The government has finally introduced Sharia-based short-term investment bonds for institutions and banks which seek to invest in interest-free financial instruments. The first auction for this type of bonds took place on January 01, 2015. On the very first day, bids amounting to Tk 856 million were offered by Sharia-based Islamic banks. All bids for the three-month bonds were accepted.
Since the Islamic banks or the buyers of the bonds will have to share the profit from this investment, the ratio of such profit has been fixed at 90:10. That is, if we understand it correctly, the Islamic banks or the buyers of the bonds will receive Tk 90 and the government – the seller of the bond – will have the rest Tk 10 out of a profit of Tk 100. But this ratio may not remain fixed for the new bids in the coming months or years.
The bond that was offered to be sold to Bangladesh’s Islamic banks and non-banking financial institutions has been named as the Government Islami Investment Bond or BGIIB. The introduction of this bond in our financial system was long overdue. We wonder why it took so long to introduce such bonds when Sharia-based interest-free banking in the economy saw a rapid growth in the last two decades and when they have idle resources for short-term investment.
The Sharia-based banking and financial system avoid interest as the fee for intermediation between the lenders and the borrowers. They operate on profit-loss sharing basis. In other words, these banks, accepting deposits from the public, do not offer any interest or a pre-fixed price for borrowing money. Instead, they offer profit-sharing option to the depositors. The profit rates or the sharing ratios do not remain fixed; these vary and are made clear to the depositors beforehand.
In case of buying government bonds of different durations like BGIIB, the Islamic banks are the investors, not the investment fund takers. Here money received from such sales will be used by the government. As we understand, the government will have to share with the investing banks of the profit (or loss) to accrue from the use of fund collected from such sales. Now the main question is: how will the government use such fund? That is, whether such fund will be used in specific projects or to meet specific expenditure and whether government use of the fund will comply with Sharia requirements. We hope, this aspect of concern will be taken care of by the government to the satisfaction of investing banks. However, investment fund sourced from the Sharia-based institutions or persons wanting to avoid interest will have a better use in specific projects having commercial purpose.
If the government wants to use the funds for longer term in specific projects, then this type of short-term bond will not be appropriate. Financial instruments like long-term bonds complying with the Sharia requirements, popularly known as ‘Sukuk’, will be appropriate here. From specific projects, it becomes easier to calculate profit and loss, and the profit (also loss) can be shared with the fund suppliers or ‘Sukuk’ buyers on a pre-agreed ratio.
Another issue that concerned the Islamic banks for long was the absence of opportunity of investing in the Bangladesh Bank’s interest-bearing short-term money market instrument, the Treasury bill. For long, as our knowledge goes, Islamic banks had forgone interest from such investment and that put an extra burden on banks’ financial management. It should be mentioned that under the regulatory requirements, all banks, including the Islamic ones, were needed to purchase treasury bills up to a percentage of their deposit receipts. We hope, by now that problem has also been solved or will be resolved soon. Recent reports said that the Bangladesh Bank has been working on the modalities and operational aspects of other Islamic financial instruments including ‘Sukuk’.
The whole world has now accepted Islamic mode of financing as a financing model alternative to that of interest-bearing one. Many scholars opine that interest-free financial system is more stable and at the end, more rewarding to the stakeholders also. The Islamic financial system is no longer confined to some Muslim countries only; rather many non-Muslim countries, including England, France and Germany, are in competition to open up their financial markets to such financing. Though interest-free system has its roots in people’s religious faith, in practice it could be accepted and operated by anybody irrespective of religious faiths. The value of worldwide Islamic financial system now amounts to about $2.00 trillion. The value addition to the Islamic system has seen a faster rate of growth than that of the traditional interest-based system.
Bangladesh permitted Islamic banking in the early 1980s when it allowed other interest-based private commercial banks in the economy. By now, eight full-fledged Islamic commercial banks have come into being and together they are controlling more than 25 per cent of the banking market. More banks are seeking to go Islamic simply because people are keen on this. The Dhaka Stock Exchange has also introduced a Sharia-based stock Index in the face of demand from a section of investors.
All these indicate that people are now more interested in Islamic mode of financing in place of the system based on pre-fixed interest payment obligation. Bangladesh can be a leader in Islamic financing if appropriate Islamic financial instruments could be designed and regulations put in place. A system that earns people’s confidence normally gives better results.
By Abu Ahmed, professor of Economics University of Dhaka. email@example.com
Courtesy: The Financial Express