INTRODUCTION

Capitalization could not solve the global economic problems. The world is looking for a new economic order. Islamic economic system will be that new economic order. The globally-booming Islamic finance is making strides and gaining popularity in Bangladesh, with experts predicting that the shari`ah-compliant industry will continue in steady steps to become the mainstream banking system in Muslim South Asian nation. Bangladesh entered the Islamic banking system only in 1983, with the establishment of Islami Bank Bangladesh. Patwary says that his bank is now one of the top performer banks in terms of business and profits among the 48 commercial banks operating in the country. Islamic Bank Bangladesh Limited has gained first position in the all private banks in term of deposits, investment, export & import and remittance collection.People of this country are religious, Patwary, of the Islami Bank, agrees. Islam forbids Muslims from usury, receiving or paying interest on loans. According to the Bangladesh Bank (BB), the central bank of the country, the deposits of the Islamic banking systems are now 25 percent of all private banks deposits and its investments are 30 percent. Bahauddin Mohammad Yousuf, vice chairman of Al-Arafah Islamic Bank, has an explanation for Bangladesh’s Islamic finance boom. A Muslim, whose religion prohibits earning or paying interests, Islamic banking makes it possible to operate interest-free business. Bankers believe that the Islamic banking is set for even more progress, if a law governing Islamic Banking policies is introduced. If an Islamic banking Act is introduced, the Islamic banking systems will even further flourish. Experts predict that with the rapid rise of Shari`ah-based systems, the industry will ultimately turn to be the financial mainstream in Bangladesh. The interest-free Shari`ah-based systems will be mainstream Banking and the conventional banks will be the minority systems in the OIC countries including Bangladesh within 2002, M Azizul Haque, a leading expert on Islamic banking in Bangladesh, told IOL. Azizul Haque, who is also chairman of the Shari`ah Council of Dhaka, believes that Bangladesh will follow the rest of the world to the Islamic banking sector. He explains that the growth rate of Islamic banking in the OIC countries for example is 15 to 20 percent while that of conventional banks is 10 to 15 percent. Islamic finance is one of the fastest growing sectors in the global financial industry. In defiance of the credit crunch, the global Islamic finance market has grown about 15 percent in each of the past three years, and is now worth about $700 billion worldwide. Currently, there are nearly 300 Islamic banks and financial institutions worldwide. Its assets are predicted to grow to $1 trillion by 2013. Azizul Haque expects that higher growth rates in the next decade will force the global financial systems to Islamic banking. There is not any sort of apprehension regarding the success of Islamic banking,” the renowned economic expert said. “The future of the Islamic banking systems is so bright. Mominul Islam Patwary, Chairman of the executive committee of Islami Bank Bangladesh Limited, told IslamOnline.net. THE recent measures taken by Bangladesh Bank with regard to Islamic banks are indeed unprecedented and absolutely uncalled for. While it is true that ever since the inception of Islamic banking system in Bangladesh, there was no expert group in Bangladesh Bank to monitor the activities of Islamic banks in Bangladesh, Islamic banks operating in Bangladesh have formed their own Shariah council to look into whether Islamic banking as a whole is in compliance with the Islamic principles. A central shariah council has also been formed. Although Bangladesh Bank has made a focus group, consisting of members of Shariah council and Islami bankers, to

formulate detailed guidelines for the Islami banks on the basis of the Banking Company Act, Bangladesh Bank utterly ignored the report that has been finalised by the focus group. There are currently six commercial banks operating under Islamic principles. They are: Islami Bank Bangladesh Limited, Al-Arafah Bank, Social Investment Bank Ltd, Exim Bank Ltd, Oriental Bank Ltd, and Shahjalal Islami Bank Ltd. apart from some other banks that also provide Islamic banking services in some of their branches. There are more than 300 Islamic banks operating all over the world -- from Africa and Europe to Asia and America. The Islamic banking industry is worth more than $200 billion and is growing at 15 percent annually, a rate much higher than that of conventional banking.1

OBJECTIVE
Islamic banking systems are a quiet new phenomenon in the money market of Bangladesh. In order to go deep into this particular area of study and also to realize the objectives. Interest Free Banking Islamic Banking and Finance-Sharjah Islamic Bank Modern Vs Islamic Banking Good prospects for Islamic banking The basic principle of Islamic banking  Islamic Bank’s Success Story — in Bangladesh  Understand problems of the Islamic banking activities  Islamic banks functions among other established conventional
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REVIEW

As at end2007. In 2000.3% respectively. Yes.9 billion and RM20. In addition.4% of the revenue of the total banking system over the 2002-2006 period. in 2006. savings institutions and housing credit institutions to introduce Islamic schemes and instruments to meet customer demand. with oil prices averaging US$70 per barrel in 2007.7% respectively of the entire banking sector. The local Islamic banking and takaful industry has made steady progress since the establishment of the first Islamic bank in 1983 and the formation of the first Islamic insurance company or takaful in 1984. comprising nine domestic commercial banks.7 trillion worth of inventory sitting in the Arabian Peninsula. the capital market has seen the rapid growth of Islamic debt and equity markets. Oman and Bahrain. assuming a sustainable price level of US$80 per barrel. Qatar. five merchant banks and seven discount houses) participating in the Islamic Banking Scheme (IBS). Table 1 clearly shows that the fouryear CAGRs (compounded annual growth rates) of the total deposits and loans of the IBS in the country have been rising steadily. Islamic banking deposits and loans accounted for 11. which was made up of an Islamic money market.2000. as at end.JEDDAH. recording an average annual growth of 49% in terms of assets over the 1995-1999 period. The significance of Islamic banking has been on a progressive trend. Bangladesh. to 7. the six countries making up the Gulf States. the number of conventional banking institutions participating in the IBS has now increased to 33. Apart from its growing share. the share of Islamic banking assets has increased to 6. For example. In terms of performance relative to the whole banking system. there is actually US$38.9%. Kuwait. five merchant banks and seven discount houses. the prospects of Islamic banking are also bright with the flush of petroleum money. 27 June 2006 —Name the first country in South and Southeast Asia to have successfully established an Islamic bank.200 branches of Islamic banks and IBS banks offering Islamic banking products and services. eight finance companies. Islamic banking has also spurred efforts by other non-bank financial intermediaries such as development financial institutions. And with their total proven reserves of 484 billion barrels. the Malaysia International Islamic Financial Centre (MIFC) initiative was launched to promote Islamic financial products and services in international currencies for the global market. To complement these developments. the share of revenue from lending and fee-based activity from Islamic banks has tripled to account for 6. the Islamic financial sector was represented by two Islamic banks and 47 conventional banking institutions (17 domestic commercial banks. The delivery channels have also improved significantly as there are now more than 2. United Arab Emirates (UAE). However. four foreignowned banks. According to Aseambanker Research. As at end-2000. that is right. should reap a total of US$320 billion in oil exports in 2007.9% and 13. with deposits and financing also rising in tandem. 14 finance companies. In . more efforts are needed to fullfil the aspiration of having a 20% Islamic banking and insurance market share by 2010. According to Bank Negara's 2006 annual report. Upon completion of the merger exercise among the domestic banking institutions.1 billion while deposits and financing increased to RM35. the Labuan IOFC (International Offshore Financial Centre) has embarked on a serious effort to establish an International Islamic Financial Market to stimulate the creation of liquidity and financial instruments as well as enhance investment opportunities aimed at greater mobilisation of Islamic funds.4% and 5. two takaful companies and a broad range of financial products.9 billion respectively. the sector continued to register strong asset growth of 30% to RM47. four foreign-owned banks. namely Saudi Arabia.

Al-Ghamdi said with a chuckle. etc. Another founder was Dr. is for you to judge. He mobilized a group of entrepreneurial Saudis and other industrialists from the Gulf to launch the financial institution. The bank is playing an important role in almost every aspect of the lives of Bangladeshis. the bank has become a phenomenal success story and a role model for other Islamic banks. Of the 79. — and they would all laugh when the idea of Islamic banking was discussed. The idea has proved to be very successful and now that Islamic banks are available there is no reason for us to deal with regular banks. Why? Because he said it had become a burden on the government? And why us? Because he said . He talked enthusiastically about his investments in Islami Bank Bangladesh Limited. “One of the government ministers told us to take charge of the government-run Krishi Bank. All those businessmen who came forward at the urging of Fouad AlKhateeb did so out of their love and responsibility toward their religion and their brethren in Bangladesh. It is a charity institution. a medical institution.5 million taka only.000. Ali S. With more than 150 branches spread throughout the country.1983 Islami Bank Bangladesh Limited (IBBL) became the first interest-free Shariah-based bank to have been established in South and Southeast Asia. especially those of us who were associated with it in its embryonic stage. That it would be such a huge commercial success was something that nobody really imagined. Saudi Arabia’s first ambassador to Bangladesh (1977-1982). All the major banks are now coming up with Shariah-compliant instruments. including the Jeddah-based Islamic Development Bank.” Patwary said. Earlier. Now we have a choice. According to a report posted on the bank’s website. Al-Ghamdi pointed out that Islami Bank Bangladesh Limited should not be merely seen as a bank. The capital is divided into ordinary shares of 1. teachers. I would meet so many Bangladeshi professionals — doctors. The bank is listed on both Dhaka and Chittagong stock exchanges. The paid-up capital of the bank was enhanced to 640 million taka in 2001. Patwary listed the bank’s many achievements and answered many questions from the Bangladeshi expatriates at the gathering. He told me he was making good money on his investments in the bank. This is a source of pride for all of us. engineers. Al-Ghamdi recalled how people would laugh at the idea of an Islamic bank in the 1980s. there were no options. Al-Ghamdi. That was then. “It was certainly not a commercial venture. The brain behind the bank was the late Fouad Abdul Hameed Al-Khateeb. “Islamic banking. Mominul Islam Patwary. The Investment Corporation of Bangladesh was allocated 20 percent of the bank’s issued capital. but the corporation subscribed shares of 0.500 ordinary shares of the bank in 1985.000 taka each. foreign sponsors. as they say. We are glad we took that crucial and all-important first step and the rest.50 million taka respectively. the executive committee chairman of the bank in whose honor the event was organized. “It is an institution in itself.” Al-Ghamdi reminded the gathering that the idea behind the bank was not to make money. Material benefit was not on anybody’s mind. Islamic banking was unheard of in those days. “is no longer an alien concept.” he said while exhorting everyone to join the institution and support it by either opening accounts at the bank or purchasing its shares. At a Bangladeshi community gathering in Jeddah on Saturday night. who was posted at the Saudi Embassy in Dhaka in the 1980s. said what was once an unheard of idea has become a welcome option for Muslims. owned 56. IBBL started operations with an authorized and paid-up capital of 500 million taka and 67. and a cultural institution.500 shares.” Al-Ghamdi said. Al-Ghamdi said he recently met one of those Bangladeshi professionals. This indicates that Islamic banking is here to stay. while local sponsors and the general public owned 23. He recalled one particular episode with pride.

acknowledged the bank’s contribution in the development of the country. recalled the contribution of the Al-Khateebs in the development of Bangladesh. He said when people talk of Bangladesh they inevitably talk about the high level of corruption. who is the senior general manager (engineering) at United Sugar Company. He said the bank is committed to conducting all banking and investment activities on the basis of an interest-free profit-loss sharing system. “Here we are. Ashraf Uddin said as a diplomat he has certain bindings. 2 bank in the private sector. Abdullahil Mamoon Al-Azami. He thought about an Islamic bank at a time when nobody would give it a second thought. Goals. We have become the role model for others. the Bangladeshi consul general in Jeddah. And for no small reason. “Ustaz Fuad Al-Khateeb was a great man.” the consul general said. “Mosharraf Hossain is the right man for the right job. Transparency has been and is the key to our success. Characteristics and Functions of Conventional Bainking System 1. He created a lot of visibility for the bank in Saudi Arabia.” he said. “The bank helped us win the trust of the good people of Bangladesh. Bangladesh.” Responding to some mild criticism from the community members that he was not proactive in promoting the bank here in Jeddah. we are the No. Ashraf Uddin. It is a moment of pride for us as the bank marches ahead. “It is beyond the pale of doubt. That can also be a wonderful contribution. the former chief of Jamaat-e-Islami. community development specialist at the IDB.” recalled Muhammad Al-Khateeb who is the member of the bank’s board of directors.we demonstrated how to run a bank successfully.” Patwary said. This is a matter of great pride.” he said. He too recalled his father’s passion for doing something good for Bangladesh. Ashraf Uddin also praised the bank’s representative in Jeddah. Background .” Al-Azami said. However. “He was very confident of the bank’s success but he had a tough task in explaining his idea to others. I have always openly supported the concept of Islamic banking. Objectives. spoke in Bengali amid loud cheers from those present.” he said. running the bank with no stain of corruption. a visionary. The two sons of Fouad Al-Khateeb — Muhammad Al-Khateeb and Abu Bakr AlKhateeb — spoke about their late father’s vision and recalled how he would always talk about it in the 1980s. “He would always be busy thinking about giving the project a practical shape.” Abu Bakr Al-Khateeb. it has unveiled a new horizon and ushered in a new silver lining of hope toward materializing a long-cherished dream of the people of Bangladesh for doing their banking transactions in line with what is prescribed by Islam. “We all should support the bank not only by opening accounts in the bank but also by generating ideas.” Patwary said. Al-Azami is highly respected by the Bangladeshi community and is the son of professor Ghulam Azam. “Since I am diplomat. “In doing so. I cannot support any specific bank.

adjusting smoothly to the internal and external shocks faced by the economy from time to time. an NCB is being sold to a foreign buyer. PCBs and FCBs . Besides these full-fledged Islamic banks. co-operative banks. BB also supervises and regulates scheduled banks and non-bank financial institutions operating in Bangladesh. providing guidelines for asset classification and income recognition. Rupali Bank. It maintains the traditional central banking roles of note issuance and the banker to the government and banks. NCBs disbursed 32.8 percent respectively. upto end December 2006 the NCBs operate 3384 branches. 2. Ansar-VDP Unnayan Bank and Karma Shangsthan Bank are operating in Bangladesh.6 and 3. 5 state-owned specialised banks (SBs). The Bangladesh Bank has the legal authority to impose penalties for non-compliance and also to intervene in the management of a bank if serious problems arise. all of which are state owned.3 percent while PCBs. Over and above the institutions cited above. scheduled banks. Its prudential regulations include. ensuring minimum capital requirements. Which are being corporatized. Among PCBs.The financial system in Bangladesh includes Bangladesh Bank (the Central Bank). PCBs have 1776 branches of which 488 are in rural areas and 1288 are in urban areas. NCBs owned 65. Out of 30 PCBs. Among scheduled banks there are 4 nationalised commercial banks (NCBs). the country will have only 3 NCBs.8. insurance companies. NCBs' share stood at 38. and FCBs have 48 branches exclusively in urban areas. 3.8 percent while SBs. 6. Of the total deposits.3 percent of total advances while SBs. of which 2146 are in rural areas and 1238 are in urban areas. the Islamic Banks' share of deposits is 12. On the other hand. Central Bank and its Policies The objectives of the Bangladesh Bank (BB) is to formulate monetary policy which aims at supporting the highest sustainable output growth while maintaining price stability. and once this transaction is completed. It has the delegated authority of issuing policy directives regarding the foreign exchange regime. applying limits on loan concentration and insider borrowing. 10 conventional banks in the private sector have opened selected branches and Islamic banking counters respectively to deal with the Islamic banking business parallel to their conventional operations. microfinance institutions (MFIs). 9 foreign commercial banks (FCBs) and 29 nonbank financial institutions (NBFIs) as of December 2006. among others. PCBs and FCBs shared 5. 30 domestic private commercial banks (PCBs). six have been operating as Islamic banks.5 percent. 48. SBs and FCBs own 24. non-bank financial institutions. Within this mandate. However. Scheduled Banks Out of 6562 scheduled bank branches operating in the country. and. SBs have 1354 branches of which 1200 are in rural areas and 154 are in urban areas. three development financial institutions namely House Building Finance Corporation (HBFC).5.6 percent respectively of total assets of the scheduled banks.7 and 6. credit rating agencies and stock exchange.

As well as NCBs and some foreign banks are engaged in long-term industrial financing.9 percent respectively at the end of September 2006. two power sector companies namely Dhaka Electric Supply Company (DESCO) and Power Grid Company of Bangladesh (PGCB) have been listed in the capital market under the newly introduced direct listing regulation. established in April 1995. 51. floats and manages closed-end and open-end mutual funds and closed-end unit funds to ensure supply of securities as well as generating demand for securities. dealing in the secondary capital market. 12 have been listed in the stock exchanges up to 31 December 2006 to strengthen financial capability and the rest are under process to be listed in due course. The NBFIs consist of investment. Capital Market The capital market in Bangladesh is regulated and supervised by the Securities and Exchange Commission (SEC) under the SEC Act. 1993. There were 29 financial institutions operating in Bangladesh as of 31 December 2006.3. 6.5 (of which 14. 4. ICB underwrites issues of securities. Non-Bank Financial Institutions (NBFIs) Non-Bank Financial Institutions are an important part of financial system in Bangladesh. NBFIs operations are regulated under the Financial Institutions Act. The SEC so far has issued licenses to 27 nonbank institutions to participate in the capital market of which 19 institutions are Merchant Banker and Portfolio Manager while 7 are Issue Managers and l(one) acts as Issue Manager and Underwriter. leasing companies etc. Among the 29 financial institutions. Some SBs. and maintains investment accounts. ICB also operates in both DSE and CSE as dealer. Recently. 15 are local (private) and the other 13 are established under joint venture with foreign participation. 8 debentures and 34 treasury bonds. As of end December 2006 the total number of enlisted securities with DSE stood at 310 of which 255 are listed companies. 5. Bangladesh Bank has introduced a policy for loan and lease classification and provisioning for NBFIs from December 2000 on a half-yearly basis. Insurance . 13 mutual funds. finance. The Dhaka Stock Exchange (DSE). which was established as a public limited company in April 1954. Bangladesh Small Industries and Commerce (BASIC) Bank Ltd. provides substantial bridge financing programs. Bangladesh Shilpa Rin Sangstha (BSRS). Of these one is government owned. and the Chittagong Stock Exchange (CSE). The Investment Corporation of Bangladesh (ICB) was established in 1976 with the objective of encouraging and broadening the base of industrial investment. such as Bangladesh Shilpa Bank (BSB).disbursed 9. 1993.8 percent was disbursed by the Islamic Banks) and 6.

of which 18 provide life insurance and 44 are in the general insurance field. and have a particular focus toward rural women clients. The Board consists of the Governor of Bangladesh Bank as ex-officio chairman. Muhammad Yunus have been awarded The 2006 Nobel Peace Prize. 7. In recognition of the robust poverty eradication via microfinance activities. are owners of the bank and it is the pioneer organization of this type. there are more than 1000 semiformal institutions operating mostly in the rural sector of the country. A total of 31 insurance companies are listed in the capital market. six government officials nominated by the government and one executive vice-president who serves as the member secretary of the board. Cooperative Banks In Bangladesh 119 cooperative banks are operating. A total of 62 insurance companies have been operating in Bangladesh. 1938 with regulatory oversight provided by the Controller of Insurance on authority under the Ministry of Commerce. ASA. overseeing. of these. and the rest of the private. undertook efforts to establish a regulatory framework which culminated in the enactment of the Microcredit Regulatory Authority Act. with the close cooperation of Bangladesh Bank. Dr. The typically landless borrowers of Grameen Bank mostly women. BRAC. 2006. the Grameen Bank and its founder. Grameen Bank was established in 1983 under a special law with the initial support from the Bangladesh Bank. supervising and facilitating the entire activities of MFls. of which 8 offer life insurances. The government. An Executive Board consisting of eight members is responsible for executing the general and administrative tasks of the management. Among the life insurance companies. Besides Grameen Bank. Among the general insurance companies. 48 are land mortgage and rest 7 are other cooperative banks. except the stateowned Jiban Bima Corporation (GBC) foreign owned American Life Insurance Company (ALl CO). Microfinance Institutions (MFIs) MFIs in Bangladesh were left unregulated for a long time since their inception. and PROSHIKA are considered three largest NGO-MFIs. A separate Insurance Regulatory Authority is being established. The member-owned Microfinance Institutions (MFIs) have an explicit social agenda to cater to the needs of the poorer sections of population. 8.The insurance sector is regulated by the Insurance Act. Now it has been recognised worldwide that microfinance can be easily adapted and thus replicated in diverse cultural and geographic locations all over the world. state-owned Shadharan Bima Corporation (SBC) is the most active in the insurance sector. of which 64 are central cooperative banks. The maximum share of . The main responsibilities of the authority include issuance and cancellation of the license for microcredit.

Goals.Objectives. Characteristics and Functions of Islamic Banking System . is controlled by central cooperatives.total assets. 90 percent. Similarly the maximum share deposits (85 percent) and advances (90 percent) are likewise handled by the same central cooperatives.

The Islamic System may well prove to be better suited to adjusting to shocks that result in banking crises and disruption on the payment mechanism of the country. albeit Qoranically acceptable basis. during the 19th and 20th centuries investment banks played a great role in French tradition while in British model of banking equitybased investment was limited. Highlighting Islamic bank’s principle Khan (1986. is not only the elimination of interest based transactions and the introduction of the zakah (contribution to poor) system but also the establishment of just and balanced social order free from all kinds of exploitation. Rather. as loan capital as well as venture capital played a great role in promoting industrial and economic development of various countries of the world. especially in lending to small business. p. In the more traditional banking system since the nominal value of deposits is fixed. argues that elimination of interest does not mean zero-return on capital. Islamic banks offer savers risky open-ended mutual fund certificates instead of fixed-interest deposits. The aim of Islamic economics. The idea of equity-based investment banking is not new to the financial market. It is not clear if this would be correct and how long the process would take. 19). Islamic banks belong to the . as observed by Molla et. (1983) reveals the fact that interest-free banking is a novel form of finance and they are not only trying to give interest another name but that legal instruments within the framework of Shari’ah exist which permit profitability on a different. Even the banking crisis in the western world during the great depression in the 30’s or the 80’s proposed two-tire banking i. shock to asset position are immediately absorbed by changes in the values of the share deposits held by the public in the banks. Similarly in Germany equity-based investment was being practiced by commercial banks during that period. Arrangements to share profits and losses lead to considerable problems of monitoring and control.Introduction The introduction of interest-free and equity-based financing by the Islamic banking system is based on the principles of Islamic economics. Therefore. The author also observed that it is the capital entrepreneurship that shares both the real contribution and the real profitability. the Islamic bank activities were discussed in detail.e.) Difficulties arise on the lending side. The Islamic banking system also proposes that resources can be contracted on the basis of venture capital and risk sharing deals. in the IMF staff Paper. where deposits earn variable interest and double as equity. Box 6. Ahmed (1994). In a number of studies such as IMF. the real value of assets and liabilities of banks in such a system will be equal at all points in time. Islam forbids a fixed predetermined return for a certain factor of production i. In an equity-based system that exclude predetermined interest rate and does not guarantee the nominal value of deposits. “Indeed it is really apparent that the Islamic model of banking based on the principle of equity participation bears a striking resemblance to proposals made in the literature on the reform of banking system in many countries.al. The Islamic bank follows the principle of equity basedinvestment. observed as. (1988). as under. one party having assured return and the whole risk of an entrepreneurship to be shared by others.3). The Islamic banking system is highlighted in the World Development report (1989. such shocks can cause a diversion between real assets and liabilities. hundred percent deposit banking and the equity-based investment banking. Paris. World Bank and IFC.” A study by OECD of the European countries. In the modern financial market an alternate arrangement for participation of capital and entreprenurship started with the advent of Islamic Banking in the 70’s. (This is not unlike cooperative banks and mutual in the west.e. If we look into history it may be observed that capital. For example.

188). About the possibility of introducing an interest-free financing system through Islamic banking principle Scharf (1983) also argues that the establishment Islamic Financial System based on the principle of Shari’ah is not only feasible but also profitable. They may be ideally suited to meet the need for equity capital in developing countries where the business risk is particularly high as well as in the industrialized countries where the development of new processes and new projects involves high risk and requires large amount of venture capital” Scharf (1983. This new relationship is the basis of the Islamic economic system being set up. need more venture capital. Australia has made a similar move. ‘Canada has already waived of all the interest. in his study entitled ‘Arab and Islamic Bank’ conducted by Development center.class of equity-participation bank. P. even from expansion and innovation. Basis and Business Practice of Islamic Banking From the viewpoint of Islamic Shariah. particularly from industrialized countries but at high interest rates. Consequently. they supply equity in the form of equity capital participants in the type of project. President Mitterrand of France has officially suggested in the Group-7 meeting that at least 30-35 percent of the present interest element of the debt should be waived off’. which in general has majority shareholders. ‘Islamic banking is trying to develop the relationship between finance on one hand and industry and commerce on the other. However. highlighted the Islamic banking principles and prospect as follows. Thus practical and immediate cooperation possibility exists between Islamic banks and enterprises all over the world. p. This has acted as a brake on productivity and economic growth in the North. Due to that. Though Islamic principles have yet to be put to the test in the competitive of international finance. stagflation and low-growth level because the core of their operation is oriented towards productive investment All countries both in the North and in the South. financial intermediation in Islamic banking between the bank and the client takes place as a partner rather than a debtor-creditor. Loan capital is available. In this regard Ahmad (1994. the two systems are similar in that they both strive for closer ties between financial intermediation and economic asset creation. as observed by Ahmad (1994. Organization of Economic Cooperation and Development (OECD). P. Secondly. 190) in his study quoted the idea of Alba’ch as. Western countries today realize the truth that interest is an unbearable burden for the developing countries. 94-95). “They supply equity in the form of venture capital to investors whose share is their ingenuity and their labor. in order to be justified islamically the banking system has to avoid interest. The financial activities of modern conventional banks are based on a creditor-debtor relationship between depositors and bank on the one hand and between the borrower and . Islamic banks could make a useful contribution to economic growth and development particularly in a situation of recession. The intermediation process remains to be fully developed’.

as no payment is allowed to labor. Islamic banks accept deposits from customers under the Investment Account on a Profit and Loss Sharing basis.e. In Saving Accounts under the Al-Wadia principle the bank is given an authorization by depositors to use the fund at the bank’s own risk. Customers give authorization to the bank to invest funds and share profit or loss on agreed proportions. no reward for capital should be allowed. The other aspect of the theoretical basis of Islamic banking is that the interest free bank is not risk free. This account is also known as ‘Demand Deposit as the deposited amount is payable to customers on demand without any notice. labor and capital. In this case banks act as trustee for its customers. Savings Accounts Islamic banks accept saving deposits from customers under Al-Wadia and Al-Mudaraba Sharia Principles. Interest is regarded by conventional banks as the price of credit reflecting the opportunity cost of money.the bank on the other. Account holders of this type of account are required to maintain a minimum balance in the account. Further to the above. This type of deposit is almost similar to a ‘Current Account’ or Demand Deposit’ except that the bank guarantees its customer the full return of the deposited fund with any profit voluntarily. According to this principle. The bank in this case acts as a manager of customers’ funds. business practices of Islamic bank. Sources of Funds of Islamic Banks Current Accounts Islamic banks accept deposits from customers on current accounts as conventional banks do. This principle is applicable to two main factors of production. 1993). especially sources and uses of bank’s funds. From these two principles of the theoretical basis of Islamic banking. As banks use current account deposits on their own risk the depositors of this type of account are not entitled to any share in the profit earned by the bank. unless it is exposed to business risk. The word ‘Al-Mudaraba’ originates from the word ‘Mudarib’ and means ‘The Manager’ of the fund. such as -savings under profit and loss sharing agreement and -savings under Investment Account. Under the Al-Mudaraba Shariah principle there are two different types of savings accounts. The word Al-Wadia means ‘Trusteeship’. it may be said that Islamic financial relationships are of a participatory nature (Ahmad. Deposits accepted on savings under the Profit and Loss sharing agreement is invested by the bank on its own risk. The depositors on the other hand are known as ‘Sahib-Al-Mal’ meaning the owner of the fund. unless it is applied to work. commercial banking in an Islamic framework could not be based on the creditordebtor relationship. Based on the theoretical background. As interest is prohibited in Islam. are characterized by the following modes or techniques. i. The .

Profits are distributed to depositors at the end of the financial year. Some Islamic banks accept a ‘Specified Investment Deposit’. The bank in this regard. In such a case no share of profit is given for the amount withdrawn. · Joint or General Investment Account · Limited-Period Investment Deposit · Unlimited-Period Investment Deposit · Specified Investment Deposit Under the ‘Joint or General Investment Account’ the bank pools together investment deposits of different maturities which are not invested in any specified project but utilized for different financing operations of the bank. Depositors of an Investment Account are required to give prior notice to the bank if they withdraw their invested funds under any special circumstance. and may charge an agreed fee for the investment function or may share the profit at an agreed proportion.saving account of such a nature in an interest-free banking system is also known as a participatory account or a Profit or Loss Sharing (PLS) account. The ‘Investment Deposits on Limited Period’ basis indicates a type of investment. Investment accounts are again subdivided into the following various categories. The bank refunds the money to depositors after the time is expired. where the bank accepts deposits from customers for a specified period of time. Depositors of this sort of savings deposits receive financial or non-financial benefits from the bank. The profit generated from such funds is distributed at the end of the financial year. works as an agent for the customer. Profits accrued from this type of investment are shared by the bank and the customer. Depositors of this type of account receive profits at the end of the period. where the bank and the customer agree to invest this fund to a specific project or trade. Saving Deposit as Quard E Hasan Apart from the above Islamic banks accept savings from customers as Quard E hasan (benevolent loan) from the customers. Uses of Funds of Islamic Banks . which is accounted and distributed on a pro rata basis. The profit and loss sharing also depends on the total amount deposited and the length of period the money is held by the bank. Depositors of this type of account receive share of profit to the agreed ratio from their funds invested by the bank. Depositors of this type of account may withdraw their funds within three months notice to the bank. The bank also accepts deposits from its customers under an ‘Unlimited-Period Investment Deposit’. where investment deposits are automatically renewable without specifying the period.

. They also contribute managerial expertise and other essential services at agreed proportions. Thus the bank earns a profit without bearing any risk. it is born by the bank.Musharaka (Partnership ) Mudaraba (Capital Financing) Capital Trust financing is a contract between at least two parties in which the bank as the investor supplies the entire capital of the business forming a relationship between the supplier of capital and the user of capital. If there is any loss. p. the entrepreneur returns the entire capital to the bank.Hasan (Interest-Free Loan) Murabaha (Cost plus profit) The word ‘Murabaha’ means a cost-plus Profit contract. Leasing is a contract between the bank and the customer to use particular assets. The main advantage with this type of partnership is that it combines the efforts of human beings and their skills with the capital. Zineldin(1990.E. which contribute greatly towards the development activities in a society and also assists to solve unemployment problems by utilizing manpower resources in a productive way. The leasing purchase is another technique followed by Islamic banks in financing customers.Mudaraba (Capital Financing) . An individual partner does not become liable for the losses caused by others. Profit or losses are shared according to the contract agreed upon. In this case the bank and the customer contribute capital jointly. the manager of capital i. designed to limited production or commercial activities of long duration. meaning the manager of capital. Ijara (Leasing) The word ‘Ijara’ indicates leasing. These are: · Murabaha (Mark-up or Cost-Plus-based Financing) · Ijara (Leasing) and · Quard.Based on the theoretical viewpoint as discussed earlier two fundamental techniques or modes of investment advocated by the Islamic Shariah Principle is.83). When the venture ends. “ The leasing agreement is based on profit sharing in which the bank buys the movable or immovable property and lease it to one of its client for an agreed sum by installments and .e. In addition to the above two financial arrangements. along with an agreed proportion of profit. Musharaka (Partnership) The word ‘Musharaka’ means a profit sharing joint venture. Islamic Banks currently in existence are also engaging in or actively considering several other financial practices usually acceptable in Islamic Law. This system is almost similar to the leasing activity provided in traditional banking. These two parties work together and share profits and losses. in this regard argues as. Under ‘Murabaha’ financing the investor is known as ‘Rab-Al-Mal’ which means the owner of the property and the entrepreneur is called ‘Mudarab’. In this system of financing the bank agrees to purchase for a client who will then reimburse the bank in a stated time period at an agreed upon profit margin. The mark-up price that the bank and the buyer agree to is mainly based on the market price of the commodity. In this case the bank is called lessor and the customer is called lessee who wants to use the assets and pays rent.

Kazarian. 1990. Khan. The main aim of this loan is to help needy people in a society in order to. Ahmad. The accumulated profit generated from the payments.for a limited period of time into a saving account held with the same bank.” According to the Western leasing system the lessee pays specific rentals and a fixed rate of interest over a given period for the use of specific assets. in case of any damage to the leased assets. and the payments themselves are invested in the bank’s investment ventures over the time period of lease. But in the Islamic banking system of leasing the risk related to leasing has to be shared between the bank and the lessee.  The interest-free Shari`ah-based systems will be mainstream Banking and the conventional banks will be the minority systems in the OIC countries including . leasing purchase. Quard E Hasan (Interest free loan) Quard E Hasan means an interest-free loan given by the Islamic bank to the needy people in a society.e.  Islamic finance is one of the fastest growing sectors in the global financial industry. These installments are invested in Mudaraba investment (Venture) for the customer’s account. when the ownership of the assets is transferred to the clients after the completion of the leasing contract. contributing to eventual purchase of the leased assets. The contract is called ‘ijara-wa-iqtina’ i. small producers. farmers. The world is looking for a new economic order. entrepreneurs and economically weaker sections of the society. (Zineldin. 1991. 1897. Islamic economic system will be that new economic order. The practice of dealing with this sort of investment differs from bank to bank. 1993) REASONS  Capitalization could not solve the global economic problems. who are not in a position to obtain loan or any financial assistance from any other institutional sources. Quard E Hasan is normally given to needy students. make them self-sufficient and to raise their income and standards of living.

Azizul Haque. there are nearly 300 Islamic banks and financial institutions worldwide. believes that Bangladesh will follow the rest of the world to the Islamic banking sector. Shari`ah-compliant financing deals resemble lease-to-own arrangements. told IOL. Azizul Haque expects that higher growth rates in the next decade will force the global financial systems to Islamic banking. with Muslims making up more than 80 percent of the nation’s 148 million population. who is also chairman of the Shari`ah Council of Dhaka. Bangladesh is the world’s third largest Muslim majority country. private and foreign commercial banks. In defiance of the credit crunch. a leading expert on Islamic banking in Bangladesh. layaway plans. or partnerships. After independence financial institutions. joint purchase and sale agreements. Patwary says that his bank is now one of the top performer banks in terms of business and profits among the 48 commercial banks operating in the country. 29. the global Islamic finance market has grown about 15 percent in each of the past three years.           Bangladesh within 2002. Currently. whose religion prohibits earning or paying interests. There is not any sort of apprehension regarding the success of Islamic banking. Bangladesh Bank is the central bank of the country and is in charge of monetary policies of the Government and controls all commercial banks. pornography. SUGGESTION Banking Environment in Bangladesh Bangladesh appeared as a new nation on the world map in the year 1971. Bangladesh entered the Islamic banking system only in 1983. gambling. Islam forbids Muslims from usury. investment. the deposits of the Islamic banking systems are now 25 percent of all private banks deposits and its investments are 30 percent. A Muslim. Islamic Bank Bangladesh Limited has gained first position in the all private banks in term of deposits. the central bank of the country. As reported by BSB (P. and is now worth about $700 billion worldwide. According to the Bangladesh Bank (BB). export & import and remittance collection. tobacco. especially banks played a vital role in re-constructing the war-torn economy of Bangladesh. weapons or pork. Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol. with the establishment of Islami Bank Bangladesh. Islamic banking makes it possible to operate interest-free business. Its assets are predicted to grow to $1 trillion by 2013.” Immediately . The renowned economic. He explains that the growth rate of Islamic banking in the OIC countries for example is 15 to 20 percent while that of conventional banks is 10 to 15 percent. receiving or paying interest on loans. five more full-fledged private Islamic banks and 20 Islamic banking branches of conventional banks have been established. M Azizul Haque. “the banking system of Bangladesh is a mixed one comprising nationalized. 1993). Since then.

29% was in time deposits and TK.780 branches (BSB.629 million. within a short period. due to the failure in administering them properly. 1993/94). Establish welfare oriented banking system. 22. Invest on profit and risk sharing basis. Source: GOB 1993/1994 During the Fiscal Year 1993-94 the banking institutions of Bangladesh transacted their business through 5.043 million or 25. 27.after independence the government of Bangladesh nationalized most of the banking institutions. The bank deposits during the year 1993-94 were increased by TK.  Establish a partnership relationship with customers and to eliminate the idea of      the debtor-creditor Relationship of traditional banks. Invest to those businesses sectors that are found legal from .870 million. including four Islamic banks and a number of foreign banks. (GB.884 million*. of which 12. 240. 1994). The total figure of banking institutions in Bangladesh may be stated by the following Table. though. credit to the government sector recorded a decrease of 55.05% and credit to the private sector expanded by 8. The deposit of scheduled banks (excluding inter-bank items) amounted to TK.50% in demand deposits.55%. Of this. The banking sector is one of the fast growing sectors of economy in Bangladesh. 309. many of them were returned to their owners. Mobilize savings towards productive sectors. At present there are 34 banks working in the financial market of the country. The total bank credit in the same year was TK.

Experts predict that with the rapid rise of Shari`ah-based systems. Contribute to establishment of a society by equitable distribution of wealth Establish justice in trade and commerce in the country. the industry will ultimately turn to be the financial mainstream in Bangladesh. Islamic . Extend banking services towards the poor. If an Islamic banking Act is introduced. This is especially so given that Bangladesh is already quite well known for its Islamic banking infrastructure and may thus be a draw for petrodollars. Islamic Discipline of Economics Emerged in late-colonial India Islamic Economics Needs a Great Deal of Creative Thinking. Render services for the economic development of the nation. ISLAMIC BANKING is increasingly becoming an area to watch in the local banking industry. Develop morals among the people and to establish the shariah in the field of trade and commerce. the Islamic banking systems will even further flourish. Bankers believe that the Islamic banking is set for even more progress. Need to Combine Islamic Economic History with Islamic Institutional Economics. Mudaraba Frame Work. if a law governing Islamic Banking policies is introduced. helpless and low-income group of people in the society in order to uplift of their standard of living. The religious point of view. CONCLUSION It may be concluded from the above discussion that the Islamic Banking System shows an overall success in both deposits and investment positions since it started its banking activities.  Create employment opportunities by investing savings towards prospective              economic sectors. Contribute towards establishment of an Islamic Economic System in the Country.

are also behind failures and collapses. Employees’ lack of knowledge of Islamic banking principles would have a negative effect on the system. the makers of progress and success. Emphasizing the need to focus more on education and training to strengthen the sector. following modern asset management principles. with strong growth in the Middle East. the Islamic banking theory as regards investment of funds and acceptance of deposits is based on two fundamental techniques such as Mudaraba (capital financing) and Musharaka (Partnership).banking. Although. This ultimately results in a reduction of the long-term investment of the bank. But its tremendous progress also carries a lot of challenges for those who work in the field. We’ll also advise member countries on how to manage Zakah and Waqf successfully. It was observed from the response of a few small-scale industrialists that the remarkable advantages they get from the bank are easy formalities of obtaining loan and quick action in processing loan activities. We know that humans. which was not the case with the Islami Bank. clients of all levels can have free access to the bank and can discuss business matters with senior officials. since the beginning of banking activities the bank has not invested any amount in any project on the Mudarab mode of investment. as they would not be able to market products effectively. the bank did not succeed much in accumulating deposits under various term deposits. which started as experiments of individuals. especially investment towards industrial sectors. the prospects of Islamic banking are also bright with the flush of petroleum money. There is an immense need for Bangladesh Bank to have a group of Islamic bankers and Shariah experts of its own who can properly monitor and formulate guidelines for all Islamic banks and Islamic banking windows in the conventional banks. It is always assigned that the growth rate of bank branches should increase the savings position of the bank. It is also observed that. Islamic banking is seeing rapid expansion worldwide. Apart from its growing share. As regards the overall investment position of the Islami Bank Bangladesh it may be concluded that. BIBLIOGRAPHY . Moreover. Need for investing more in human capital development.

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