ry an# emerge# as a ne* system of "anking ca))e# Is)amic "anking. 1he esta")ishment of the Is)amic Deve)o!ment Bank 7IDB9 in 1+?= gave moment$m to the Is)amic Banking movement. %ince the esta")ishment of IDB( a n$m"er of Is)amic Banking an# financia) instit$tions have "een esta")ishe# a)) over the *or)# irres!ective of 4$s)im an# non34$s)im co$ntries. Over the !ast fe* #eca#es( the Is)amic financia) in#$stry has ra!i#)y e0!an#e# *or)#*i#e. >$rrent)y a"o$t 2 0 Is)amic financia) instit$tions 7I/Is9 have tota) com"ine# assets e0cee#ing A2=0 "i))ion in more than =? co$ntries. 1he Is)amic financia) market is estimate# to gro* at ann$a) rates averaging 1=B in a year. 1heir ra!i# gro*th has gaine# consi#era")e attention in internationa) financia) circ)es *here vario$s market !artici!ants have recogni2e# !romising !otentia)s. 1he Is)amic finance market has "ecome e0treme)y so!histicate# as *e)) as increasing)y com!etitive. 1o#ay( virt$a))y a)) )arge *estern financia) instit$tions are invo)ve# in Is)amic finance *hether thro$gh Is)amic s$"si#iaries( CIs)amic *in#o*sD( or the marketing of Is)amic !ro#$cts. In recent years( a

range of ne* Is)amic !ro#$cts have a!!eare#( s$ch as Is)amic "on#s 7or s$k$k9 an# Is)amic #erivatives. Ehi)e some of those !ro#$cts are *i#e)y acce!te#( others are sti)) controversia).

Objective
Is)amic "anks are not )ike commercia) ones *ith conventiona) motives an# o"@ectives *hich can "e easi)y @$stifie# "y the activities an# !hi)oso!hy he)# "y the Is)amic "anks. Is)amic "anks confront to the economic system kee!ing the Is)amic vie*s an# F%hariahG at core of their "$siness o"@ectives. Is)amic "anks have tota))y some #isting$ishing feat$res *hich make them stan# #ifferent from the conventiona) "anks. 1here are some inefficiency in the e0isting "anking system in case of f$n# mo"i)i2ation an# ca!ita) $ti)i2ation *hich in t$rn @eo!ar#i2e the *ho)e economy in co$ntry. 1he first o"@ective of Is)amic "anks is to e)iminate the F;i"aG 7interest9 from a)) sector of the economy. Is)amic "anks are *orking together to esta")ish the FBaiyaG 71ra#e( commerce < in#$stry9. Is)amic "anks are very m$ch efficient in mo"i)i2ing the savings for the !ro#$ctive !$r!oses. 4ost im!ortant)y to earn the reasona")e !rofit thro$gh Ha)a) transaction is anther o"@ective of Is)amic "anks. >reating em!)oyment o!!ort$nities "y increasing economic activities an# ens$ring e:$ita")e #istri"$tion of reso$rces are a)so !rimary o"@ective of Is)amic "anks. A)) that c$stomers nee#s are safeg$ar# of their savings( an# Is)amic "anks are !erforming this activity very tr$stf$))y over #eca#es. As mentione# a"ove Is)amic "anks create efficient $se of f$n#s( hence contri"$te to the #eve)o!ment of the economic con#ition. %ome other o"@ective of Is)amic "anks are3 esta")ishing "a)ance# tra#e an# *e)fare( #eve)o!ing h$man reso$rce an# se)f assessment( !revent a))o*ing of concentration of *ea)th( esta")ishing @$stice an# h$manity( serving a)) c)asses of !eo!)e in genera) an# s!ecia))y to favor the *eaker c)asses( an# )ast "$t not the )east esta")ishing goo# an# e)iminate evi)s.

Common Products of Islamic Banks

Is)amic "anking !ro#$cts are #ifferent from the conventiona) "anking !ro#$ct as they are #esigne# "ase# on Is)amic shariah. Is)amic "anks have some common "$t $ni:$e !ro#$cts of their o*n. 1he feat$res an# trai)s of these !ro#$cts are #isc$sse# "e)o*.

Al-Wadia Current !eposit Account: A)3Ea#iah im!)ies that the "ank receives f$n# *ith $n#ertaking to ref$n# the #e!osit on #eman# an# a)so *ith a$thori2ation from the #e!ositors to $se the f$n# for "enefit of an# the risk of the "ank. BankHs >$rrent Acco$nt De!osits are manage# on this !rinci!)e. Is)amic "anks #o not !ay !rofit on this #e!osit. Here the o*ner of the f$n# #oesnGt en@oy any !rofit nor "ear any )oss. "eatures: 1. 1his acco$nt re:$ires minim$m tk. =00 to o!en. 2. 1his acco$nt o!erate# $n#er A)3 Ea#iah !rinci!)es *here the !ermission is takenin the acco$nt form from the #e!ositor that the "ank can $se the f$n#s of the "ank( other #e!ositors an# A) *a#iah acco$nts of tra#e < commerce. 3. Eitho$t any con#ition any amo$nt can "e #e!osite#. 4. A che:$e "ook is !rovi#e#. =. Any amo$nt can "e *ith#ra*n at any "anking ho$r. . 5o !rofit is !rovi#e#. #pecial $udara%a !eposit Accounts: Ehen an Is)amic Bank receives 4$#ara"a #e!osits for investment in some "$siness sector( or !ro@ect( the #e!osit is ca))e# s!ecia) 4$#ara"a #e!osits. In this case( an Is)amic "ank( *hi)e receiving #e!osits( comes to an agreement *ith the #e!ositors that money to "e receive# *i)) "e investe# in some s!ecific "$siness vent$res s$ch as ferti)i2er or sa)t "$sinessI or in some s!ecific sectors )ike in#$stria) sector( te0ti)e sector( e0!ort3im!ort

sector etc. or some s!ecific investment sector of the "ank s$ch as rea) estate( shi! "reaking or shi!!ing !ro@ect etc. %!ecia) 4$#ara"a #e!ositors *i)) share on)y in the !rofit an# )oss of those !artic$)ar "$sinesses( sectors or !ro@ects for *hich they have #e!osite# their money. 1hey are neither concerne# nor re)ate# to the entire !rofit an# )oss "$siness of the "ank. In Bang)a#esh( #e!osits receive# "y the Is)amic "anks are genera))y in the form of common !oo) 4$#ara"a #e!osits. "eatures: 1. Any com!any( "$siness entity( #e!t. of govt( organi2ation an# tr$st or any !erson can o!en this acco$nt. 2. 1his acco$nt is o!erate# $n#er 4$#ara"a !rinci!)e 3. Any amo$nt can "e *ith#ra*n or transferre# to a) *a#iah c$rrent acco$nt or any other acco$nts after !)acing a notice ? #ays 4. >he:$e "ooks are !rovi#e# for this acco$nt. =. 1he !rofit rate is com!arative)y )o*er $udara%a #avin&s !eposit Account: 4$#ara"a savings acco$nt of the Is)amic "anks is tota))y #ifferent from the savings acco$nt of the interest"ase# "anks. 4$#ara"a !rinci!)e im!)ies that the "ank receives #e!osits from the #e!ositor *ith the a$thority that the "ank *i)) have e0c)$sive right to manage the f$n# an# the !rofit res$)ting from s$ch #e!osits *i)) "e share# "et*een the "ank an# the #e!ositor at a !re3agree# 4$#ara"a ratio an# the )oss( not res$)ting from the neg)igence of the Bank or any of its re!resentative( *i)) "e "orne "y the #e!ositors. 6rofit an# )oss sharing savings #e!osit acco$nts an# vario$s term #e!osits of the Is)amic "anks are con#$cte# on this !rinci!)e. Is)amic "anks in Bang)a#esh receive #e!osits in the 4$#ara"a acco$nt on the "asis of 4$#ara"a contract. Jenera))y( 4$#ara"a savings acco$nt is not for any s!ecific #$ration. Bank receives this sort of #e!osit s$"@ect to investment of the money in any %hariah a!!rove# vent$re "y a!!)ying a )egitimate Is)amic mo#e of financing. In the case of 4$#ara"a #e!osits( the #e!ositor is the %hahi" a)34aa) an# the "ank is the 4$#ari". 1he ratio of !rofit is #etermine# at the time of

contract. 1he re)ationshi! "et*een the "ank an# #e!ositor is of shareho)#ers( not of the ty!e of #e"tor3cre#itor. "eatures: 1. 1his acco$nt is o!erate# $n#er !rofit sharing !rinci!)e. Here "ank is 4$#ari" an# the #e!ositors are %ahi" a)3 ma). 2. >he:$e "ooks are !rovi#e# for this acco$nt 3. 4oney can "e *ith#ra*n fo$r times a month 4. /or this acco$nt an interim !rofit is in the month of @$ne an# Decem"er in each year. =. After !re!aring the fina) acco$nt at the en# of each year the fina) !rofit is !rovi#e# to the #e!ositors. . 1he minim$m "a)ance for the 'erm $udara%a !eposit Account: Is)amic "anks receive term #e!osit for a minim$m !erio# of 3 months to 3 years on the !rinci!)es of 4$#ara"a. Bank invests the money( earns !rofit( an# shares it *ith the #e!ositor as !er !re#etermine# 4$#ara"a ratio agree# $!on at the time of the contract. In case of )oss( #e!ositors "ear the )oss in !ro!ortion to their #e!osits at their acco$nts. 1he 4$#ara"a term #e!ositors( if they )ike( can again #e!osit their money $n#er a ne* contract. 5o che:$e "ook is iss$e# against any term 4$#ara"a De!osits. 1he "asic #ifference "et*een the 4$#ara"a savings #e!osits acco$nt an# term 4$#ara"a #e!osit acco$nt is the :$estion of s!ecificity of the #$ration an# *eightage fo))o*e# for ca)c$)ation of !rofit. "eatures: 1. Eith a minim$m of tk. 1000 or greater *hich is a m$)ti!)e of 100 this acco$nt can "e o!ene# at any time of the year 2. 1here are terms of #e!osits are receive# 3. 5o !rofit is !rovi#e# if money is *ith#ra*n "efore com!)etion of months months( 12 months( 24 months an# 3 months $n#er *hich
th

an# )ast #ay is consi#ere# for the !rofit acco$nts

4. /or the #e!osits of 24 an# 3 months an interim !rofit is !rovi#e# after each year. #pecial 'erm $udara%a : 1. 1his arrangement is the com"ination "oth term m$#ara"ah an# s!ecia) m$#ara"ah acco$nt. Un#er this arrangement the o*ner of the f$n#3 a. Agress to kee! the #e!osit remain *ith the Is)amic "anks for a !artic$)ar time !erio# ". %!ecifies a !artic$)ar ty!e of "$siness for the !$r!ose of investment $udara%a (a)) savin&s Account: 1. A !erson inten#e# to !erform Ha@ *ithin 1 to 10 year can o!en this acco$nt for a !erio# his convenience 2. A year is #ivi#e# into 12 insta))ments 3. 6rofit is given for the #ai)y "a)ance "ase# on a *eightage of 1.1B 4. 1here is no !rovision for *ith#ra*a) $udara%a $ont ly savin&s account: 1. Un#er this system the !roce#$re of #e!osit is )ike the D6% of conventiona) "anking system. 2. 1he scheme is taken for a !erio# of time say = years 3. A !rovisiona) month)y !rofit is given an# at the en# of the year the !rofit is a#@$ste# *ith the act$a) !rofit for the year Cas Wa*+ Certi+icate: 1. A !erson aove 1, years in sing)e or in @oint name an# non3!rofit earning instit$tions can "$y these "on#s for = years or , years of tk. 1000. 2. O*ners of the "on#s can receive !rofits for their !ro!ortionate investment in the "on# at =B of their income from investment "ase# on *eightage as fo))o*s. 3. 4$#ara"ah savings "on# of , year: Eeightage of 1.=

4. 4$#ara"ah savings "on# of = year: *eightage of 1.1

Problem in Islamic Banks

Is)amic "anks in Bang)a#esh have "een enco$ntering n$mero$s cha))enges. /irst( they have not yet "een s$ccessf$) in #evising an interest3free mechanism to !)ace their f$n#s on a short3term "asis. 1hey face the same !ro")em in financing cons$mer )oans an# government #eficits. %econ#( the risk invo)ve# in !rofit3sharing seems to "e so high that a)most a)) of the Is)amic "anks in Bang)a#esh have resorte# to those techni:$es of financing( *hich "ring them a fi0e# ass$re# ret$rn. 6resent)y 0B3?0B investments of Is)amic "anks are ma#e on mark3$! "asis 74$ra"aha an# Bai34$a@@a) etc.9. As a res$)t( the i#ea) mo#es of investment 74$#ara"a an# 4$sharaka9 are :$ite a"sent in their !ractices. >oncentration of Is)amic "anksH investment in short3term tra#e is a !ertinent !ro")em in Is)amic "anking. Is)amic "anks are heavi)y #e!en#ent on Bai 4$a@@a)K4$ra"aha in their o!erations. 1his is #$e main)y to t*o reasons. 1heir orientation is main)y to*ar#s short term financing of tra#e transactions for *hich Bai 4$a@@a)K4$ra"aha a!!ear to "e more convenient #evices com!are# to the system of !rofit3)oss sharing. %econ#)y( they are in com!etition *ith interest3"ase# "anks an# are therefore an0io$s to earn at )east as m$ch on their investments as *i)) ena")e them to give a ret$rn ro$gh)y com!ara")e to !revai)ing interest rates to their investment acco$nt ho)#ers. 1his is easier to achieve "y engaging in Bai34$a@@a)K4$ra"aha transactions as -mark3$!- can "e fi0e# in a manner *hich more or )ess ass$res the re:$ire# ret$rn. /or that reason( the Is)amic "anks are re)$ctant to invest $n#er 4$#ara"a or 4$sharaka( the tr$e Is)amic financia) mechanisms. 1here is a gen$ine concern among Is)amic scho)ars that if interest is )arge)y s$"stit$te# "y a #evice )ike -mark3$!-( it *o$)# re!resent a change @$st in name rather than in s$"stance( an# the ne* system *o$)# not "e any #ifferent from the interest3"ase# system so far as e:$ity is concerne#. It is a)so em!hasi2e# that a!art from e:$ity consi#erations( the !rohi"ition of interest in Is)am is meant to stim$)ate overa)) !ro#$ction( *hich is the mains!ring of gro*th. 1hese

")essings can on)y "e rea!e# if the interest system is com!)ete)y $!roote# in the rea) sense of the term an# re!)ace# "y a f$n#amenta))y #ifferent system )ike !rofitK)oss sharing. 1he im!)ications of the Is)amic financing mo#a)ities for Is)amic "anking are yet to "e f$))y recogni2e#. 1he Base) !rotoco)s are *ith reference to the interest3"ase# "anking system. In their !resent form( they are not #irect)y a!!)ica")e to Is)amic "anking that is essentia))y a #ifferent *ay of "anking. Base)3com!ati")e or Base)3com!)iant arrangements nee# to "e *orke# o$t an# got recogni2e# at the a!!ro!riate )eve). A##itiona) consi#erations for kee!ing Is)amic "anks as "anks( checks against mis$se of Is)amic financia) instr$ments( the %hariah a$#it( etc.( a)so ca)) for in3#e!th st$#y an# form$)ation of a!!ro!riate reg$)atory an# s$!ervisory stan#ar#s. It is evi#ent from the Ann$a) ;e!orts of the %hariah >o$nci)s of the Is)amic "anks that( in many cases( %hariah >o$nci)s *ere #isa!!ointe# at the inor#inate #e)ay in %hariah im!)ementation in the "anking transactions or $n*i))ingness to fo))o* %hariah g$i#e)ines in the "anks "y "oth the o*ners an# management of the "anks. In this regar#( s!ecia) mention can "e ma#e for %hariah g$i#e)ines for*ar#e# to com!)y *ith the act$a) "$ying an# se))ing in Bai 4o#es. 5on3im!)ementation of this sing)e a#vice of the %hariah co$nci)s )ea#s the Is)amic "anks to !ractice Bai34$a@@a) mo#es in a corr$!te# manner( *hich can "e terme# as H>orr$!te# Bai34$a@@a)- mo#es of financing. Ho*ever( some of the to!ica) !ro")ems "eing face# "y the Is)amic "anks are: A"sence of an organi2e# Is)amic inter3"ank money market A"sence of f$))3f)e#ge# )ega) frame*ork for Is)amic "anking %hortage of traine# an# efficient man!o*er committe# to Is)amic "anking 'ack of co3or#ination an# co3o!eration among the Is)amic "anks 'ack of %hariah3com!ati")e reg$)atory an# s$!ervisory stan#ar#s Ina!!ro!riate organi2ation of the %hariah >o$nci)s an# *eak fo))o*3$! of the %hariah im!)ementation stat$s of the Is)amic "anks 'ack of cor!orate governance in the Is)amic "anks

Conclusion
Is)amic "anking system of Bang)a#esh( as a ne* !ara#igm of "anking( has "een a")e to esta")ish its o*n !resence *ith a contin$e# e0!ansion geare# "y increasing acce!tance "y the !eo!)e. 1o contin$e this #ynamic e0!ansion( the first action that #eserves imme#iate attention is the !romotion of the image of Is)amic "anks as 6'% "anks. %trategies have to "e caref$))y #evise# so that the image of Is)amic character an# so)vency as a "ank is sim$)taneo$s)y !romote# Is)amic "anks sho$)# c)ear)y #emonstrate "y their actions that their "anking !ractices are not g$i#e# mere)y "y !rofita"i)ity criterion. 1hey m$st a)so esta")ish that their !ractices ens$re efficient a))ocation of reso$rces an# !rovi#e tr$e market signa)s thro$gh 6'% mo#es. Is)amic "anks sho$)# contin$o$s)y monitor an# #isseminate thro$gh vario$s means the im!act of their o!erations on the #istri"$tion of income !rimari)y "et*een the "ank an# the other t*o !arties: the #e!ositors an# the entre!rene$rs( an# then on #ifferent income gro$!s of the society. 1hese !res$!!ose the esta")ishment of a f$))y e:$i!!e# research aca#emy in each Is)amic "ank.