Central bank finds lacunae in Islamic banking regulations

Separate act mooted

The absence of a separate act and comprehensive standards covering all areas relevant to Islamic banking activities in Bangladesh has resulted in a number of difficulties for issues related to Shariah compliance, according to an assessment by Bangladesh Bank (BB).
Besides, maintaining a capable and active Shariah Board—with an adequate number of scholars and experts—is a challenge for the banks.
This study was released on Thursday at a research almanac organised by BB at the Institute of Bank Management at Mirpur in the city. 
According to the central bank’s assessment, it is also a challenge to transform the central Shariah Board into a highly capable and active organisation that can perform the role of advising and issuing directives as to whether or not all functions of the Islamic banks, including investment procedures, are being carried out in accordance with Shariah.
The assessment said the absence of financial engineering, illiquidity of assets, implications of globalisation, lack of profit-sharing on the assets side and the dearth of a mechanism to deal with debt defaulters are perceived as the five most important challenges facing Islamic banking in general, in both the global and Bangladesh contexts.
The perception of the Bangladeshi Islamic scholars regarding the relevant and contemporary challenges faced by Islamic finance and banking in Bangladesh are the dearth of financial engineering (61.67 per cent), illiquidity of asset structures (60.34 per cent), implications of globalisation for Islamic banking (53.45 per cent), lack of profit-sharing on the asset side (50.85 per cent), the lack of a mechanism to deal with loan defaulters (46.67 per cent), a short-term asset structure (46.55 per cent), lack of opportunities for short-term placement of funds (40.68 per cent) and the absence of a lender of last resort (40.68 per cent).
In the case of Bangladesh, moral hazard (66 per cent), lack of financial engineering (59 per cent), illiquidity of asset structures (57 per cent), lack of supervision by central banks (45 per cent), lack of risk management tools (37 per cent), lack of opportunities for short-term placement of funds (36 per cent) and lack of cooperation among Islamic banks (32 per cent) are relevant challenges for Islamic finance and banking, 
BB said.
Regarding the operational challenges faced by Islamic Banks, the assessment said teaching, training and research are the cornerstones for the development of any discipline. This is more so for a discipline like Islamic finance and banking, which is still nascent in Bangladesh.
Even many managers of Islamic banks are not very well trained in the use of Islamic modes of finance.
Managing these risks in the financial institutions has recently become a matter of utmost importance due to the global economic recession and the subsequent downfall of many renowned banks and financial institutions across the globe.
As an alternative financial intermediary, with profit- and loss-sharing contracts (in Mudarabah and Musharakah contract) as their cornerstone, Islamic banks use various profit and loss share (PLS)-based contracts and non-PLS-based contracts (Murabaha, Ijara, Salam, Istinsa, Qurad, etc.) while operating their business.
It also noted that in the process of offering Islamic finance and banking services, the practitioners of Bangladesh have been facing several challenges. Addressing some of these challenges is critical for improving the efficiency of Islamic finance and banking activities in the country.
While operating in a conventional environment, Islamic finance requires a different legal and supervisory framework that is appropriate for its nature of business, the BB study suggested.
Considering these factors, the study came up with the recommendations for improving the operational efficiency of Islamic banking activities.
It also suggested that all stakeholders, especially depositors, investment clients and human resources of all Islamic financing Institutions in Bangladesh, should get equal treatment, without any discrimination with respect to their Muslim and non-Muslim identities.

Central bank finds lacunae in Islamic banking regulations

Separate act mooted

The absence of a separate act and comprehensive standards covering all areas relevant to Islamic banking activities in Bangladesh has resulted in a number of difficulties for issues related to Shariah compliance, accordingto an assessment by BangladeshBank (BB). Besides, maintaining a capable and active Shariah Boardwith an adequate number of scholars and expertsis a challenge for the banks. This study was released on Thursday at a research almanac organised by BB at the Institute of Bank Management at Mirpur in the city. According to the central banks assessment, it is also a challenge to transform the central Shariah Board into a highly capable and active organisation that can perform the role of advising and issuing directives as to whether or not all functions of the Islamic banks, including investment procedures, are being carried out in accordance with Shariah. The assessment said the absence of financial engineering, illiquidity of assets, implications of globalisation, lack of profit-sharing on the assets side and the dearth of a mechanism to deal with debt defaulters are perceived as the five most important challenges facing Islamic banking in general, in both the global and Bangladesh contexts. The perception of the Bangladeshi Islamic scholars regarding the relevant and contemporary challenges faced by Islamic finance and banking in Bangladesh are the dearth of financial engineering (61.67 per cent), illiquidity of asset structures (60.34 per cent), implications of globalisation for Islamic banking (53.45 per cent), lack of profit-sharing on the asset side (50.85 per cent), the lack of a mechanism to deal with loan defaulters (46.67 per cent), a short-term asset structure (46.55 per cent), lack of opportunities for short-term placement of funds (40.68 per cent) and the absence of a lender of last resort (40.68 per cent). In the case of Bangladesh, moral hazard (66 per cent), lack of financial engineering (59 per cent), illiquidity of asset structures (57 per cent), lack of supervision by central banks (45 per cent), lack of risk management tools (37 per cent), lack of opportunities for short-term placement of funds (36 per cent) and lack of cooperation among Islamic banks (32 per cent) are relevant challenges for Islamic finance and banking, BB said. Regarding the operational challenges faced by Islamic Banks, the assessment said teaching, training and research are the cornerstones for the development of any discipline. This is more so for a discipline like Islamic finance and banking, which is still nascent in Bangladesh. Even many managers of Islamic banks are not very well trained in the use of Islamic modes of finance. Managing these risks in the financial institutions has recently become a matter of utmost importance due to the global economic recession and the subsequent downfall of many renowned banks and financial institutions across the globe. As an alternative financial intermediary, with profit- and loss-sharing contracts (in Mudarabah and Musharakah contract) as their cornerstone, Islamic banks use various profit and loss share (PLS)-based contracts and non-PLS-based contracts (Murabaha, Ijara, Salam, Istinsa, Qurad, etc.) while operating their business. It also noted that in the process of offering Islamic finance and banking services, the practitioners of Bangladesh have been facing several challenges. Addressing some of these challenges is critical for improving the efficiency of Islamic finance and banking activities in the country. While operating in a conventional environment, Islamic finance requires a different legal and supervisory framework that is appropriate for its nature of business, the BB study suggested. Considering these factors, the study came up with the recommendations for improving the operational efficiency of Islamic banking activities. It also suggested that all stakeholders, especially depositors, investment clients and human resources of all Islamic financing Institutions in Bangladesh, should get equal treatment, without any discrimination with respect to their Muslim and non-Muslim identities.