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Monday, September 28, 2020 08:57:20 PM
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Islamic Finance Still Lacks A Comprehensive Law

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Md. Harun-Or-Rashid :
The popularity of Islamic finance is on the rise around the world not only the Muslim majority nations rather non-Muslim nations like USA, UK, Hong Kong, Singapore, Thailand and Philippines and are practicing more ethical and responsible mechanisms while making transactions. Financial agreements are issued in accordance with Islamic Shariah law by sharing risk between the investors and the borrowers without the collection of riba (interest) and prohibits business dealings in alcohol, pornography, arms manufacturing, tobacco or poor products (products which are not permitted by shariah law).
At present, eight fully Shariah compliant Islamic banks has been operating their banking activities with more than 1273 branches in Bangladesh, in addition, 19 Islamic banking branches of nine commercial banks and 88 Islamic banking windows of eight commercial banks (both local & foreign) are also providing Islamic financial services throughout the country.
In Islamic banking model, the banks owns the property, the banks gives you the property on rent basis or you will buy the property and ultimately the banks takes the risk. And the banks share the profits to the depositors. The key notion here is risk sharing, the banks makes a profit on the transaction as a reward of the risk they took with the customer.
As on December, 2019 total deposit of banking sector of Bangladesh stood at BDT 11.37 trillion out of which deposit of Islamic banks stood at BDT 2.64 trillion i.e. 23.22% of total deposits and aggregate market shares of Islamic banks were valued more than 20.00%. And deposit portfolio of Islamic banking windows and branches of conventional banks stood at BDT 0.17 trillion and investment stood at nearly BDT 0.08 trillion as on December 2019.
According to Islamic finance service report the global Islamic finance industry was valued approximately BDT 230 trillion while total Shariah-compliant assets are expected to grow to BDT nearly 298 trillion by 2021. Even though the growth of Islamic banking has outstripped that of conventional banking in recent years, it still represents only 1.00% of the whole banking market around the world while competing with the mainstream financing institutions because of absence of comprehensive law, fiscal economies, cost of funding, standards and codes, absence of Shariah compliant money market, absence of Shariah compliant court, institutional reforms like taxes policies, capital markets development and LIBOR reforms etc.
As a substitute of thriving off of interest rates, Islamic banks use their money to acquire assets such as property or business and profit if the investment is successfully repaid. And if something went wrong the bank is exposed it to the market value of the house. Henceforth, the two key aspects of Islamic financial systems are it asset-based and sharing of risk & reward between the provider of funds (the investor) and the user of funds (the entrepreneur).
Shariah compliant banks need to share the profit and loss of the enterprise they invest in. An Islamic law prohibits gambling and making money out of chance and uncertainty rather than from effort. And risk sharing is lacking because profit and loss sharing modes are so infrequently used. Islamic finance is trying to remove loan plus interest element, disregard concept of money upon money and prohibits derivatives (artificial transactions) like forwards, futures, options, swaps etc. which substantially protected Islamic banks during 2008 financial crisis. It helps strengthen financial stability. As the 2008 global financial crisis ravaged financial systems around the world, Islamic financial institutions were relatively untouched, protected by their fundamental operating principles of risk-sharing and the avoidance of leverage and speculative financial products.
Unlike their conventional counterparts, Shariah compliant banks were not involved with toxic assets and resisted the shock better. The objective of an Islamic finance undertaking is not simply the pursuit of profit, but that the economic benefits of the enterprise should extend to goals such as social welfare and full employment. Islamic finance could help bring about more inclusive economic growth by allowing underserved populations to access banking that is grass root banking.
However, critics suggest that Islamic financial institutions and the traditional counterparts are not so different by saying that there is no other formal interest and equivalent comes in a disguise forms and much of the infrastructures in Islamic finances closely remix that of the western counterparts. Also, they have said, some Islamic banks are not adhering to Shariah principles and are instead copying more financial models of traditional banks as well.
Islamic finance still faces many challenges, however, in practice, Islamic banks have to work within the existing conventional market economy and perhaps, the issues are identifying as the distinguishing nature of Islamic economy and finance has to fit into the existing systems.
Shariah scholars have to be more independent though they are being highly paid by the institutions, most importantly, improve the morality of Islam to prevail Islamic financial systems. Notable, in Bangladesh, Islamic Bank Bangladesh Limited started its journey in 1983 and in 2009 i.e. after 26 years of inception of IBBL, we have found only a guideline and yet to receive a comprehensive law from competent authority to make Islamic financial systems more popular.

(Mr. Harun works at Social Islami Bank Limited as Manager Operations, Certified Finance Specialist, Certified Project Management Analyst)

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