With due respect, I would like to inform you that it is my great pleasure to present my research report on “Concept of Islamic Banking in Bangladesh” under your supervision as a requirement for BBA degree from United International University. The main purpose of this study is to understand the concept of Islamic banking system and Islamic banking in Bangladesh.
Introduction
- Background
- Objectives of the Study
- Scope of the Study
- Limitation of the Study
- Research Methodology
The purpose of the study is to explore the concept of Islamic banking systems in Bangladesh and how Islamic banks perform compared to conventional banks. Finally, Islamic Banks auditor report and financial report are analyzed to present the performance of Islamic banking sector in Bangladesh.
Overview of the Islamic Banking System
- Introduction to Islamic Banking
- Concepts of Riba (Interest) in Islam
- History of Islamic Banking
- History of Islamic Banking System in Bangladesh
- Difference between Islamic Banking and Conventional Banking System
The principle of Islamic Bank is to follow Islamic Laws (Sharia) and operates according to the Quran, Hadith and the sayings and practices of the Prophet Muhammad (Peace be upon him). In the Islamic banking system, real assets are the product of the bank and money is only a medium of exchange.
How Islamic Banking System Works
- Principles of Islamic Banking System
- Sources of Funds of Islamic Banks
- Capital & Equity
- Current Accounts
- Saving Accounts
- Investment Accounts
- Utilization of Funds of Islamic Banks
- Mudarabah (capital financing or profit sharing)
- Al-Murabaha (Cost-plus profit or markup financing)
- Musharaka (Partnership)
- Bai’Muajjal (deferred payment or credit sale)
- Bai’Salam (advance payment or pre-paid purchase)
- Ijara (leasing or hire purchase)
- Qard Hassan (Benevolent loan or interest-free loan)
- Products and services of Islamic Banks
- Deposit Scheme
- Investment Scheme
- Foreign Remittance Service
- ATM Service
- Online Banking
- SMS Banking
- Locker Service
Sharing of risk: In the economic transaction, both the bank and the customer share the risks of that transaction. The money invested to start the operation of the bank is therefore the capital of the bank. However, all the information about the business must be transparent and available to the bank.
The bank receives the principal together with any accrued profit according to the share agreed upon at an agreed time. Hasan is also allowed to manage the business on behalf of the bank. So he will enter into an agreement with the bank and pay cash to the bank in advance.
It is a legally binding contract under which the bank purchases goods such as machinery, land or real estate and rents them to the customer. After opening the account, the customer receives a monthly compensation from the bank based on the amount deposited. With these types of accounts, the customer deposits money into the bank and the bank invests that money.
The bank will purchase goods according to the customer's requirements and then sell them to the customer on a cost plus profit basis. Ownership of the asset remains with the bank until the customer pays the full price of the asset.
Islami Bank Bangladesh Ltd (IBBL)
- IBBL at a glance
- Mission and vision of IBBL
- Objectives of IBBL
- Products & Services of IBBL
Bangladesh is one of the largest regions of Muslim communities where most of the people are Muslims. However, in 1983, Islami Bank Bangladesh started its operation to meet the demands of Muslims. IBBL started its Islamic banking operation on March 30, 1983, which ushered in a new era in the history of the financial market of Bangladesh.
Now IBBL has more than 350 branches and more than 2700 agent outlets and more than 1800 ATMs located in different areas of Bangladesh. Mission: IBBL's primary mission is to establish a disinterested Islamic banking system to serve the welfare of the people of Bangladesh. They also aim to invest in the priority sector and less developed and rural areas of Bangladesh to raise the standard of rural exit as well as to achieve balanced and equitable growth in the county.
Their vision is also to establish and maintain modern banking techniques based on Islamic Sharia so that the financial system of Bangladesh can develop and be efficient by employing highly motivated experts from banking sectors so that the common people of Bangladesh can benefit from transparency, accountability, integrity and ease of use of the financial transaction. Another vision of IBBL is to encourage savings in the form of direct investment which will contribute to the welfare of the society and lead to a higher employment rate in Bangladesh. To diversify investment and expansion by investing in the priority sector of Bangladesh, women entrepreneurs, rural areas and SMEs that show potential in the development of the country.
Social Islami Bank Limited (SIBL)
- Overview of SIBL
- Mission and Vision of SIBL
- Values of SIBL
- Products and Services of SIBL
SIBL was incorporated on July 5, 1995 as a public limited company and started operations on November 22, 1995. SIBL was established to serve the society and reduce poverty in Bangladesh to increase the standard of living. This motto and the name of the company Social Islami Bank Limited prove that they are committed to create a caring society and work for the welfare of the society, following Islamic Sharia banking.
In 2010, SIBL was listed on the Dhaka Stock Exchange (DSE) with an authorized capital of 10,000 million taka and 8,933 million taka paid-up capital. Mission: Their motto is "Working Together for a Caring Society", which means they want to serve society by eliminating poverty in Bangladesh. Vision: Their primary vision is a one-stop solution for every financial and banking service while following the Islamic Shariah and becoming a leading financial institution in Bangladesh while eradicating poverty and working for the welfare of society.
SIBL aims to use modern technology to deliver innovative, better and more efficient products and services to satisfy the needs of the customers. They want to empower real poor families by creating income opportunities and increasing their income level so that poverty is eliminated.
Overview of Other Islamic Banks in Bangladesh
- EXIM Bank
- Al Arafah Islami Bank Ltd (AIBL)
- First Security Islami Bank ltd (FSIB)
- Shahjalal Islami Bank Limted (SJIBL)
Exim Bank also known as Export-Import Bank of Bangladesh was established in 1999 and started its operations on 3 August 1999. First, EXIM bank was registered as Bengal Export Import Bank Ltd (BEXIM), however, due to legal restrictions , the name was changed to EXIM Bank on November 16, 1999. The main mission of EXIM Bank is to provide a complete Islamic banking system to its customers while maintaining transparency, accountability, quality, CSR and the use of technology to introduce products and innovative and efficient services.
Exim Bank has diversified its investments in various sectors such as textile, RMG, steel, telecommunication, agriculture and many others. AIBL's mission is to achieve the full establishment of Sharia-Based Islamic Banking to contribute to the growth of the national economy of Bangladesh. AIBL's vision is to be the leading Islamic Bank following full Islamic Shariah to make Bangladesh economically developed by providing enhanced financial services.
FSIB started its operations with 10,000 million taka and now has paid up capital of 7,840 million taka. The authorized capital is 15,000 million taka and now the paid up capital is 10,291 million taka. The main mission is to operate a banking system in accordance with the principle of Islamic Sharia to serve the well-being of the people.
Performance of Islamic Banking Sector in Bangladesh
In line with the global growth in Islamic finance, Islamic banks in Bangladesh have also shown tremendous growth and performance in the past year. Also, Bangladesh Bank, the central bank of Bangladesh, has made easy policies for Islamic banks that support the development of Islamic banks and the economy. Of these 61 scheduled banks, there are currently 10 full-fledged Islamic banks in Bangladesh operating under the principles of Islamic Sharia.
There are a total of 10,942 bank branches in Bangladesh, of which 1,679 branches are operated by Islamic banks. The total deposits of Islamic banks in March 2022 was 28% compared to the total deposits of the entire banking sector in Bangladesh. This table illustrates the total investment of loans and advances of Islamic banks from March 2021 to March 2022 and the percentage change from March 2021 to December 2021 and from December 2021 to March 2022.
The total investment of Islamic banks in March 2022 was 27.78% compared to the total investment of the entire banking sector in Bangladesh. Here we can see that the branches of the Islamic banking sector have increased drastically from 1,755 points in March 2021 to 2,154 points in March 2022. This means, out of all the branches of the banking sector in Bangladesh, the Islamic banking sector holds 19.69% of bank branches.
Findings
The concept of Islamic banking system is not as clear to many people in Bangladesh as the concept of conventional banking system. The conventional banking system has been functioning all over the world for decades, but the modern era of Islamic banking system developed in Bangladesh in late 1983, when very few people had knowledge about Islamic banking. However, the concept of Islamic banking is very extensive. Through this research paper, people can gain some knowledge about the concept of Islamic banking system and how it works.
The main principle of the Islamic banking system is that it is interest-free banking instead of operating on a profit and loss sharing basis. It is also very important to understand the concept of riba or usury in Islamic banking. Since Islamic banks do not handle interest, the banks have to provide innovative products and services.
Lack of knowledge in this area has caused many potential customers not to invest and deposit in Islamic banks. Also without authentic and clear knowledge of what is permissible and what is prohibited in Islam, Islamic banking is very difficult. So, the product schemes and services of the Islamic banking system have been briefly discussed in this project.
Conclusion
Bangladesh is predominantly Muslim, and there is a potential demand for an Islamic banking system that follows Islamic Sharia. Islamic banks primarily operate by collecting deposits from customers and then investing those deposits in various business sectors of the country. Because interest is completely prohibited in Islam and follows Islamic Sharia, they operate on the basis of capital gains and shares.
This means that they invest in various projects and companies of the economy and share profits or losses with their customers. This injects money into the economy and money is used which contributes to economic growth, development of social norms alleviates poverty and increases employment levels in a country. However, in addition to making profits, the aim of Islamic banks is to achieve the well-being of society, stabilize economic growth and reduce unemployment.
About 20% of the banking sector consists of Islamic banks and this percentage is increasing day by day. This means that people are coming to understand the concept of Islamic banking system as the days pass by. The overall performance of Islamic banks is also growing as discussed in this thesis.
