Islami Banking

Islami Banking a new concept of banking that operates on principles adhering to the Quranic norms forbidding usury and transactions, including granting of loans or credits for interest. The economic rationale for eliminating riba (interest) and establishing the Islamic banking system is based on values of justice, efficiency, stability and growth. It is assumed that under the system of Islamic banking, the industrial and/or commercial risk is shared more equitably between the entrepreneur and the capital owner and the returns on investment are shared among the investors on the basis of their proportionate capital. The conventional banks tend to serve the most creditworthy borrowers, while the Islamic banking system presumably looks for the most productive and profitable projects. The Islamic banking approach theoretically opposes the idea of discrimination in offering banking services to people of different social standings and provides for social cohesion among all classes.

The origin of Islamic banking can be traced back to the practice of mudaraba by the Prophet Muhammad (Sm) himself. The Prophet (Sm) was mudarib (agent) for his wife, who entrusted her capital or merchandise to him for trading and got back the principal plus an agreed share of the profit. As a reward for his labour and entrepreneurship, the Prophet (Sm) received his share of the same as a mudarib. The mudarib, however, was not liable for losses resulting from the risks of travel or from an unsuccessful business venture. This form of partnership is called ‘mudaraba’. There is another form of partnership called musharaka, in which the musharik (agent) has a contribution to the capital and can therefore, claim a higher percentage of profit. As early as in the Seventh century, the tax revenue from Iraq was sent across the desert to Medina in the form of a mudaraba. Caliph Umar is known to have invested orphans’ money in merchant trading between Medina and Iraq. Musharaka partnerships were practiced in the north-south trade between Egypt and Jeddah during the Eleventh century. As many as 32 mudaraba contracts were practised in the 17th century in the Turkish city of Busra. Mudaraba was in practice in Tunisia, Indonesia, Arabian Peninsula and India.

Modern Islamic banking concepts came from the historical practice of the concept of a ‘three-tier mudaraba’. On the first tier, there is the individual, rab-al-mal, who wishes to invest capital. The second tier is the mudarib (agent), to whom the rab al-mal entrusts his capital by contract and finally, on the third tier, there is the entrepreneur, with whom the mudarib signs a contract, and to whom the mudarib passes the capital originally entrusted to him by the rab-al-mal.

The first attempt to establish an Islamic financial institution took place in Pakistan in late 1950s with the establishment of a local Islamic bank in a rural area. Borrowers of the bank did not pay interest on the credit advanced, but a small charge was levied to cover the bank’s operational expenses. Although the experience was encouraging, two main factors were responsible for its failure. First, the deposits made in the bank were to be held for long and the depositors, who were mostly the landlords found that with increasing number of borrowers the gap between the amount of capital available and that of the credit demanded had become very large. Secondly, the depositors showed considerable interest in the way their money was lent out but the bank staff did not have complete autonomy over the bank’s operations and therefore, could not always satisfy the customers in this regard.

The second experiment with Islamic banking was conducted in Egypt between 1963 and 1967 through the establishment of the Mit Ghamr Savings Bank in a rural area of the Nile Delta. The bank’s operations were based on the same Islamic principles of no-interest to depositors or from the borrowers. Unlike the Pakistani case, the borrowers made deposits in the bank for credit facilities. On the basis of success in the experiment more branches were soon opened in different parts of Egypt to develop a network of local savings banks. The project suffered a setback due to political unrests in the country but was revived in 1971 under the name of Nasser Social Bank, which became the first Islamic bank in the urban setting based in Cairo.

Following the example of Egypt, Islamic banking emerged in Malaysia in 1963 and in Dubai in 1975. A significant development in Islamic banking was the granting of a license to Islamic bank in Saudi Arabia. This bank was established by the fifty-year old Al-Rajhi Company, a firm with assets valuing more than $5 billion and noted for its currency, exchange and commercial activities. The bank started operations in 1985 under the name of Al-Rajhi Banking Investment Corporation and later, developed active relationships with major manufacturing and trading companies in Europe and several US corporations. The success of Al-Rajhi in operating profitably in different regions of the world motivated the Saudi government to go for full-fledged Islamic banking. In 1975, the Muslim countries have founded Islamic Development Bank as a multinational corporation to support social and economic development in Muslim nations within an Islamic Framework. Bangladesh is a member of the Islamic Development Bank.

Islamic banking started in Bangladesh through establishment of the islami bank bangladesh limited (IBBL), which is considered to be the first interest-free bank in Southeast Asia. It was incorporated on 13 March 1983 as a public limited company under the companies act 1913. In December 2010, IBBL had 237 branches, its authorised capital was Tk 1000 million and paid up capital Tk 640 baraka bank Ltd, often called the second Islamic bank of Bangladesh, commenced banking business on 20 May 1997. At present, the bank is functioning as ICB Islamic Bank Ltd. It is a joint-venture enterprise of Al-Baraka Investment and Development Company, a renowned financial and business house of Saudi Arabia, Islamic Development Bank, a group of eminent industrialists of Bangladesh, and the government of Bangladesh. The authorised capital of the bank is Tk 600 million and its paid up capital is Tk 259.55 million. The bank has now 35 branches in different parts of the country. In addition to extending conventional commercial banking facilities to its customers, the bank gives substantial financial support to the implementation of industrial and real estate projects.

In 1996, two more Islamic banks were given clearance to operate under Islamic banking principles. They were the Al-Arafah Islami Bank Ltd and Social Investment bank Ltd. The fifth Islamic bank of the country is shahjalal islami bank limited, which emerged as a scheduled bank in 2001 and started banking on 10 May. Its present authorised capital is Tk 600 million and paid up capital Tk 3425 million. It has 52 branches. The performance of shahjalal Islami Bank is quite satisfactory. Meanwhile two traditional banks, export-import bank limited and the First Security Bank have turned into complete Islamic Banks. Exim Bank went into banking operation in 1996 and started its new journey as an islami bank in July 2004. Its authorised capital is Tk 3500 million and paid up capital Tk 2677 million. Exim Bank has 58 branches. Both the banks are doing better business after becoming interest free institutions.

These seven Islami banks, now operating in Bangladesh have altogether 532 branches throughout the country covering both urban and rural areas. Their Banking activities and services are expanding day by day. Islami Bank Bangladesh Limited has the highest number of 238 branches. A new phenomenon has been emerged in the banking sector of Bangladesh. The dominating traditional scheduled banks have been accommodating islami banking in their regular operation. 12 scheduled banks and three leading international banks Standard Chartered Bank, HSBC and Bank Al-Falah Limited have already opened up 25 branches having both islami banking and traditional banking. The number of such branches is being increased, as the change of role is considerably significant. More government owned commercial banks and private banks of traditional nature have applied to Bangladesh Bank sacking permission to open islami-banking branches.

According to the Bangladesh Bank report, the amount of collective deposit of all islami banks is equal to 26.05% of total deposits of commercial private banks and 17.98% of that government’s commercial banks. Similarly the total investment of islami banks is equal to 29.27% and 22.15% of that of public and private commercial banks respectively. The comparative analysis reveals that only seven islami banks out of the country’s 49 commercial banks controlling 20% share of the national economy. At present all the islami banks have a deposit of Tk 442,750 million. Among those, Islami Bank Bangladesh Limited (IBBL) ranks the top position in terms of highest growth of investment and deposit as well. These banks play an important role in transacting remittance from non-residence Bangladesh. The goodwill, earned by islami banks, for that matter is praiseworthy. IBBL has been retaining the top rank for the last five years in this service. All Islami Bank are enlisted in the Dhaka and the Chittagong Stock Exchanges and they have been collecting capital from the people by issuing primary share or Initial Public Offering (IPO). Modern banking services like ATM card and on-line banking facilities are also offered by Islami Bank. All these steps taken by islami banks prove that their activities, directed for the development of banking and the services for investment are programmatic. [Muzahidul Islam]