Islamic Bank Essay

1272 words - 6 pages

Abstruct : Thisis paper focuses on the prospect and growth potentials of Islamic banks in Bangladesh as perceived by Islamic and conventional bankers. The study noted that there is a high demand for interest-free banking services from a segment of people in Bangladesh who have a strong desire to abide by the rules and principals set by Shariah. Along with religious requirement, economic exigencies provide a new outlook to the role of banking in promoting investment/ productive activities, influencing distribution of income and adding stability to the economy. The Islamic banking sector is, however, criticized on several grounds by the Conventional bankers. The banks are believed not to apply ...view middle of the document...

In August 1974, Bangladesh signed the Charter of Islamic Development Bank and committed itself to reorganize its economic and financial system as per Islamic Shariah1. As a consequence of this, the first interest-free Shariah-based bank in South and Southeast Asia, Islami Bank Bangladesh Limited was established in Bangladesh in 1983. Since then, six more full-fledged private Islamic banks, 10 conventional banks with parallel Islamic banking services and a number of conventional banks with Islamic banking windows have been established.

According to the Bangladesh Bank (BB), the central bank of the country, the total deposits of the Islamic banks and Islamic banking branches of the conventional banks stood at Tk 286.5 billion ($ 4.09 billion) at the end of June 2007. This was 23.6 per cent of the deposits of all private commercial banks and 14.3 per cent of the deposits of the total banking system. Total investment of the Islamic banks and the Islamic banking branches stood at Tk 265.4 billion ($ 3.79 billion) at the end of June 2007. This was 26.9 per cent of all private banks and 17.2 per cent of the total banking system of the country. The remarkable shifting or conversion of the conventional banks and their branches into the Islamic lines signals high acceptance of the interest-free banking by the public in general. The Islamic banking industry continued to show strong growth since its inception in 1983 in line with the growth of the economy, as reflected by the increased market share of the Islamic banking industry in terms of assets, financing and deposits of the total banking system (Rashid et al. 2004).

However, Islamic banking in Bangladesh is facing numerous problems or challenges. First, they have not yet been successful in devising an interest-free mechanism to place their funds on a short-term basis. Studies conducted on Islamic banking in Bangladesh show that the future of Islamic banks hinges on their ability to find a viable alternative to interest for financing all types of loans. Ahmad and Hassan (2007) concluded that Islamic banks in Bangladesh should recognize the fact that their success in abolishing interest has been only partial and they have a long way to go in their search for a satisfactory alternative to interest. They face the same problem in financing consumer loans and government deficits. Second, the risk involved in profit-sharing seems to be so high that almost all of the Islamic banks in Bangladesh have resorted to those techniques of financing which bring them a fixed assured return. As a result, there is a lot of genuine criticism that these banks have not abolished interest but, in fact, only changed the nomenclature of their transactions.

In terms of individual consumers, the evidence to date suggests that the presence of Islamic finance involves a substantial degree of market segmentation. While religious conviction is a logical key determinant of the use of Islamic finance services, it is often...

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