Regulating, supervising Islamic banks

The Bangladesh Bank (BB) issued a licence in 1983 under the Banking Companies Act 1991 for the establishment of the country’s first Islamic bank. The government of Bangladesh had participated in establishment of it by holding five per cent stake of its paid-up capital. Though there is no complete Islamic Banking Act in Bangladesh, some Islamic banking provisions have already been incorporated in the amended Banking Companies Act, 1991 (Act No. 14 of 1991).

islamic bondThe BB did not set up any separate department to control, guide and supervise operation of Islamic banks. Though there is a dedicated Inspection Department for inspection of Islamic banks and foreign banks, the inspection and supervision of Islamic banking operations are conducted by the BB as per the general guidelines framed for conventional banks. So, ensuring implementation of Shariah principles in Islamic banks is being conducted by their own Shariah Committees. In maintaining the Shariah implementation status of Islamic banks, the BB examines only the report of a bank’s Shariah council.

To support Islamic financial markets and instruments in the country, the BB granted some preferential provisions. For example, Islamic banks in Bangladesh have been allowed to maintain their Statutory Liquidity Requirement (SLR) at 11.5 per cent of the total deposit liabilities while it is 19.5 per cent for conventional banks. In the deregulated regime, Islamic banks are allowed to fix their profit-sharing ratios and markups independently commensurate with their own policy and banking environment. This freedom in fixing profit-loss sharing (PLS) ratios and markup rates provided a scope for the Islamic banks to follow the Shariah principles independently.

However, the Islamic banks are to abide by the restriction on interest rate spread of the BB. At present there is no central Shariah supervisory board to monitor and examine the functions of Islamic banks in Bangladesh. The BB depends on the Shariah certificate provided by the Shariah Supervisory Committee of an Islamic bank.

The BB formulated a guideline in 2009 for conducting banking business by Islamic banks or Islamic bank branches of conventional banks. Based on the recommendations of a focus group, this guideline embodied different terminologies used in Islamic banking operations, definition of the terminologies and the principles and modes of deposits and investments. It also dwelt on the issues like liquidity, maintenance of books of accounts and preparation of financial statements and other related issues. The guideline is treated as supplementary, not substitute, to the existing banking laws, rules and regulations. The rules under the Banking Companies Act, 1991 and Companies Act, 1994 prevail for any point not covered under the guideline and in the event of any contradiction. It refers to the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) standards for accounting and auditing in the event of preparation and disclosure of financial statements.

The BB guideline pointed out specific criteria for setting up any full-fledged Islamic bank in the country. The banking company is to maintain the required capital adequacy ratio, as prescribed by the Bangladesh Bank. Practically, the provisions relating to establishment of Islamic banks and appointments of chief executives for both conventional and Islamic banks are almost same. The guidelines identified terms and conditions for conventional banks to obtain the licence for opening any Islamic banking branch. According to the BB guideline, an Islamic Banking Division can be set up in the head office of a local bank or in the country office (in Bangladesh) of a foreign bank.

As noted in the BB guideline, separation of funds of Islamic banking branches and control and pursuance of appropriate procedures are to be ensured for safeguarding the interest of depositors. In this connection, an operational manual on how to run Islamic banking business is to be prepared and approved by the respective board of directors of a bank. In the event of a foreign bank, it is to be approved by their head office. The banks have to maintain a separate accounting system for their Islamic banking branches. For this purpose, separate ledger books, software etc. are to be maintained. All other terms and conditions as set by the BB for opening a bank branch will be applicable.

The BB guideline has also prescribed the necessary measures for conversion of a conventional bank to an Islamic bank in the country. The guideline stipulates Shariah principles for receiving deposits and making investments by Islamic banks under different modes including export and import business, remittance and other banking services. Besides, the Islamic banks are to fully abide by the national and international norms and guidelines relating to export and import business. Islamic banks can render miscellaneous banking services like locker service, receipt and payment of clients’ bills, issuance of guarantee and working as agents of clients against commission or service charges. Collection of service charges or commissions for rendering those services is permissible under the Shariah.

According to the BB guideline, in case of liquidity surplus and crisis the Islamic banks or branches of conventional banks may invest in the ‘Bangladesh Government Islamic Investment Bond’ (Islamic Bond introduced by the government). In the same way, Islamic banks or branches facing a liquidity crisis can tide over the crisis by seizing investment from Islamic Bond funds as per the prescribed rules. The BB initiated introduction of the Islamic Inter-bank Fund Market (IIFM) for Shariah-based banks in 2012. In such a market, transactions are based on profit instead of interest. If any bank has any excess fund, it may invest the amount in the IIFM for one day. Though the IIFM has been formed in the model of the traditional call money market to remove the temporary and short-term liquidity crisis of Islamic banks, it is yet to attract substantial response from the market.

To engage Islamic banks in the agricultural and rural development, the BB introduced the Funding Assistance Programme-from Islamic Shariah-based financing to agro-based product processing industries in rural areas and small enterprises (including women entrepreneurs) in October, 2013. As per the circular, an Islamic bank ought to sign a participation agreement with the SME and the BB. Banks are also to abide by ‘Guidelines for Islamic Banking’, ‘Prudential Regulations for Banks’, ‘Prudential Regulations for Financial Institutions’ and other regulations put in place by the BB from time to time. Alongside regulating and supervising, the BB is undertaking different awareness and academic activities for promoting Islamic banking in the country.

By Dr Shah Md Ahsan Habib, a Director (Training) at the BIBM.

Courtesy the Financial Express