the Prospects and Challenges in Development of Islamic Finance for Bangladesh, by Dr. Atiur Rahman

Keynote address of the Governor, Bangladesh Bank

IFSB-BB Seminar on the Prospects and Challenges in Development of Islamic Finance for Bangladesh

(Date: 23 September 2013 Time : 9.30 am Venue : Hotel Purbani International, Dhaka.)

Honorable governor of Bangladesh Bank Dr. Atiur Rahman delivered his key note speech at the inaugural session of the IFSB-BB Seminar on the Prospects and Challenges in Development of Islamic Finance for Bangladesh held in September 2013 at the Hotel Purbani International, Dhaka. The Seminar was attended by a host of eminent scholars, academicians, practitioners and regulators in the field of Islamic finance from around the globe. The speakers in the seminar included among others Mr. S.K.Sur Chaudhury, Deputy Governor of Bangladesh Bank; Mr. Daud Vicary Abdullah, President and CEO of International Centre for Education in Islamic Finance (INCIEF); Professor Dr. Volker Nienhaus, University of Reading, United Kingdom; Professor Dr. M. Azmi Omar, Islamic Research and Training Institute (IRTI)and Mohammad Abdul Mannan, Managing Director of IBBL.

Excerpts of the Governors speech:

The Governor in his speech characterized Islamic banking as value driven, speculationaverse risk-sharing which attribute greater inclusivity and stability support. In his remarks, Islamic banking is outpacing conventional banking in growth and fared better than conventional ones in the last global financial crisis, which is a reason why there is niche presence of Islamic financing widening steadily in non-Muslim countries including the advanced Western economies. He also mentioned that, Islamic banks in Bangladesh generally have higher capital adequacy ratios and lower non performing loan ratios than their conventional banking counterparts. Aggregate assets and deposits of Islamic banks in Bangladesh have nearly doubled in the last four years; by end 2012 aggregate assets and deposits both crossed trillion Taka thresholds, comprising around a fifth of total banking sector assets and liabilities. This share of Islamic banking looks set to grow further with time, given its faster growth than conventional banking. With its ethical, inclusivity promoting and stability enhancing attributes, Islamic finance undoubtedly bears promise of playing major beneficial role in our socioeconomic development. He concluded that a global network of mutual learning among regulators and participants of Islamic finance markets in different countries may be a useful tool for fast buildup of knowhow in Islamic finance.

Full speech of the Governor is appended below:

IFSB Secretary General Mr. Jaseem Ahmed, Deputy Governor Mr. Sur Chowdhury, distinguished speakers, guests, and participants; Assalamu Alaikum, a very good morning, and my warm welcome to you all. I am very happy to have IFSB co-hosting with us this important seminar on prospects and challenges for development of Islamic Finance in Bangladesh. The seminar is of topical relevance for our financial market, where Islamic banking is outpacing conventional banking in growth, and where need for new Islamic financial products and services are arising from continued steady growth of our economy even amid the lingering global slowdown in economic growth. The value driven, speculation-averse risk-sharing features of Islamic finance attribute greater inclusivity and stability supportiveness to it. Islamic banks and financial institutions fared better than conventional ones in the last global financial crisis, which may be a reason why we see niche presence of Islamic financing widening steadily in non-Muslim countries including the advanced Western economies.

Islamic finance commenced in Bangladesh in early nineteen eighties with just one Islamic commercial bank. By now there are eight Islamic banks run wholly on Shariah principles. Besides, as any as seventeen conventional banks, including one globally active foreign bank, are running Islamic banking branches or windows side by side with their conventional banking. Further, approval requests of a number of conventional banks for their conversion into wholly Shariah based Islamic banks indicate robust customer demand in Bangladesh for Islamic financial services. Barring one exception of a small sick Islamic bank in process of restructuring, the Islamic banks in Bangladesh generally have higher capital adequacy ratios and lower non performing loan ratios than their conventional banking counterparts.

 Aggregate assets and deposits of Islamic banks in Bangladesh have nearly doubled in the last four years; by end 2012 aggregate assets and deposits both crossed trillion Taka threshold, comprising around a fifth of total banking sector assets and liabilities.

This share of Islamic banking looks set to grow further with time, given its faster growth than conventional banking. The inclusive nature of Islamic banking is evidenced in their growing and already significant engagement in agricultural, SME and microfinance, so far without any refinance support like those available for conventional banks. Lately, BB has taken a move for structuring some appropriate Shariah compliant SME refinance support line for the Islamic banks. Apart from Islamic banking, Takaful or Islamic insurance is also now gaining ground in our financial market. Challenges of course are also coming hand in hand with the ongoing growth trends and the emerging new growth prospects. Designing and introducing new Shariah compliant versions of conventional deposit and loan products tailored to needs of our financial market require ingenuity as well as thorough understanding of relevant Shariah principles and practices; appropriate risk management norms and standards are needed for the new Shariah compliant financial products and services, risk mitigation requires developing of new Shariah compliant variants or substitutes of their conventional financing equivalents.

Over years Bangladesh Bank (BB) and Islamic finance market participants have worked together in developing a fairly comprehensive set of the needed norms, guidelines and regulations. The core standards developed by IFSB on various aspects of Islamic finance have been crucially helpful in this important work. As of now we are still to have a well functioning interbank Islamic money market for efficient day to day liquidity management by Islamic banks; a proposal for a new Shariah compliant short dated Treasury bill for this purpose is awaiting government approval. Sukuk, the Shariah compliant long term fund raising instrument is already in extensive use in the Middle East and East Asia; this instrument is likely to be very useful for financing of Bangladesh‘s much needed infrastructure projects. Other Islamic finance products and services already in use elsewhere can usefully be tested and tried in Bangladesh; regulators and market participants from incipient Islamic finance markets elsewhere can likewise benefit from knowledge about the Bangladesh experience. A global network of mutual learning among regulators and participants of Islamic finance markets in different countries may be a useful tool for fast buildup of knowhow in Islamic finance. I expect seminar participants to benefit much by way of gaining useful new knowledge and insights on these and other allied issues in the seminar sessions.

I heartily thank the IFSB, and its Secretary General Jaseem Ahmed personally, for co-hosting this important seminar with us. I wish the visiting erudite resources persons from abroad an enjoyable stay in Bangladesh, I would urge the participants to take full opportunity of engaging interactively with the resource persons in the seminar sessions. With its ethical, inclusivity promoting and stability enhancing attributes, Islamic finance undoubtedly bears promise of playing major beneficial role in our socioeconomic development. Let me conclude here looking forward to the best success for the seminar, and also voicing one caveat for our Islamic finance market participants, that they must exercise utmost caution in steering clear of any involvement with extremist dogma driven influences aiding or abetting terrorism; meticulously adhering to AML compliance routines prescribed by BB‘s FIU.

Thank you all for your patient attention.