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Chapter-1: Introduction

1.1 Introduction

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Islamic banking and finance is a creation of modern age. Capitalism argues, capital- one of the key factors of production, deserves fixed return whereas the entrepreneurs have to bear all the risks. The conflict of opinions with the Islamic values starts from this very basic point. As the conventional banking systems follow the philosophy of capitalism and interest which is forbidden according to Islamic Shariah, the Muslims made the first move toward the Islamic financial system was observed in the second half of 20th century when the Muslim world got liberation from colonial powers. Conference of Foreign Ministers of Muslim countries (1973) can be marked as a landmark of the growth and popularity of Islamic Financial Institutions (IFIs). Soon after this conference, Bangladesh signed the Charter of Islamic Development Bank August 1974. Analyzing the demand and feasibility of Islamic banking, Islami Bank Bangladesh Limited, the first Islamic bank of Bangladesh was established in March 19833. Currently eight Shariah based Islamic banks are operating in Bangladesh with their significant contributions to the banking industry and to the financial system of the country

  • 1.2 Objectives of the Research

The key objectives of the study are:

To review the distinctive concepts of Islamic banking To evaluate the current practice and performances of the Islamic banks of Bangladesh

To evaluate the potentials and future prospects of Islamic banking systems in Bangladesh

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This is a secondary data based report. Information has been collected from various secondary sources like journal articles, annual reports of different banks, books and different websites. All the existing Islamic banks of Bangladesh are included in this study. The first two objectives of the research are subject to be achieved through the secondary data review and the qualitative discussion. Current Islamic banking practices and the performances of different Islamic banks are measured and analyzed from the financial statements of the banks and information from different relevant websites. Statistical analysis tool SPSS and MS Excel had been used for analysis and graphical presentations.

1.4 Review of Literature

A significant level of development had been observed in Islamic banking research since the last decade. The western analysts and economists demonstrated their emphasis on the interest-free business transactions. These western economists discovered the connection between the interest rates and some key macroeconomic instabilities like- unemployment, inflation or negative growth (Bernante andGertler, 1990; Fisher, 1933; Greenwald and Stiglitz, 1988; Hayek, 1933 & 1939; Minsky, 1977; Smith, 1904; Wicksell, 1935). In different parts of the world, Islamic banking researches had been mostly conducted by Muslims and a small portion by the non-Muslims. The works of Erol and El-Bdour (1989) and Erol et al (1990) revealed three key selection criteria for Islamic banks: fast and efficient services, reputation and confidentiality. According to their findings, religious motivation was not a prime criterion. On the contrary, Metawa and Almossawi (1998) and Naser et al (1999) found loyalty to Islamic belief the primary criterion for selecting Islamic banks in countries like Bahrain and Jordan. Similarly, some

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other scholars discovered same findings in their studies in Indonesia, Kuwait and Malaysia (Kader 1993 & 1995; Osman et al, 2009; Othman and Owen, 2001 & 2002; Wakhid and Efrita, 2007). A study on a large number of respondents by Dusuki and Abdullah (2006) discovered that Islamic bankers should not only rely on promoting the Islamic factors but also the necessary service quality. The three most important factors found in their study were competence, friendliness and customer service quality. Hanif & Iqbal (2010) categorized Islamic modes of financing objectively in two heads; Sharia compliant and Sharia based. Later, Hanif (2011) discussed these terms used for modes of financing briefly. He explained Sharia compliant products as the modes of financing where return of financier is predetermined and fixed but within Sharia constraints. The tools which are relatively harmonizing the operations of Islamic financial system with conventional banking includes Murabaha (cost plus profit sale), Ijara (a rental arrangement), Bai Salam (spot payment for future delivery), Bai Muajjal (sale on deferred payment), Istasna (order to manufacture) and Diminishing Musharaka (house financing) are all Sharia compliant products. Sharia based transactions means the financing modes adopted by IFIs on profit and loss sharing basis including Musharaka (partnership in capital) and Mudaraba (partnership of capital and skill). Under Sharia based modes of financing returns of financier are not fixed in advance rather it depends upon the outcome of the project. However loss is to be shared according to capital contribution. Following the rule of substance over form one can conclude that the major difference between conventional and Islamic financing is Sharia based modes of financing.

Mahal & Rahman (2013) made a comparative analysis between conventional and Islamic banks of Bangladesh. They discussed the distinctions of product or service

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and the distinctions in terms of business efficiency between Islamic Banks and Conventional Banks. Their key findings on the product or service differences are about the principles of business, variation in goals, variations in deposit etc. The conventional banks of Bangladesh deal with man-made principles or principles provided by Bangladesh Bank. But Islamic banks follow Shariah based principles under the supervision of BB. Conventional banks currently focusing on the CSR activities but Islamic banks are focusing on the IT development though they also consider the CSR issues. Conventional deposit schemes are like the fixed deposit, savings or short notice deposit and current deposit. The Islamic banks offer through Al-Wadeeah principle and Mudaraba principle. These researchers also discussed the distinctions in terms of business efficiency. Profitability of conventional banks depends on loans and investments both; whereas Islamic banks depends on only investments sectors. Conventional banks have to maintain more SLR (19%) than the Islamic banks (10.5%). Islamic banks do not collect deposits through conventional methods rather on the basis of profit & loss sharing notion.

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Chapter-2: Banking Industry of Bangladesh

2.1 Overview of Banks

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After the independence, banking industry in Bangladesh started its journey with 6 nationalized commercialized banks, 2 State owned specialized banks and 3 Foreign Banks. In the 1980's banking industry achieved significant expansion with the entrance of private banks. Now, banks in Bangladesh are primarily of two types:

Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991 (Amended in 2003) are termed as Scheduled Banks

Non-Scheduled Banks: The banks which are established for special and definite objective and operate under the acts that are enacted for meeting up those objectives, are termed as Non-Scheduled Banks. These banks cannot perform all functions of scheduled banks.

There are 56 scheduled banks in Bangladesh who operate under full control and supervision of Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and Bank Company Act, 1991. Scheduled Banks are classified into following types:

State Owned Commercial Banks (SOCBs): There are 5 SOCBs which are fully or majorly owned by the Government of Bangladesh.

Specialized Banks (SDBs): 3 specialized banks are now operating which were established for specific objectives like agricultural or industrial development. These banks are also fully or majorly owned by the Government of Bangladesh.

Private Commercial Banks (PCBs): There are 39 private commercial banks which are majorly owned by the private entities. PCBs can be categorized into two groups:

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Conventional PCBs: 31 conventional PCBs are now operating in the industry. They perform the banking functions in conventional fashion i.e interest based operations.

Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in Bangladesh and they execute banking activities according to Islami Shariah based principles i.e. Profit-Loss Sharing (PLS) mode.

Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of the banks which are incorporated in abroad.

There are now 4 non-scheduled banks in Bangladesh which are:

Ansar VDP Unnayan Bank,

Karmashangosthan Bank,

Probashi Kollyan Bank,

Jubilee Bank

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2.2 Overview of Non-banks

Non-Bank Financial Institutions (FIs) are those types of financial institutions which are regulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank. Now, 31 FIs are operating in Bangladesh while the maiden one was established in 1981. Out of the total, 2 is fully government owned, 1 is the subsidiary of a SOCB, 13 were initiated by private domestic initiative and 15 were initiated by joint venture initiative. Major sources of funds of FIs are Term Deposit (at least six months tenure), Credit Facility from Banks and other FIs, Call Money as well as bonds and Securities.

The major difference between banks and FIs are as follows:

FIs cannot issue cheques, pay-orders or demand drafts.

FIs cannot receive demand deposits,

FIs cannot be involved in foreign exchange financing,

FIs can conduct their business operations with diversified financing modes like syndicated financing, bridge financing, lease financing, securitization instruments, private placement of equity etc.

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2.3 Overview of Islamic Banks


Numbers of

Operational Style of Scheduled banks


Full-fledged Islamic banking operation


Partial Islamic banking operation


Total full-fledged or partial banking operation





ypes of Islamic Bank



Full-fledged Islamic banks (8)


Convention banks with partial Islamic Banking (8)


Conventional banks with partial Islamic window (7)




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Name of Banks

Year of


  • 1. Islami Bank Bangladesh Limited (IBBL)


  • 2. ICB Islamic Bank Limited (ICBIBL)

  • 3. Al-Arafah Islami Bank Limited (AAIBL)


  • 4. Social Islami Bank Limited (SIBL)


  • 5. Export Import Bank of Bangladesh Limited



  • 6. First Security Islami Bank Ltd. (FSIB)


  • 7. Shahjalal Islami Bank Limited (SJIBL)

  • 8. Union Bank Limited (UBL)




List of

Islamic banks:

Portion of Islamic banks in banking industry: 14% 86% Scheduled banks(Non Islamic) Islamic banks
Portion of Islamic banks in banking industry:
Scheduled banks(Non Islamic)
Islamic banks

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Chapter-3: Evolution of the Islamic banking in Bangladesh

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People’s initiative

In the early twentieth century, after the formation of East Bengal and Assam

province, centering Dhaka as its capital, the socio-economic development of East

Bengal was in a new spur. At that time an initiative was taken to set up and manage

interest-free banks in different areas of Bangladesh including Jessore and Cox's

Bazar. But those initiatives could not get solid foundation on the backdrop of then

socio-economic and political circumstances. Although individual efforts and

organizational initiatives continued, however, introduction of Shari’ah-based

banking remained a dream for a long time.

State-level initiatives or interventions

After independence, a number of initiatives were taken up from different stages to

establish an Islamic bank from the state level. The Bangladesh government signed

the IDB Charter in 1974. Member countries, through the signing of the charter,

were committed to reconstructing their banking system in consonance with the

Islamic principles.

The definition of Islamic banks was approved in the Dakar conference of OIC

member countries in Senegal in 1978. Member Countries of the OIC also approved

a set of recommendations for gradual transformation of their banking system into

Islamic. Bangladesh actively participated in the conference and

qualified to become a partner in implementing the recommendations.

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Bangladesh Bank’s supportive role

From the very inception, the Bangladesh Bank has been playing a highly active

and positive role in implementing the principles and procedures of Islamic banks in

the country.

On 4 April 1981, Ministry of Finance issued a letter to Bangladesh Bank, directing

all state-owned banks of the country, on the experimental basis, to open separate

Islamic banking counter in all of their branches in towns and villages and to keep

separate ledgers for them.

In November 1980, A. S. M. Fakhrul Ahsan, the research director of Bangladesh

Bank, was deputed to the Middle Eastern countries to see for himself the activities

of Islamic banks and Islamic financial institutions operating there. In January 1981,

he submitted a comprehensive report with a set of recommendations to initiate the

process of setting up Islamic banks in Bangladesh.

Later, on 18-19 March 1981, on the initiative of BIBM a two-day seminar on

Islamic banking was organized in Dhaka. The then first deputy Governor of

Bangladesh Bank M. Khalid Khan inaugurated the seminar as chief guest, where

recommendations were taken up to set up Islamic banks in both public and private

sectors.On June 9-11, 1981, a senior official of the Bangladesh Bank took part in

an international seminar held in Geneva, Switzerland on Islamic Banking and


On 16 October, 1982, at the 4th Bankers’ meeting of the Bangladesh Bank, chaired

by the then-governor Nurul Islam, decision was taken to introduce Islamic banking

in all branches of six state-owned commercial and two specialized banks at

metropolitan and district headquarters level as soon as possible.

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In the light of the decision of Bangladesh Bank and for creation of suitable

manpower for Islamic Banking, a one-month long full-time residential course was

held on 6 October 1981 at Sonali Bank Staff College. A total of 37 officers from

Bangladesh Bank, all state-owned banks, BIBM and then-proposed 'Dhaka

International Islamic Bank Limited (now, the Islami Bank Bangladesh Limited)

took part in the course.

The then Principal of Sonali Bank Staff College M. Azizul Haq played a vital role

in the successful implementation of the course. The opening ceremony was

presided over by M. Khaled, the then Chairman and Managing Director of Pubali

Bank.While the training course was underway, M. Khaled was appointed second

deputy governor of Bangladesh Bank. He was the special guest at the closing

ceremony of the training program as the Deputy Governor of Bangladesh Bank.

Other Initiatives

From 1979 to 1982, a number of public and private institutions in the country took

part in the preparatory work for the establishment of Islamic banks. At the time, a

`Working Group for the Islamic banking in Bangladesh’ was constituted under the

leadership of M. Khaled. He also led the reorganizing process of the group and

subsequently it came to be known as ‘Bangladesh Islamic Bankers Association


At that time, several national and international seminars and training courses on

Islamic banking were organized by Bangladesh Institute of Bank Management

(BIBM), Islamic Economics Research Bureau, Bai’tus Sar’f Islamic Research

Institute, Chittagong where, senior bankers, economists and professionals of the

country took part. In the meantime, more than 300 bank officials were trained.

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Emergence of a real entity

A number of local individuals as well as Islamic Development Bank (IDB) and

various financial institutions began to extend their cooperation to establish Islamic

banks in the country. With the commendable initiative of Islamic Development

Bank (IDB) Kuwait Finance House, Dubai Islamic Bank, Bahrain Islamic Bank,

Islamic Investment and Exchange Corporation of Luxemburg, Al-Razi Company

for Currency Exchange and Commerce of Saudi Arabia and three Ministry of

Kuwait provided 70% capital for the establishment of an Islamic bank for the first

time in Bangladesh.

The remaining capital came from local entrepreneurs, where Bangladesh

Government’s share was five percent. On 13 March 1983, Islami Bank Bangladesh

Limited was registered as the first shari’ah-based Bank in South-East Asia and

began operation on 30 March of the year.

Along the path of success of the country’s first Islamic bank, several Islamic banks

were established in later years. In 1987 Al Baraka Bank, in 1995 Al-Arafah Islami

Bank and Social Investment Bank and in 2001 Shahjalal Islami Bank were


On 1 July 2004, Exim Bank and 1 January 2009 First Security Bank have

transformed their activities to Islamic banking style. Shari’ah-based 'Union Bank'

was established in 2013.

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Chapter-4: Islamic banking system

4.1 Investment principles of Islamic banks

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There are different modes and mechanisms of investment under the Islamic Sharia’ah which are mainly categorized are under:

  • 1. Bai Mechanism

  • 2. Sharing or Partnership Mechanism

  • 3. Ijara Mechanism




Bai- Murabaha Bai- Muazzal • Bai-Salam • Bai-Istisna


• Mudaraba

• Musharak a

  • Bai- Sharing



• • Hire Purchase shirkatul under Purchase Hire


Islamic banks do not directly deal with money. They run business with money. The funds of Islamic banks are mainly invested in the following modes:

  • 1. Mudaraba

  • 2. Musharaka

  • 3. Bai-Murabaha

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  • 5. Salam and Parallel Salam

  • 6. Istisna and parallel Istisna

  • 7. Izara

  • 8. Izara Muntahia Bittamleek (Hire purchase)

  • 9. Hire Purchase Musharaka mutanaqisa (HPMM)

    • 10. Direct investment

    • 11. Investment auctioning etc.

    • 12. Quard

    • 13. Quard Hassan etc

Mudaraba: Mudaraba refers to a contract between at least two parties in which

the bank as the investor supplies the entire capital of the business. Hence, a

relationship is formed in which banks act as the supplier of capital. The

entrepreneur acts as the manager of capital only. When the venture ends, the

manager of capital i.e. the entrepreneur pays the entire capital back to the bank,

along with an agreed proportion of profit. If there is any loss, it is borne by the


Musharaka: The word Musharaka stands for a partnership that shares both profit

and loss. Such joint venture way of financing is designed to limited production or

commercial activities of long duration. Under Musharaka, the bank and the

customer jointly contribute capital as well managerial expertise and other essential

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services at agreed proportions. Profit or losses are shared according to the contract

agreed upon.

Bai-Murabaha: The word ‘Murabaha’ means a cost-plus profit/mark-up contract.

In this system of financing the bank agrees to purchase for a client. The client will

then repay the bank within 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. Thus, under Bai-Murabaha mode of financing, the

bank earns a profit without bearing any risk.

Bai-Salam: Bai-Salam means a sale in which an advance payment is made for a

later delivery. Usually the seller is an individual or business and the buyer is the

bank. Bai-Salam benefits both the banks and seller. The banks locks in the price at

which the commodities will be purchased and upon delivery can profit for selling

the commodities. On the other hand, by receiving advance payments for

commodities, the seller can use the money for meeting various financing needs,

particularly any working capital requirements.

Bai-Muajjal: Bai-Muajjal refers to a contract resembling credit sale. Under this

type of contract, the seller sells certain specific goods to the buyer at an agreed

fixed price payable at a certain fixed future date in lump sum or in fixed

installments. The sold goods must be allowed under both Shariah and the law of

the country. Under this type of financing, Islamic banks buy goods for those who

need them and then, receive a fixed payment for the goods at a later date.

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Ijarah: Ijara refers to leasing in Islamic finance. Leasing by Islamic banks is very

similar to the leasing of conventional banks. It is argued that: “The leasing

agreement is based on profit sharing in which the bank buys the movable or

immovable property and leases it to one of its client for an agreed sum by

installments and for a limited period of time into a saving account held with the

same bank. These installments are invested in Mudaraba investment for the

customer’s account. The accumulated profit generated from the payments, and the

payments themselves are invested in the bank’s investment ventures over the time

period of lease, contributing to eventual purchase of the leased assets.” The

difference of Islamic banking lease with the traditional lease is that under Islamic

banking leasing the risk related to leasing is shared between the lessee and lessor.

There are various modes of leasing under Islamic banking, discussion of which

does not fall under the specific purview of this report.

Hire Purchase under Shirkatul Meelk: Under this mode of financing, Islamic

banks share equity with the client in purchasing some assets. Both the bank and the

client share the ownership and the share of benefit and loss in operating the asset.

The portion of the asset owned by the bank is leased out to the client for use under

specific conditions (like rent) and then, the client buys the bank’s portion upon

agreed upon terms.

Qard: Qard refers to interest-free loan provided by Islamic banks to its clients.

According to various authors ‘the main aim of this loan is to help needy people in a

society in order to, make them self-sufficient and to raise their income and

standards of living’.

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4.2 Investment system for import/ export business as per Islamic Shariah

Import business

The import business is broadly divided into following three categories

1. Import to Commercial goods

2. Import of raw materials for production purpose

3. Import of capital/ machineries

a) Import under the Bai-Murabaha system

Bai-Murabaha is a contract between a buyer and a seller under which the seller

sells certain specific goods permissible under Islamic Shariah and law of the land

of the buyer at a price determined by charging agreed profit, margin or mark up

over the cost price. In this case, the buyer either makes cash payment to receive the

goods or is allowed to make payments by installments or on a fixed future date.

The profit mark-up may be fixed in lump sum or in percentage over the cost price

of the goods.

Some features of Bai-Murabaha system:

The client(buyer) request the bank to purchase particular goods and promise to

purchase the same from the bank at a price fixed by charging profit over the cost


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Under this mode there is no scope to increase the price once it is fixed.

After buying the goods the bank has to bear all the risk until goods are actually

delivered to the client.

b) Import under the Bai-Muazzal system

Under this mode of investment, a contract is made between the buyer and seller for

buying and selling of goods approved by Islamic Shariah and law of the land on

the stipulation to pay the agreed price at a specific future date or by fixed

installments. Some features of Bai-Muazzal: most of the features of Bai-

Murabaha and Bai- muazzal are alike except the following-

Bai-Muazzal sale is executed completely on deferred payment system

The sale price is determined adding the profit with cost price. It is not necessary

to disclose the cost price and profit markup separately to the clients. But in Bai-

Murabaha, the cost price and the profit mark-up ratios are to be disclosed

separately to the client.

c) Import under diminishing proprietorship method (hire purchase under shirkatul Meelk- HPSM)

Capital machineries and other re-usable goods are imported under this mode. It

combines three modes: rent (Izara)), partnership (shirkat) and buying and selling.


The bank and the client invest their capital jointly through a contract called

partnership (shirkat)

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The bank leases its portion at a certain rent

The bank sells its portion to the client on receipt of the price under this system.

d) Import under the Musharaka system

Musharaka is a Shariah compliant mode of investment wherein the bank and the

client jointly provide the capital. Here no prefixed profit is determined like in Bai-

Murabaha or Bai-Muazzal. Profit, if any, is distributed as per agreement between

the client and the bank while the loss, if any, is shared according to capital ratio.

e) Import under Mudaraba system

Under the Mudaraba mode of investment, the client or the businessman or capital

user does not invest any capital. In this case, the bank alone invests all the required

capital and the entrepreneur (the client) directly manages and looks after the


Under this mode, the bank bears all the expenditures related to imports. In this

case, the bank supervises the use of capital, system of business operation and

income of the business etc. the client maintains all the registers, documents and

accounts concerning buying & selling of the goods. In this case, profit, if any, is

distributed between the bank and the client as per the agreed ratio and loss is fully

borne by the bank.

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Export business

a. Pre-shipment finance

i. Back to back letter of credit(back to back L/C)

Bank extends back to back L/C facilities to exporters to procure/import raw-

materials for producing/ manufacturing exportable goods at pre-shipment stage

under the mode of Bai-Muazzal. Initially, no financial facility from the bank is

required when the back to back L/C is opened. But if the exporter fails to pay the

L/C value at maturity or on due date, the bank provides financial facilities to the

client under Bai-Mazzal mode.

ii. Bai-murabaha TR(trust receipt)

To procure/purchase raw-materials for executing export order the bank provides

investment facilities to the client under the mode of Murabaha TR. In this case, the

bank obtains Trust Receipt signed by the client and handover the imported goods to

the exporter.

iii. Bai-Salam

Under the Bai-Salam mode of investment, payment is made in advance to purchase

the goods and the supplier makes promise to delivers the goods at a future date.

Investment under Bai-Salam mode is made to meet other expenses of the exporter

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excepting the manufacturing cost of exportable goods. The bank purchase a portion

of goods under the Bai-Salam mode and makes advance payment for the same on

the condition that the arrangements will be made by the exporter to export the

goods purchased by the bank along with other goods of the exporter.

iv. Musharaka

Pre-shipment investment may be made under Musharaka mode of investment if

there is any pre-determined investment agreement.

b. Post-shipment finance

Bank provides post-shipment facilities through negotiation (FBN) and purchase of

export bills. It normally negotiates or purchases the export documents if the

documents/bills prepared by the exporter are found in order/correct in all respect.

The bank adjusts the liabilities against FBN/FBP after receiving the export

proceeds and earns exchange income from this. This mode of investment is in

compliance with the Islamic Shariah.

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Chapter-5: Performance of Islamic banks

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5.1 Current Performance of Islamic Banks

Table: Net profits














(2,062.21) 858.99










(1,358.24) 1,816.14






11,662.44 1,666.06



(1,796.15) 1,992.87

1,032.46 2,017.72








(1,061.04) 1,694.14

1,465.22 2,083.08




12,304.89 1,757.84













Here, we see that except the ICB, most of the Islamic banks shows remarkable

increase in their profitability. Islami Bank Bangladesh Limited, the first Islamic

bank of Bangladesh is leading in term of net profit since the last decade. On the

other hand, ICB Islami Bank Limited shows net loss in almost all the years of the

last ten years. This one is an exception. One reason behind this consistent negative

figure in profitability is the change of ownership. The other banks show more or

less gradual increase in their profitability or portray the upward trend in financial

performance. Union Bank Limited, which is the latest incorporation, hasn’t

published any official financial statements yet.

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Net profit (Average):

Chart Title 2000 1800 1600 1400 1200 1000 1757 1666 800 1374 1400 600 400 816
Chart Title

Figure: Profitably trend of Islamic banks

5.2 Growth of Islamic banks

Islamic banking, a new genre of the Shari’ah-based banking system, has been able

to prove its proficiency and augur its potentials in recent years with the average

annual growth of 18 percent, despite the global recession and diverse challenges

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confronted by various banks in Bangladesh pursuing the conventional banking

system. A dominant indicator of the continued growth of the Islamic banking

practices is that current assets of more than 500 Islamic financial institutions

amounted to be about two trillion U.S. dollars. It is expected that the amount will

exceed 5 trillion U.S. dollars in the next five years. Now, Islamic banking has 38

million customers across the globe. Of them, 13 million or 35 percent are in

Bangladesh alone. Moreover, the biggest Shari’ah-based Islamic bank in

Bangladesh contains 50 percent of the global microcredit.

The Islamic banks have been making significant contributions to the process of

poverty reduction, inclusive growth and economic development of the country.

Public demand and market share of this approach are growing by degrees. With 18

percent market share, Islamic banking in Malaysia has achieved the fame of

Shari’ah banking center (Hub) of the world. With a limited number of Islamic

banking products, the United Kingdom and Singapore are striving to attract Islamic

banking in emerging markets through simplification of the financial policies. With

more than one-fifth market share of the country, one-third share of the global

Islamic banking customers and fifty percent share of the global Islamic

microcredit, Bangladesh has the potentials to be an important center of Islamic

banking on the global map with the help of competent leadership, incentives and

appropriate branding.

Bangladesh is one of the emerging economies in South Asia. The Islamic banking

set out its glorious journey in this country three decades ago. Now, this banking

system covers one-fifth of the country's total banking. On the basis of asset value

(size of assets) Bangladesh holds 12 th position in the global Islamic bank ranking.

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Considering the financial inclusion or `the nature of distribution’ rather than `the

size of assets’, the position of Islamic banking in Bangladesh is quite encouraging.

The average growth of deposit in the banking sector in last five years (2009-2013)

was 19% which was 20% for Islamic banks. During this period the average

investment growth of country’s banking sector was 18%, which was 20% for

Islamic banks. For the same period, the total assets in banking sector increased by

19%. In contrast, Islamic banks have achieved 21% growth. In the last five years,

mentioned above, the average growth of equities in Islamic banks was 24%, which

was 27% for the total banking sector of the country. A number of public banks

have increased their capital in 2013, which has contributed to raise the equity


P a g e | 31 Considering the financial inclusion or `the nature of distribution’ rather

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I. Deposits

P a g e | 32 I. Deposits Total deposit of the Islamic banks stood at
P a g e | 32 I. Deposits Total deposit of the Islamic banks stood at

Total deposit of the Islamic banks stood at Tk. 1,13,360 crore in December 2013,

which was 18.00% of total deposits of the country and 29% deposits of the private

commercial banks. Total deposits of the Islamic banks stood at Tk. 1,33,561 crore

in June 2014.

ii. Number of depositors

In March 2014, the customer deposits of Islamic banks in the country were 1 crore

and 17 lakh, which was 17.92% of the total customer deposits. Until this period,

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country's total customer deposits for all private commercial banks were 2 crore and

78 lakh, of them 42.12% was in the Islamic banks.

iii. Investment

Investment Share in Banking Industry'13 Investment Share among PCBs'13 Islamic Banks (8); 21; 21% Islamic Banks
Investment Share in Banking Industry'13
Investment Share among PCBs'13
Islamic Banks (8); 21; 21%
Islamic Banks (8); 30.07; 30%
Conventional Banks (31); 69.93; 70%
Conventional Banks (48); 79; 79%

Total investment of the Islamic banks was Tk. 97,530 crore on December 2013,

which was 21% of total investments in the country's banking sector and 30%

investment of the private commercial banks. Islamic banks’ investment stood at

Tk. 113,796 crore on June 2014.

iv. Classified Investment

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On December 2013, 8.90% investment of the country's banking sector was in

classified, which was 4.2% for Islamic banks. At the same time, the amount of

classified investments in Islamic banks, compared to equity was 39.9%, which was

20% lower than the country's banking sector.

P a g e | 34 On December 2013, 8.90% investment of the country's banking sector

v. Assets

P a g e | 34 On December 2013, 8.90% investment of the country's banking sector
P a g e | 34 On December 2013, 8.90% investment of the country's banking sector

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On December 2013, the size of Islamic banks assets stood at Tk. 135,900 crore,

which was 17 % of country’s banking assets and 27.40% of the total assets of

private commercial banks. Total amount of assets of Islamic banks was Tk.

147,604 crore on June 2014.

Vi. Equity

Equity Share in Banking Industry'13

Islamic Banks (8) Conventional Banks (48) Conventional Banks (48); 85; 85% Islamic Banks (8); 15; 15%
Islamic Banks (8)
Conventional Banks (48)
Conventional Banks (48); 85; 85%
Islamic Banks (8); 15; 15%

Equity Share among PCBs'13

Conventional Banks (31) Islamic Banks (8) Conventional Banks (31); 77; 77% Islamic Banks (8); 23; 23%
Conventional Banks (31)
Islamic Banks (8)
Conventional Banks (31); 77; 77%
Islamic Banks (8); 23; 23%

By following the principles of capital adequacy rules set by the central bank, Islamic banks’ share in total equity was in a satisfactory level in the past years. Total equity of Islamic banks was Tk. 10,280 crore on December 2013. It is 15 percent equity of the country's banking sector and 23 percent equity share of private commercial banks. Total equity of the country’s Islamic banks stood at Tk. 11,382 crore in June 2014.

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vii. Remittance

Remittance Share in Banking Industry Remittance Share among PCBs) (Jan-Jun'14) (Jan-Jun'14) Islamic Banks (8); 28; 28%
Remittance Share in Banking Industry
Remittance Share among PCBs)
Islamic Banks (8); 28; 28%
Conventional Banks (48); 72; 72%
Conventional Banks; 57; 57%
Islamic Banks; 43; 43%

Hard-earned remittance by Bangladeshi expatriates is one of the main pillars of

country’s overall economy. Islamic banks play a significant role in transferring it to

beneficiaries. Bangladesh received a total of Tk. 57,044 crore in first 6 months

(January-June) of 2014. Of the amount, Tk. 15,952 crore has come through the

Islamic banks, which was 28% of the total remittance inflow in the country and

43% of PCB’s.

viii. Import

The amount of total imports in Bangladesh, during January-June of 2014, was Tk.

167,014 crore. Islamic banks imported over Tk. 34,952 crore; which was 21% of

the total imports. The Islamic banks were at the forefront in importing various raw

materials and essential goods including fertilizers, cotton, rice, wheat, etc.

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P a g e | 37 ix. Export Total exports of the country, during January-June 2014

ix. Export

Total exports of the country, during January-June 2014 period, stood at Tk. 110,096

crore. The amount of Tk. 26,787 crore has been exported through the Islamic

banks, which was 4% of total national exports. Islamic banks have been playing a

leading role in drawing of foreign exchange through the export of various products

including ready-made garments.

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P a g e | 38 x. Ratio (Capital Adequacy CAR), ROA, and ROE Compared to

x. Ratio (Capital Adequacy CAR), ROA, and ROE

P a g e | 38 x. Ratio (Capital Adequacy CAR), ROA, and ROE Compared to

Compared to 10 percent Capital Adequacy Ratio (CAR) set by the Central bank,

country's banking sector CAR was 11.50% in December 2013. At that time, capital

adequacy ratio of the Islamic banks was 12.16%.

Total asset-based average net profit (Return on Asset-ROA) for the Islamic banks

was Tk. 0.98 during 2012 and 2013. Total equity-based average net profit (Return

on Equity-ROE) was Tk. 13.05 and the amount was Tk. 14.11 for the overall

banking sector in the same period.

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Chapter-6: Problems and Challenges of Islamic Banking in Bangladesh

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6.1 Nature of the Problem and Challenges

The Islamic banks in the world have been facing a number of challenges. Side by

side, the Islamic banking in Bangladesh is also facing numerous problems of

challenges. First, they have not yet been successful in devising an interest-free

mechanism to place their funds on a short-term basis. 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, they have, in fact, only changed the nomenclature

of their transactions. Third, the Islamic banks do not have the legal support of the

Central bank in Bangladesh, do not have the necessary expertise and trained

manpower to appraise, monitor, evaluate an audit the projects that are required to

finance. As a result, they cannot expand despite having huge excess financial

liquidity. The implementation of an interest-free banking in Banking raises a

number of questions and potential problems which can be seen from the macro and

micro operational point of view. A partial list of the issues confronting Islamic

banks in Bangladesh include:

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6.2 Problems Related to Macro Operation of the Islamic Banks

  • 1 Liquidity and Capital

  • 2 Valuation of bank Assets

  • 3 Financial Stability

  • 4 The Ownership of Banks

  • 5 Lack of Capital Market and Interest-free Financial Instruments

  • 6 Insufficient Legal protection

  • 7 Controlling and Supervision by the Central bank on the Basis of Islamic Shariah

  • 8 Lack of Unified Shariah Rulings

  • 9 Absence of Islamic Inter-Bank Money Market

    • 10 New Banking Regulations

    • 11 Accounting principles and Procedures

    • 12 Shortage of Supportive and Link Institutions

    • 13 Shortage of Skilled and Trained Manpower in Islamic Shariah banking

    • 14 Lack of Co-operation among the Islamic Banks

    • 15 Lack of Familiarity by International Financial and Non-financial Sector with

Islamic Products and procedures.

  • 16 Severe Competition in the Financial Sector

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18 Inadequate Track Record of Islamic Banking

19 Absence of Infrastructure for International Islamic Trade Financing

  • 20 Defaulting Culture of the Borrowers

  • 21 Short-term Asset Concentration in the Islamic Banks

  • 22 Lack of Course or paper on Islamic Economics, Banking and Finance at the

Educational Institutions.

  • 23 Lack of Uniform Operational procedure of Islamic Banking

  • 24 Lack of Specialized Islamic Banks and Non-Bank financial Institutions

  • 25 Lack of Consortium or Syndication of the Islamic Banks

  • 26 Lack of Harmonization of Islamic financial Practices

  • 27 Lack of Inter-country Study on the practical Operations of Islamic Banking

  • 28 Lack of Secondary Securitization Market

  • 29 Lack of Coordinated Research Work on Islamic Economics, Banking and


  • 30 Lack of Apex Training Institute for the Islamic Banks.

6.3 Problem Related to Micro Operation of the Islamic Banks:

1 Increased Cost of Information

  • 2 Control over Cost of Funds.

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  • 4 Excess Resort to the Murabaha Mode of Financing

  • 5 Utilization of Interest Rate of fixing the Profit Margin in Bai-Modes

  • 6 Financing Social Concerns.

  • 7 Lack of Positive Response to the Requirement of government Financing.

  • 8 Failure of Islamic Banks to Finance High Return Projects.

  • 9 Sacrifice of allocative Efficiency

    • 10 Loss of Distributive Efficiency.

    • 11 Depression of Profit.

    • 12 Lack of Full-fledged Shariah Audit.

    • 13 Fraud-Forgery or corruption in Islamic Banks.

    • 14 Minimum Budget for Research and Development.

    • 15 Working Environment.

    • 16 Issuance of Letter of Guarantee (L/G)

    • 17 Minimum Budget for Research and Development.

    • 18 Lack of Shariah Manual or Guidelines.

    • 19 Islamic Investment Risk Analysis and measurement Methodology.

  • 20 Non-exemption of Stamp Duty for Purchasing Property by Banks.

  • 21 Lack of Co-operation between Islamic Banks and Islamic NGOs for extending


  • 22 Lack of Establishment of Links with other Training Institutes and Shariah

Supervisory Bodies.

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23 Lack of Intention of the Management to be strict with Shariah Guidelines. The

above problems are some of the burning problems confronting the Islamic banks in

Bangladesh. However it is felt that much operational work and in-depth research

work has to be undertaken to allow the Islamic banks to flourish with highest

quality and strength.

Chapter-7: The Future of Islamic Banking in Bangladesh

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  • 1. Need for Re-organization of the whole financial System

Review of the problems of Islamic banking in general and Islamic banks of

Bangladesh in particular poses a challenging feature for the promotion and survival

of Islamic banks in Bangladesh. The policy implication is not that Islamic banks

should never be floated within the conventional banking framework. Rather it is

the conventional banking system whose operational mechanism needs to be re-

examined and converted into PLS system considering beneficial impact of the

latter on the economy. However, as long as Islamic banks are to operate within the

Conventional banking framework, the recommendations under the following heads

may be taken note of.

  • 2. New banking philosophy for the Islamic Banks

There seems to be a gap between the ideals and actual practice of Islamic banks in

Bangladesh. In their reports, booklets, bulletins and posters there banks express

their commitment to striving for establishing a just society free from exploitation.

Study shows that a little progress has been achieved so far in that direction.

Though this failure is attributed mainly to the pervasive influence of conventional

banking system itself, lack of vigilance of the promoters of Islamic banking in

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realizing the objective is no less to blame. There should be a thorough review of

policies that have been pursued by these banks for about a decade and points of

departure have to be identified to redesign there of action.

  • 3. Future Policy and Strategy

The first action that deserves immediate attention is the promotion of the image of

Islamic banks as PLS banks. Strategies have to be carefully devised so that the

image of Islamic character and solvency as a bank is simultaneously promoted. To

this end, Pilot schemes in some much selected areas should be started to test

innovative ideas with profit-loss-sharing modes of financing as major component.

Islamic banks should clearly demonstrate by their actions that their banking

practices are guided by profitability criterion thereby establishing that only Islamic

banking practices ensures efficient allocation of resources and provide true market

signals through PLS modes. Islamic banks should continuously monitor and

disseminate through various means the impact of their operations on the

distribution of income primarily between the bank and the other two parties: the

depositors and the entrepreneurs, and then on different income groups of the

society. These presuppose establishment of a fully equipped research academy in

each Islamic bank.

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The task is more challenging for Islamic banks, as they have to promote their

distributional efficiency from all dimensions together with profitability, Islamic

banks, step by step, have to be converted into profit-loss-sharing banks by

increasing their percentage share of investment financing though PLS modes. The

Islamic banks, to do that, can be selective in choosing clients for financing under

PLS modes. They should establish direct functional relationship between the

income of the depositors and between the income the income of the bank and that

of the entrepreneurs. The relationship improves with share of bank financing under

PLS modes increases.

  • 5. Promotion of Allocative Efficiency

The Islamic banks can improve their allocative efficiency be satisfying social

welfare conditions in the following manner. First, they should allocate a reasonable

portion of their investible funds in social priority sectors such as agriculture

(including poultry and fishery), small and cottage industries and export-led

industries like garment, shrimp cultivation. Secondly, when the percentage shares

of allocation of investible funds are determined among the sectors of investment

financing, profitability of projects should be the criterion for allocating investment

funds. The criterion would be best satisfied if more and more projects were

financed under PLS modes.

  • 6. Modern banking Policies and practices

Islamic banks, with a view to facing the growing competition either fellow-Islamic

banks or the conventional banks which have launched Islamic banking practices,

will have to adapts their functioning in line with modern business practices, though

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improvement and expansion of the range of dealing in the banking sector. Thus, it

is necessary for them to provide comprehensive banking and investment services to

clients and simultaneously to take advantage of modern technological

breakthroughs in areas such as electronic communication, computerization etc.

  • 7. Government and Central bank Responsibilities

Government should think actively for the promotion of Islamic banking in

Bangladesh considering its pro-development role. It should amend existing

financial laws, acts and regulations to create favorable environment conducive to

smooth operation of Islamic banks. The bank Reforms Committee may be

entrusted to draft an Islamic Banking Act. Government should also allow

establishment of Islamic insurance and other subsidiary companies in order to

facilitate their operation. Bangladesh Bank should develop some Islamic Monetary

and saving instruments and create separate window for transactions with the

Islamic banks and a full-fledged Islamic banking Department for analyzing,

supervising, monitoring and guiding purpose, thereby facilitating Islamic banks for

their smooth development in Bangladesh.

  • 8. Inter-Islamic Bank Co-operation and Perspective Plan

All Islamic banks should come forward to help each other’s and adopt a

perspective plan say for 20 years for Islamization of the banking system of

Bangladesh. To actualize this mission, they should set-up immediately and Apex

Research Academy and a Training Institute designed with modern tools. Books and

other accessories.

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Chapter-8: Findings, Recommendations& Conclusions

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8.1 Findings & Recommendations

1. Need for appropriate laws and regulations: Islamic banks can provide

efficient banking services to the nation if they are supported with appropriate

banking laws, and regulations. This will help them introducing PLS modes of

operations, which are very much conducive to economic development. It would be

better if Islamic banks had the opportunity to work as a sole system in an economy.

That would provide Islamic banking system to fully utilize its potentials. Studies

show that Islamic banks cannot operate with its full efficiency level if it operates

under a conventional banking framework, their efficiency goes down in a number

of dimensions. The deterioration is not because of Islamic bank’s own mechanical

deficiencies. Rather it is the efficiency-blunt operations of the conventional

banking system that puts obstructions to efficient operation of Islamic banks. This

does not mean that the survival of Islamic banks operating within the conventional

banking framework is altogether threatens. Evidences from Bangladesh indicate

that Islamic banks can survive even within a conventional banking framework by

which over from PLS to trade related modes of financing.

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  • 2. Need for proper policy measure: Even under the conventional banking

framework Islamic banks can operate with certain level of efficiency by applying

in a reasonable percentage the PLS modes. The distinguishing features of Islamic

banking. This has been possible in some countries of the Muslim world where the

management of Islamic banks was cautious about possible impacts of every policy

measure. Particularly, the management of these banks was judicious in selecting

sectors or areas as major of their operations. Sudan Islamic banks is a typical

example in this respect. Islamic banks in Bangladesh have much to learn from the

experience of this successful Islamic bank.

  • 3. Need for separations: Having been considered the pro-efficiency character of

Islamic banking and its beneficial impacts on the economy, government policy in

Bangladesh should be in favor of transforming conventional banking system into

Islamic banking. It is reasonable to assume that risks involved in Mushraka or

Mudaraba financing are different from those involved in trade-type financing. It

follows, therefore, that prudential regulations of these transactions should be


  • 4. Need for separate standards and measures: Determination of profit and loss

in profit/loss sharing arrangement and treatment of costs and reserves in such

accounting is a pertinent issue to be addressed with utmost importance and priority.

However, Islamic banking is a very critical institution to materialize the economic

objectives of Islam. It should however, be noted that it is to the whole of the

Islamic framework. Compared to the conventional banks it is very much viable by

itself, but the full impact of it can only be realized by supplementing it with

corresponding reforms in other spheres of life in general, and in the monetary and

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fiscal fields in particular. Finally, it may be mentioned that if the Islamic financial

system, is to become truly liquid and efficient it must develop more standardized

and universally (or at least widely) tradable financial instruments. The

development of a secondary financial market for Islamic financial products is

crucial if the industry is to achieve true comparison with the conventional system.

It must also work hard to develop more transparency in financial reporting and

accounting and ideally - a form of Islamic GAAP. Development if the whole sale

and especially inter-bank and money markets, will be the key to Islamic finance

growing outside its current little sphere of influence, and becoming a truly national

invigorating force.

8.2Limitations of the study

First of limitation is that Data related to the year 2014 are not available. So the paper is mostly based on the data of the year 2013 and earlier. For the collection of information, websites, published articles in the journals, voluntary disclosures made by the companies, annual reports, sustainability reports or CSR related disclosures are analyzed.So the verifiability of the information was not properly confirmed.Besides many essential informations were not found for the specific topics and subjects.

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Chapter-9: References


1. Islamic Banking in Bangladesh: Progress and Potentials by Mohammad Abdul Mannan, Managing Director of Islami Bank Bangladesh Limited.

2. Chapra,



Foundation, UK.







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  • 3. Kahf, Monzer, (2002), Strategic Trends in the Islamic Banking and Finance Movement, Harvard University, USA, articles read at a seminar of Harvard Forum on Islamic Finance and Banking (April 6-7, 2002).

  • 4. Nienhaus, Volker (2011), Islamic Finance Ethics and Shari'ah Law in the crisis of the aftermath: Concept and Practice of Shari'ah Compliant Finance, in ethical perspectives, volume 18, Issue No. 4.

  • 5. Mannan, Mohammad Abdul (2007), Islamic banking system, Central Shari'ah Board for Islamic Banks of Bangladesh.

  • 6. World Islamic Banking Competitiveness Report 2013-14, Ernst & Young.

  • 7. Journal of Islamic banking and Finance, March 2014, by Salahuddin Yousuf, Md. Ariful Islam, Md. Rayhan Islam.

  • 8. Islamic Banking in Bangladesh: Performances, Problems & Prospects, by Abdul Awwal Sarkar.

  • 9. Prospects of Islamic banking in Bangladesh by Md. Maruf Ullah and Md. Shahnur Azad Chowdhury.

10.Development of Islamic Banking in Bangladesh, April-June 014, Research Department, Bangladesh Bank. 11.Financial Stability Report 2013, Issue 4, June 2014, Bangladesh Bank. 12.Scheduled Bank Statistics, December 13 & March 14, Bangladesh Bank.