When a minuscule droplet of lime evades the clasp of betel leaves, some incite commotion with their lips. In the domain of banking, their pursuits currently pivot towards Islamic banking—an industry experiencing remarkable expansion over the years. This surge can be ascribed to its prioritization of welfare-oriented practices over profit-centric methodologies, marking a paradigm shift that has left many conventional banks grappling with newfound challenges.
When global banking analysts foresaw a considerable rise in the global Islamic financing market during the forecast period between 2024 and 2031, certain media outlets began circulating rumours about a liquidity crunch in some banks. This narrative portrayed the decrease in excess liquidity as alarming news for the banks. For instance, citing Bangladesh Bank data, a daily report highlighted that Shariah-based banks witnessed a decline in excess liquidity within a year.
It's noteworthy that excess liquidity at Islamic banks dropped from Tk 175.25 billion to Tk 77.67 billion by the end of September 2023, compared to the same period last year. Regrettably, the Daily failed to acknowledge that while liquidity on the current date might be positive, excessive liquidity can result in lower returns in the future and an elevated risk profile. For instance, if a company's liquidity is inflated by current debtors, there exists a risk of default during that period. Therefore, it's imperative to consider the intricate relationship between liquidity management and risk mitigation, beyond the immediate portrayal of liquidity metrics.
Meanwhile, this report has created panic among depositors of many Islamic banks and financial institutions at a time when Islamic banking has been playing a pivotal role in creating employment opportunities for the 120 million individuals in Bangladesh. Shariah-based banking commands significant market shares in various sectors, with a breakdown as follows: 26% in deposits, 26% in imports, 24% in exports, 39% in remittances, 27% in industrial finance, 17% in agricultural investment, and 38% in SMEs. These impressive market shares underscore the growing preference for Islamic financial products and services in Bangladesh and reflect the trust placed in the principles of Shariah compliance, which not only aligns with religious beliefs but also offers financial stability and ethical investment opportunities.
According to the World Bank, globally Shariah-compliant financial assets are currently estimated at roughly $2 trillion, covering bank and non-bank financial institutions, capital markets, money markets and insurance. In Bangladesh, Islamic banking witnessed significant growth over the last decades since the launch of Islami Bank Bangladesh in 1983, which has played a substantial role in sustaining the nation's economic landscape. Islamic financial institutions are pivotal in facilitating agricultural financing, thereby enhancing food security, fostering the growth of the financial sector, and promoting broader financial inclusion.
However, this growth stands at a crucial juncture due to a decline in public trust in the country's banking sector. Recent financial scandals have unveiled mismanagement and corruption, compounded by misinformation about Islamic banking due to inadequate knowledge. Certain media outlets have specifically targeted Islamic banking, circulating unwarranted negative news and rumors of irregularities. Consequently, public confidence has suffered, prompting substantial withdrawals from bank deposits. Speaking anonymously, a senior Bangladesh Bank official emphasized the need for journalists to navigate intricate financial landscapes with integrity, eschewing sensationalism and ensuring precise representation.
Some senior bankers working in Shariah based banks also expressed grave concern over some misleading negative reports published in some newspapers and social media. But the reality is that the Islamic banking system stands on sound footing with remarkable growth over the years with a 30 per cent market share. For example, Islamic banks have expanded Islamic banking wing in 80 countries through 1400 institutions with assets of around $ 2.50 trillion. Islami Bank Bangladesh PLC alone has set a new milestone by collecting foreign remittances worth $700 million in January 2024 and recorded an impressive 34% growth in exports in 2022. For the impressive growth history and seeing bright prospect of Islamic banking innovations, most conventional banks -both foreign and local are now directing their focus towards Islamic products, either by establishing new Islamic branches or converting them into full-fledged Islamic banks.
Islamic banking in Bangladesh grabbed the news headlines after Bangladesh Bank in last September sent directives to 15 banks including state-run banks through its observers and coordinators to improve their respective financial health. But the question is why the Islamic banks are becoming the target of misinterpretation when this Sharia-based banking has surged as a dominant force in Bangladesh, witnessing remarkable growth in deposits and investments amidst rising demand for interest-free financial instruments and profit-sharing arrangements. For example, Islami Bank Bangladesh, PLC ( IBB) alone captured around 35 per cent market share of the country's total remittances and more than 50 per cent of the Islamic Banking industry in January thanks to its strong relationships with 594 banks and financial institutions in 64 countries around the world and its API to deliver money to the relatives of the expatriates quickly and safely. The bank retained the top position in remittance collection for the last 16 years and has added 12.5 billion USD in the reserve of the country after meeting its all import expenses which play a vital role in the economy.
The future of Islamic banking will be decided by the relationship between banks, customers, and other stakeholders when the transformative technologies shape the next generation of financial services. Here, the role of media is crucial.
In the dynamic global financial arena, Islamic banking has emerged not merely as a religious sentiment but as an innovative force, driven by its welfare-centric business model. Unlike conventional finance, plagued by opacity and inequity, Islamic banking boasts a transparent structure devoid of intricate black boxes that demand a genius to unravel.
When the global Islamic finance market is growing moderately, because of the strong investments in the Halal Sectors, infrastructure, and Sukuk bonds, especially through electronic modes in all products and services, there is speculation that some Islamic banks in Bangladesh suffer liquidity stress owing to a deposit withdrawal spree. Many bankers say that customers won't trust banks for a generation and at the same time banks would lose confidence in the high-profile customers of their default culture if we fail to restore trust and confidence in banking. As the negative reports on Islamic banking grabbed the news headlines, many clients of these Islamic banks became worried about their deposits. This has also worried the central bank, as the lender of the last resort, which has already extended its support to the Islamic banks.
In the dynamic global financial arena, Islamic banking has emerged not merely as a religious sentiment but as an innovative force, driven by its welfare-centric business model. Thomas Helbling, a non-Muslim IMF expert, champions this model, asserting that "environmental issues often face a collective action problem." The question then arises: Can private markets proffer a remedy? The answer lies within the domain of pioneering Islamic banking and financial products. A fundamental distinction between conventional banking systems and Islamic banking is the explicit prohibition of usury and speculation within the latter. Shariah strictly forbids any form of speculation or gambling, known as maisir, and also prohibits the acceptance of interest on loans. Consequently, Islamic financial institutions possess the potential to gain a competitive edge through strategic innovation. This process involves the development of new knowledge and capabilities, presenting a significant avenue for revenue growth.
How can society ensure that financial markets channel funds into sustainable investments and assets that tackle climate change? Islamic finance has some answers. Traditional market finance is supposed to be the best way of pricing risk. But there can be many costs – so-called externalities – that are not captured by market prices. If a firm produces poor quality baby food, for example, that can be a heavy burden for others. The firm, however, may not pay for any of those costs unless regulators and legislators step in. The costs of climate change are another example of what many would see as market failure. Private investors often have little interest in protecting public goods like clean air and water.
After the recent global crisis, the Islamic banking and finance sector has captured the attention of international banking mavens, projecting the UK as the forthcoming Islamic finance hub in Europe. This Sharia-based financial system is firmly establishing its roots in the Middle East and Asia while gaining increasing trust in the United States. Unlike conventional finance, plagued by opacity and inequity, Islamic banking boasts a transparent structure devoid of intricate black boxes that demand a genius to unravel. As a result, market pundits foresee the Islamic Finance Market poised for a CAGR exceeding 10% over the next five years. This anticipated growth is expected to be particularly remarkable in Bangladesh, the second-largest Muslim country.
However, the Islamic banking sector in the country wrestles with distinctive challenges. The path ahead holds the potential for strengthened legal frameworks, collaborative opportunities, and technological advancements, all poised to enhance the sector's resilience and propel its growth. Industry experts affirm that the fate of Islamic banking hinges on the evolving dynamics among banks, customers, and other stakeholders, especially as transformative technologies redefine the next generation of financial services. In this context, the role of the media becomes pivotal, emphasizing the need for responsible journalism to take centre stage. It is crucial to refrain from disseminating misleading information or spreading rumours that could stifle the progress of Islamic banking innovation, hindering the nation's journey towards a Smart Bangladesh.
The bottom line is this: Do not stifle Islamic finance innovation with misinterpretations or loose talk.
(The writer is the Editor of THE BANGLADESH EXPRESS and the Chairman of Bangladesh Journalists’ Foundation for Consumers & Investors-BJFCI)
