Islamic Banking in Bangladesh

Topics: Bank, Banking, Fractional-reserve banking Pages: 27 (10359 words) Published: February 18, 2011
International Journal of Islamic Financial Services Vol. 1 No.4

Mohammed Nurul Alam

The article undertakes a case study on an Interest-Free Financial Institution in Bangladesh known as Islami Bank Bangladesh Limited (IBBL). The aim of the study was to see how Islamic banking activities differ from a conventional bank and also to see how Islamic banks may contribute to render financial services towards small and rural sector. By discussing various aspects of the IBBL, it is shown in detail how interest-free bank functions besides many established conventional banks in the country. Although conventional banks are rendering financial services in Bangladesh for a long period still, the innovation of interest-free banking systems, proved its worth in the country’s money market, since IBBL started rendering banking services without any interest in the nation’s financial market in recent years. The article mainly consists of two sections. In the first section, an introduction of Islamic banking systems and various financing modes or techniques used by Islamic banks, are discussed. The second section includes a short history of the Islami Bank Bangladesh Limited (IBBL) along with an empirical based detailed accounts of its financial activities in the country since the introduction of this financial institution in the financial system of Bangladesh.

Introduction The introduction of interest-free and equity-based financing by the Islamic banking system is based on the principles of Islamic economics. The aim of Islamic economics, as observed by Molla (1988), is not only the elimination of interest based transactions and the introduction of the zakah (contribution to poor) system but also the establishment of just and balanced social order free from all kinds of exploitation. The Islamic banking system is highlighted in the World Development report (1989, Box 6.3), as under; “ Islamic banks offer savers risky open-ended mutual fund certificates instead of fixed-interest deposits. (This is not unlike cooperative banks and mutual in the west, where deposits earn variable interest and double as equity.) Difficulties arise on the lending side. Arrangements to share profits and losses lead to considerable problems of monitoring and control, especially in lending to small business”. Ahmed (1994), argues that elimination of interest does not mean zero-return on capital. Rather, Islam forbids a fixed predetermined return for a certain factor of production i.e. one party having assured return and the whole risk of an entrepreneurship to be shared by others. The author also observed that it is the capital entrepreneurship that shares both the real contribution and the real profitability. The Islamic bank follows the principle of equity basedinvestment. The Islamic banking system also proposes that resources can be contracted on the basis of venture capital and risk sharing deals. The idea of equity-based investment banking is not new to the financial market. If we look into history it may be observed that capital, as loan capital as well as venture capital played a great role in promoting industrial and economic development of various countries of the world. For example, during the 19th and 20th centuries investment banks played a great role in French tradition while in British model of banking equitybased investment was limited. Similarly in Germany equity-based investment was being practiced by commercial banks during that period. Even the banking crisis in the western world during the great depression in the 30’s or the 80’s proposed two-tire banking i.e. hundred percent deposit banking and the equity-based investment banking.

International Journal of Islamic Financial Services Vol. 1 No.4

In the modern financial market an alternate arrangement for participation of capital and entreprenurship started with the advent of Islamic Banking in the 70’s. In a number of...
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