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Whether Shari`ah Compliance Efficiency a Matter for the Financial

Performance: The Case of Islami Bank Bangladesh Limited

Md. Hafij Ullah


Associate Professor
Department of Business Administration
International Islamic University Chittagong, Bangladesh
&
PhD Fellow
Department of Accounting and Corporate Governance
Macquarie University, Sydney, Australia
33/34, Hythe Street, Mount Druitt
Contact: +61470449084
E-Mail: hafij_1980@yahoo.com

and

Ruma Khanam
Senior Officer
Islami Bank Bangladesh Limited
Muradpur Branch, Chittagong, Bangladesh

Citation:
Ullah, M. H. and Khanam, R. (Forthcoming), Whether Shari`ah Compliance Efficiency a
Matter for the Financial Performance: The Case of Islami Bank Bangladesh Limited, Journal
of Islamic Accounting and Business Research, Vol. 9, No. 2, pp. ---.
Whether Shari`ah Compliance Efficiency a Matter for the Financial
Performance: The Case of Islami Bank Bangladesh Limited
Purpose- Shari`ah is the foundation of Islamic banks. Though all the Islamic banks required complying the
Shari`ah requirements fully but the level of compliance differs among the Islamic banks. At the same time,
Islamic banks have been performing well, but all of them are not demonstrating similar financial performance.
This paper endeavored to explore whether Shari`ah compliance efficiency makes any difference in financial
performance of Islami Bank Bangladesh Limited (IBBL).

Design/ methodology/approach- This study used IBBL as a case. For exploring the issue of study, this
paper applied e-mail interview approach and interviewed 24 interviewees including financial analyst, IBBL
clients, and executives of regulatory bodies, IBBL, other Islamic and interest-based traditional banks. Interview
opinions are then analyzed and interpreted for a deeper understanding of the topic.

Findings- The study observed that some other factors have influences on the financial performance of IBBL,
but the level of Shari`ah compliance is the dominant instinct in acquiring leading position. Superior Shari`ah
compliance creates lots of internal strengths and external opportunities that facilitate IBBL in achieving loftier
financial performance. Most of the interviewees argued that Shari`ah be the only disposition that makes IBBL
unique. Moreover, the bank that follows more Shari`ah gets better financial outcomes.

Research limitations- The study used a qualitative method using interview responses only for evaluating the
relationship between Shari’ah compliance and financial performance. Further study may be conducted based
on quantitative approach.

Social implications- This paper expects to uphold the significance of Shari`ah in swelling the financial
performance of IBBL and simultaneously motivating the parties relating to Islamic banks in enhancing the level
of Shari`ah compliance. Moreover, this study provides new insights into the important of Islamic banks and
their performance in relation to the choice of customers.

Originality/value- This study explores the significance of Shari`ah compliance in creating avenues for
greater financial performance and develops a model showing the ways how Shari`ah compliance leads
Islamic banks in achieving the haughtier financial position.

Keywords- Shari`ah Compliance, IBBL, Islamic Bank, Financial performance, and Bangladesh.

Paper Type- Research Paper

1. Introduction:

Shari’ah is regarded as the foundation of Islamic organizations (Ullah, 2014) and Shari`ah
compliance is the primary responsibility to maintain their status as ‘Islamic.’ Shari’ah
compliance or religion is the single most important factor that makes Islamic banks favorable
to the customers (Ahmad and Haron, 2002; Naser et al., 1999; Metawa and Almossawi, 1998;
Rashid et al., 2014 and Archer and Karim, 2002). Moreover, Allah (SWT) provided divinely
ordained Shari`ah laws that ensure the rights and responsibilities of all parties concerned.
Shari`ah laws in banking business remove cruelty and injustice in the financial system due to
Riba and ensure socio-economic development by introducing the Halal ways of doing
business (Jalil and Rahman, 2010; Imam and Kpodar, 2010; Rarick, 2009; Bidabad and
Allahyarifard, 2008 and Rahman, 2007).
Islamic banking has been dominantly flourishing for last few decades throughout the globe.
Currently, more than 475 Islamic financial institutions spread over 75 countries and well over
250 mutual funds that comply with Islamic principles (Malik, et al., 2011). During the last
decade, the Islamic banking industry has grown at a remarkable pace, at 20–30% per year
being three times the rate for conventional banks (Srairi et al., 2015). Moreover, Islamic
financial institutions are growing much faster than conventional banks because of the strong
demand among consumers for products and services that comply with Shari`ah (Benaissa, et
al., 2005). Compare to traditional banks, Islamic banks have been performing better in case of
deposit growth (Khan, 2010), business development, profitability, liquidity and solvency
(Safiullah, 2010), asset quality, capitalization (Beck et al. 2013), financial stability (Cihak
and Hesse, 2010), solvency, risk, cash, cash-deposit ratio (Samad and Hassan, 2000).

The level of Shari`ah compliance and financial performance of the Islamic banks differ.
Sometimes Islamic banks cannot comply a few Shari'ah rulings due to economic and external
regulatory reasons. The level of Shari`ah compliance of all the Islamic banks is not same
though they are working in the same regulatory and economic environment (Ullah, 2014).
Among the sample Islamic banks, Islami Bank Bangladesh Limited (IBBL) is the most
Shari`ah compliant bank in Bangladesh (Ullah, 2014). Similarly, the studies of Uddin (2014)
and Chowdhury (2009) provided that financial performance of Islamic banks in Bangladesh
are different. Among others, they observed that IBBL outperformed all other Islamic banks
and even the traditional banks in new branch opening, deposit growth, return on assets,
capital adequacy ratio, and return on equities. That means IBBL has been accomplishing
exceptional performance as a most Shari`ah compliant bank. Therefore, the study explores
whether Shari`ah compliance efficiency a matter for the financial performance of IBBL.
Moreover, this paper provides new insights into the importance of Islamic banks and their
performance in relation to the choice of customers.

The remainder of the paper is organized as follows. Section 2 reviews the relevant literature.
The research method is outlined in Section 3. Section 4 presents the analysis of the findings.
Finally, Section 5 summarizes the paper and draws the conclusion.
2. Literature Review:

Shari’ah is the basic guiding principles for directing all of the operations of the Islamic banks
(Siddiqi, 1983; Ahmad, 1984; Siddiqi, 1985; Khan and Mirakhor, 1986; Ahmad, 2000;
Siddiqui, 2001). The primary objective of an Islamic bank is to offer banking services
according to Islamic law and in fact, Shari`ah compliance is the very essence of an Islamic
bank and its banking business (Ghayad, 2008). The findings of Ahmad and Haron (2002),
Naser et al. (1999), Metawa and Almossawi (1998), Rashid et al. (2014), and Archer and
Karim (2002) showed that Shari’ah compliance or religion is the single most important factor
for choosing Islamic banks and Shari’ah compliance guarantees the credibility of Islamic
banks and inspires confidence in the shareholders and stakeholders (Briston and El-Ashker,
1986; Tomkins and Karim, 1987; Karim, 1990a; 1990b; Banaga et al., 1994; Bhambra, 2002;
Rammal, 2006; Ghayad, 2008; Laldin, 2008). Though Shari`ah compliance initiates few
limitations to the Islamic banking business, it also creates enormous advantages to them.

Shari`ah compliance creates few boundaries to the Islamic banking business. Primarily,
Islamic banks do not have unlimited scope for investment in any stock or security because of
religious constraints. As Shari`ah Board supervises bank investment, therefore, they can only
invest in Shari`ah approved projects (Samad and Hassan, 2000). They cannot invest beyond
the Shari`ah Board approved investments even if they can earn a higher rate of returns.
Moreover, Abbas et al. (2009) and Iqbal et al. (1998) hold that new products for the Islamic
banks cannot be introduced without prior permission and approval from the Shari’ah board.
Due to maintaining the Islamic banking procedures, it is evidenced to be less cost-effective
(Beck et al. 2013). On the other hand, Shari`ah compliance unlocks many avenues of
opportunities that outweigh these constraints.

Islamic banks, in some cases, outperform the traditional banks. Safiullah (2010) stated that
though interest-based banks are superior in some instances, overall, comparatively Islamic
banks are superior in financial performance to that of interest-based conventional banks. The
performance of interest-free Islamic banks in business development, profitability, liquidity,
and solvency, is higher than that of interest-based conventional banks (Safiullah, 2010). Also,
Islamic banks have a higher intermediation ratio, higher asset quality and are better
capitalized (Beck et al. 2013). The better stock performance of listed Islamic banks during the
financial crisis is due to their higher capitalization and better asset quality (Beck et al. 2013).
Cihak and Hesse (2010) found that small Islamic banks are more stable than small
conventional banks, with the reserve holding for large banks. Khan (2010) observed that
Islamic banks enjoy substantially higher deposit growth rates than conventional banks.
Samad and Hassan (2000) also evidenced that Islamic bank showed better performance than
traditional banks regarding solvency, risk, cash, cash-deposit ratio and it is significant at 5%
level.

Islamic banks have been performing better not only in financial performance but also in
social performance. The studies of Jalil and Rahman (2010), Imam and Kpodar (2010),
Rarick (2009), Bidabad and Allahyarifard (2008), and Rahman (2007) noted that cruelty and
injustice in the financial system due to Riba is removed, and socio-economic development is
ensured by introducing the Halal ways of doing business e.g. Musharkah, Mudharbah, Bai’
Salam and Ijarah. Islamic banking system is much participatory than traditional banking
(Safiullah, 2010). Samad and Hassan (2000) expected that the information gap between bank
and the bank borrowers to be minimum because both party jointly works to maximize profit
and minimize losses. Moreover, Islamic banking could motivate the employees more than
traditional banks in complying Shari`ah and legal systems (Safiullah, 2010).

Though Shari`ah compliance generates enormous benefits to the Islamic banks, all of them do
not comply Shari`ah appropriately. The study of Ullah (2014) on four selected Islamic banks
of Bangladesh revealed that all the Islamic banks are not following Shari`ah equally,
management and executives of the banks are not knowledgeable in Shari`ah at the same level
and do not emphasize Shari`ah compliance equally. Chong and Liu (2009) found that only a
small portion of Islamic bank financing in Malaysia is based on profit-loss sharing and that
Islamic deposits are not interest-free, but closely pegged to traditional deposits. Practitioners
and academics alike, however, have observed that most Islamic products, in reality, are not
based on profit-loss sharing but resemble very much debt instruments (Cihak and Hesse,
2010). Similarly, Hassan (2012) noted that the Shari’ah reviews were found not to be
effectively implemented by the Shari’ah boards, and Meera and Larbani (2009) confirmed
that the current model is operating similar to conventional banking, violates Shari’ah,
therefore, hinders the attainment of the objectives of Islamic law. Sometimes, it is observed
that Islamic banks violate Shari`ah as they become compelled to do so.
Different factors hinder Shari`ah compliance of the Islamic financial institutions. Fatwa
shopping, tempting or influencing or the invisible hand of management on the decision of
Shari`ah Supervisory Board, a different interpretation of existing Shari`ah rulings (Grais and
Pellegrini, 2006; Ullah, 2012) and lack of specially-designed Shari`ah-compliant financial
products (Koch and Stenberg, 2010) were found to instigate Shari`ah violation. The economic
system, regulatory procedures, Islamic banking law, Shari`ah Research, Shari`ah audit, full-
time Shari`ah experts are the significant factors influencing Shari`ah compliance of the
Islamic banks in Bangladesh (Ullah, 2014).

It is observed from the above that Shari`ah compliance creates advantages and constraints for
the Islamic banks; all the banks are not complying Shari`ah equally; Islamic banks, in
different cases, performing better than traditional banks. Moreover, Ghayad (2008) observed
that Shari`ah and profit are quite compatible. Therefore, it is the dilemma whether the level of
Shari`ah compliance has any influence on the financial performance of the Islamic banks.
This paper examines the case, Islami Bank Bangladesh Limited, to reach a conclusion in this
regard.

3. Method

This study used electronic mail (e-mail) interview method for collecting responses from the
interviewees. The researchers could not take face-to-face interviews because of time and
resource limitations and importantly, the researchers currently are not available in the country
of study. E-mail interviews followed all the guidelines of Saunders et al. (2009), Murray &
Sixsmith (1998) and McCoyd & Kerson (2006). Researchers are using this approach more
because of its advantages after 2000 (McCoyd & Kerson, 2006, Mann and Stewart, 2000).
Major advantages of the e-mail interview approach include: (i) collects rich data because of
more honest and candid response than face-to-face interview (Turkle, 1995, Motluk 1997 and
McCoyd & Kerson, 2006); (ii) abolishes the “time and space constraints” (Motluk 1997,
Murray & Sixsmith, 1998); (iii) gives more opportunities of thinking to the respondents for
providing planned and better response (Hiltz and Turoff, 1978, Burton, 1994, Morgan and
Symon, 2004); (iv) eradicates time and cost for transcribing interview response (Foster
1994); (v) cost-effective and informal access to the respondents (Alves and Szucs, 2001, Fyfe
et al., 2001, Sills and Song, 2002); (vi) offers more control over the response that the
respondent himself replied the answers to the questions using his e-mail (Witmer et al. 1999)
and (vii) permits widespread and long dialogue at their convenience (McCoyd & Kerson,
2006).

The study applied the e-mail interview process as delineated in different researches. Firstly
researchers identified the possible interviewees (Hewson et al. 2003). Two set of questions
were developed, one for IBBL clients and another for financial analysts, executives of
regulatory bodies and other Islamic and traditional bank officers. Interview participants were
selected giving importance to their knowledge in Islamic and traditional banking. An e-mail
was sent as a “Pre-survey contact” informing them expecting a questionnaire (Saunders et al.,
2009). Then interview questions were sent along with a cover letter. The e-mail was sent
assuming the favorable time of the interviewees. A follow-up e-mail was sent after a week
and a second reminder after two more weeks to the interviewees who did not respond at that
time.

i. Questionnaire:

Relevant literature was consulted for determining the research gap and setting the appropriate
interview questions. Two sets of questionnaires were prepared for collecting the responses
from the interviewees. One set, consisting of 9 questions, was prepared for the IBBL clients
and another set, composed of 5 questions, was prepared for the remaining interviewees. The
study was conducted on IBBL because of its outstanding performance and the first Islamic
bank not only in Bangladesh but also in South-east Asia.

ii. Sample:

The study primarily expected to collect e-mail interviews from 60 interviewees (please see
Table 1) including financial analysts (5), executive of regulatory bodies (5), IBBL clients
(15), IBBL executives (15), executives of other Islamic banks (10) and executives of
traditional banks (10). According to the plan, after collecting the e-mail IDs, the
questionnaires were sent to the interviewees requesting for early response. E-mail interviews
were collected in between September 14 to October 23, 2015. Total 24 interview responses
were received out of which 13 received without any reminder, eight received after the first
reminder, and three more were received after the second reminder.
Table 1: Shows the categories of interviewees and percentage of response

Categories of interviewees Interview Interview Percentage of Overall


Target collected target class Percentage
1 Financial Analyst 5 1 20% 4.17%
2 Regulatory Executive 5 3 60% 12.50%
3 IBBL Client 15 9 60% 37.50%
4 IBBL Executive 15 4 26.67% 16.67%
5 Other Islamic Bank Executive 10 4 40% 16.67%
6 Traditional Bank Executive 10 3 30% 12.50%
Total 60 24 40% 100.00%

Details of the interviewees are provided in appendix-1. Among the interviewees, two are
female and remaining are male. IBBL clients were chosen from International Islamic
University Chittagong and the University of Chittagong to get informed responses because of
the expectation of having knowledge of Islamic and traditional banking. Among the clients,
seven are university teachers, a university executive, and an IT professional. All the four
executives of other Islamic bank respondents were from EXIM bank, and three traditional
bank executives were from Jamuna Bank Limited, Dutch-Bangla Bank Limited, and Prime
Bank Limited. Two executives of traditional bank replied that they are not capable of
response as they have no or poor knowledge of Islamic banking.

Most of the interviewees are highly educated. Three (12.50%) of the interviewees have Ph.D.
or Ph.D. students in finance and banking, two (8.33%) of them have M.Phil or M.Phil student
in finance and banking, two (8.33%) of them are professional accountants (CA/CMA) and 17
(70.83%) have MBA/MSc degree. Moreover, all of the eight executives of the Islamic banks
have specialized diploma and training in Islamic banking. Five (20.83%) of the interviewees
are from junior-level, 12 (50%) are from middle-level, and seven (29.17%) are from high-
level management. Four (16.67%) of the interviewees are of 31-35, 16 (66.67%) are of 36-40
and four (16.67%) are of 41-50 year of age.

4. Analysis of the Findings

The analysis of the responses of the interviewees incorporates two sets of the questionnaire in
which nine questions were for the clients, and five questions were for the remaining
interviewees. However, nine questions asked to the clients also include those five questions
asked to other respondents. The analysis of the responses are delineated as under:
i. Reasons: Islamic banks as a choice

Different factors influence in choosing a bank as a custodian of own money and for
performing financial transactions with confidence. As a response to the question, all of the
interviewees replied that they had chosen Islamic banks because of Shari`ah-based interest-
free banking. Client-1 stated:

“Interest is Haram in Islam. As a Muslim, I cannot accept it. So I have chosen Islamic
Banking activities.”

Client-5 uttered:

“Islam is the complete code of life. Allah (SWT) will ask me about my income and
expenditure. I do believe that Islamic bank will help me in saving myself from the
torment of Almighty.”

Importantly, client-9 said that verse from the Quran and two hadiths influenced him in
choosing Islamic bank. He mentioned:

“Allah (SWT) make business Halal, and Interest Haram; interest provider, receiver,
recorder and being evident are doing same sin; and the sin of interest is equivalent to
the sin of Jina with own mother.”

The responses of the interviewees are compatible with the findings of other studies. Ullah
(2014) observed that 94.91% of the bank officers thought that most of the clients are attracted
to the Islamic banks because of Shari`ah compliance but not for earning more profit. The
findings of Ahmad and Haron (2002), Naser et al. (1999), Metawa and Almossawi (1998),
Rashid et al. (2014) and Archer and Karim (2002) showed that Shari’ah compliance or
religion is the single most important factor for choosing Islamic banks.

ii. Reasons: IBBL as a choice

Though eight Islamic banks have been operating in Bangladesh, at the second stage, the study
tried exploring why interviewee-clients chose the sample bank. Responses of all the
interviewed clients provided that better Shari`ah standing of the IBBL be the cause that
influenced their choice. Only client-3 identified IBBL as “leading and trustworthy bank” for
providing Islamic banking. Among the nine clients, seven clearly mentioned that IBBL
complies more Shari`ah rules than other Islamic banks in Bangladesh. Client-5 opined:
“I studied some articles regarding Islamic practices of Islamic banks of Bangladesh; I
observed that the level of Shari`ah compliance of IBBL is higher than other Islamic
banks.”

Client-1 uttered that only IBBL is practicing sound Islamic banking, and client-2 mentioned:
“as per my study, apparently IBBL follows the Shari’ah canons more than the other Islamic
banks do.” Importantly, client-8 did not opine that the sample banks is providing sound
Islamic banking, but it follows Shari`ah to a greater extent. He mentioned, “IBBL operates its
banking activities based on Islamic Shari`ah to a greater extent than other Islamic banks in
Bangladesh.” The study of Ullah (2014) calculated Shari`ah violation score of the four
sample Islamic banks in Bangladesh and observed that the score of IBBL is the least meaning
that IBBL is more Shari`ah compliant than other sample Islamic banks.

iii. Financial performance: IBBL as a choice

Though the financial performance of the bank plays a significant role in influencing the
banking decision of its stakeholders, the opinion of the clients implies that they did not
compare the financial performance before choosing IBBL. Except two, all the clients did not
contemplate financial performance of IBBL. However, as a leading Islamic bank, the
performance of IBBL is well known to a major portion of ordinary people and similarly the
responding clients were well-informed on this issue. Client-3 pronounced:

“I have not compared financial performance, but it is evident that IBBL is performing
well due to their overwhelming demand.”

Only client-8, to some extent, considered financial aspect before choosing IBBL as he stated
that “I took financial performance into account to a limited extent before choosing IBBL.”

iv. Shari`ah performance: IBBL as a choice

Shari`ah is the foundation of Islamic banking, and a major portion of the clients are attracted
to Islamic banks because of this religious cause. Among the clients, six (66.67%) uttered that
they evaluated the level of Shari`ah compliance of IBBL before banking with them. Client-5
claimed that he did not compare the level of Shari`ah compliance and two other clients
(Client 3 & 7) also stated the same, but they added that they have trust in them in this regards.
Client-1 positively answered:
“Yes, I collected the necessary information and came to know that the Shari`ah rules
are strictly followed in IBBL, and they have a strong Shari`ah board.”

Another client (client-9) thoroughly examined the level of Shari`ah compliance before
banking with IBBL. In this regard, he collected information from different sources like IBBL
officers, clients, and the website. Majority of the bank officers (94.91%) believed that most of
the clients are fascinated to the Islamic banks because of Shari`ah compliance, but not for
earning more profit (Ullah, 2014), and religion is a dominant reason for banking with Islamic
bank (Ahmad and Haron, 2002; Naser et al., 1999; Metawa and Almossawi, 1998; Rashid et
al., 2014 and Archer and Karim, 2002).

v. Reasons: Outstanding financial performance of IBBL

All the interviewees including the clients were asked general questions for identifying the
reasons for better and stable performance of IBBL. These questions were asked to all
interviewees to explore how many of them identified the level of Shari`ah as a cause for the
better financial performance of IBBL. After getting the interview responses, it is observed
that 45.83% of the interviewees recognized the level of Shari`ah compliance as a vibrant
cause for the stable financial performance of the sample bank. Not only 63.64% of the bank
executives including 75% of IBBL executives, 50% of other Islamic bank executives, and
66.67% of conventional bank executives but also the financial analyst, a regulator and
22.22% of the clients acknowledged that Shari`ah compliance for the better financial
performance of IBBL. An executive of a regulatory body (R-1) mentioned:

“Financial performance of IBBL is better because of the bank’s following the Shari`ah
law to the maximum extent possible.”

An executive of another Islamic bank (IB-4) opined “Besides, they are more Shari`ah
compliant than other Islamic Banks” and IBBL executive (IBBL-3) viewed that “IBBL
performs all of its activities based on Islamic Shari`ah.”

An executive of a traditional bank (TB-2) pleasantly identified the reasons for better
performance of IBBL as under:
“For more Shari`ah compliance, dedicated workforce, skilled & devoted
management, low-risk exposure, loyalty towards central bank's directions, being in
pressure from media & for having higher reputational risk.”

Among other reasons, the interviewees mentioned first Islami Bank (41.67%), large number
of loyal customers (33.33%), efficient investment management (investment policy,
diversification and lower non-performing investment) (33.33%), strong and effective
governing body (29.17%), largest Islami bank performing mass banking (16.67%), faith and
trust on IBBL (16.67%), high volume of remittance (12.50%) and appropriate risk
management (12.50%), social welfare activities and media pressure as the basis for superior
financial performance of IBBL.

vi. Islamic Banks in Bangladesh: Comparative Shari`ah performance

Almost all the interviewees (87.50%) argued favoring IBBL that it applies Shari`ah more
than other Islamic banks in Bangladesh. Only three interviewees including a regulator and
two clients provided general opinion like “not sure,” “probably yes,” and “IBBL claim” that
they follow Shari`ah more than others. An executive of the sample bank (IBBL-3) most
certainly opined as “I can assert without a second thought that IBBL obeys Shari’ah more
than other Islamic banks.” Not only IBBL executive or clients, but it is also surprising that
regulator, executives of other Islamic banks and even the executives of a traditional bank
certified the superiority of IBBL in the case of Shari`ah compliance. Regulator-1 asserted:

“I think yes, IBBL follows Shari`ah law more than other banks as the Bank started
its business as Islamic bank that is uncommon to other Islamic banks that once were
conventional banks. From my observation, I have not seen any serious complaint
from depositors and borrowers of this bank regarding non-compliance of Shari`ah
laws.”

Executive of traditional bank (TB-1) opined-

“Yes, I think IBBL complies Shari`ah more than other Islamic Banks… They have
full-fledged Islamic Shari`ah board consisting of prominent Ulamas having adequate
knowledge in Fiq-Hul-Muamalat, prominent lawyers, and eminent economists...”

Another executive of traditional bank (TB-3) uttered that-


“In my point of view, IBBL obeys Shari’ah more than other Islamic Banks in Bangladesh
since they gave birth of this concept in the country and they are continuously researching on
different issues that they face while performing in the real field; whereas other Islamic banks
are just followers…… Moreover, huge competition, extra client base, position in the market
and target orientation create a situation that compels IBBL to obey Shari’ah 100%.”

Client-2 from her practical observation assured, “after several personal observations in
different cases, it appeared to me that they are trying to follow the Shari’ah more sincerely
than the others.” On the other hand, Client-5 identified the reasons for more Shari`ah
compliance as “…IBBL has independent Shari`ah board and organizes regular appraisal
program; besides, they have Islami Bank Training and Research Academy (IBTRA) for
research and development.” Two executives of other Islamic banks (IB-1 & 4) used the
phrase “obviously IBBL obeys more Shari`ah” and IB-4 provided the credit to the “loyal
customers” for assisting IBBL in this case. He asserted that IBBL comply Shari`ah more
“because loyal customers never feel disturbed because of strict compliance whereas it is a
challenge for other Islamic Banks.” One executive of IBBL (IBBL-2) acknowledged the role
of management in this regard as “IBBL motivates its staffs for Shari`ah awareness by
continuous training, audit and many other motivational programs.”

vii. Preferring Shari`ah performance: IBBL as a choice

In addition to the cause of better financial performance of IBBL, this section explores
whether people choose the sample bank for Shari`ah performance or not. Half of the
interviewees (54.17%) unswervingly identified Shari`ah performance as the cause for
choosing IBBL, whereas a major portion of them (37.50%) acknowledged Shari`ah
performance as a fundamental reason but not the only reason. They recognized some factors
that also have a significant role in making the IBBL favorable to their clients. Two
interviewees (8.33%) even opposed saying that “not at all because most of the banks'
customers are unaware of Shari`ah issues relate to banking activities.”

Along with IBBL executives and clients, financial analyst, executives of regulatory bodies,
other Islamic banks, and traditional banks recognized Shari`ah performance of IBBL for its
favorable position among its customers and achieving stable financial performance.
Interestingly, regulator (R-1) made the following comment in this regards:
“Yes, I think people choose this bank mostly for its Shari`ah performance. In
Bangladesh, we know that 90% people are Muslims and majority of them feel
uncomfortable with banking transaction that includes interests. Hence, they opt for
Islami Bank for their banking because the bank follows the Shari`ah banking that
denies interest based transaction and prefers risk-based profit/loss sharing approach.”

An executive of a traditional bank (TB-1) also argued Shari`ah performance be the reasons
for choosing IBBL as under:

“Yes, of course. Islamic-minded people keep IBBL on top of their choice for their
banking activities because of being more Shari`ah compliant than other Islamic banks
in Bangladesh. IBBL has a full-fledged Shari`ah board constitutes with renowned
Islamic scholars of the country from the very outset of the operation.”

On the other hand, other interviewees recognized some other factors influencing the banking
decisions for the clients in addition to Shari`ah performance. Importantly, all the IBBL
executives uttered some other issues for making the bank unique other than Shari`ah.
Responses of the two executives (IBBL-1 and IBBL-4) in this case are:

“Shari`ah performance is one of the reasons but not the only cause why people choose
IBBL. The doors of IBBL are open for mass people. Individual depositor, small-scale
owners, new entrepreneurs, as well as large importers and exporters are clients of
IBBL. Reasonable charges for different services and availability of branches at various
locations in are other reasons.”

“Most of the IBBL client choose IBBL for their Shari`ah commitment, some choose for
their financial strength and some for the higher amount of single borrower exposure
limit.”

Some interviewees (16.67%) argued that though religiosity is a principal reason for choosing
IBBL but clients are not aware of the actual Shari`ah performance. As a Muslim country,
most of the clients chose IBBL due to their devotion to Islam. One of the Client-6 argued
that:

“Loyal customers and mass people have a deep-rooted regard for religious institutions.
Such fascination does not depend on knowledge rather based on emotion.”
Hence, it is evident that, in addition to Shari`ah performance, some other factors also play an
influential role in making banking-decision with IBBL. Among others, interviewees
identified availability of branches (29.17%), trust & confidence for safe deposit (20.83%),
low service charges (20.83%), market position (16.67%), stability in financial performance
(12.50%), better customer services (8.33%), single borrowing exposure (8.33%), low profit
rate on investment (8.33%), first Islamic bank in Bangladesh, devoted employees, and
compliance with rules and regulations as the important reasons for selecting IBBL for
banking.

viii. Relationship: Shari`ah performance Vs. Financial performance

It was observed from above that people choose Islamic banks and specifically IBBL due to
Shari`ah performance, and financial performance of IBBL is better than other Islamic banks
in Bangladesh. Does Shari`ah performance matter for the better financial performance of
IBBL? Among the interviewees, 70.83% of them agreed that financial performance of IBBL
is better because of the Shari`ah performance; 20.83% of the interviewees opined that
Shari`ah performance is not the only reason, but other factors also influence its performance;
and finally, 8.33% of them argued the opposite.

Interviewees explained that better Shari`ah performance creates various advantages to IBBL.
As IBBL has been performing welfare banking and providing appropriate rights to clients, it
could accumulate an enormous amount of low-cost or non-cost deposit only because of the
trust and faith of its customers. Moreover, IBBL has the opportunity of generating more
income by appropriate usage of these abandon of funds. Because of Shari`ah bindings, IBBL
cannot invest in the high-risk areas, and Islamic investment policy directs them in selecting
most appropriate trustworthy investment-clients. Furthermore, these sorts of arrangements of
Islamic investment policies advantage Islamic banks in most recovery and escape frauds.

Executive of a traditional bank (TB-1) argued positively identifying the major benefits of
IBBL because of Shari`ah compliance. He uttered:

“Yes. I agree with the statement that the financial performance (stability) of IBBL is
better due to its Shari`ah performance. Due to the compliance of Islamic Shari`ah, all
Islamic minded people prefer IBBL for their banking despite having lots of options.
Lots of people keep low-cost and no-cost deposit (as some people do not demand any
profit from the bank for the money deposit) with IBBL. Low and no-cost deposit gives
IBBL competitive advantage over their counterpart as the deposit is the blood of bank
business. Apart from these, because of Islamic Shari`ah compliance, IBBL does not
make any risky investments like as stock markets, so they are safe from lots of risks and
this low risk help them to do better than others.”

An executive of a regulatory body (R-1) argued as under:

“Yes, as I said before, the financial performance of IBBL is better because of the bank’s
following the Shari`ah law to the maximum extent possible. In recent times, banks in
Bangladesh are having a tough time with the huge amount of loan default and other
financial scams but IBBL, despite having millions of amount of deposit, the bank is not
lavish in expenditure, and they finance the industry complying almost with the Shari`ah
principle. That is why the bank’s fund is very unlikely to be used by defaulters and
frauds.”

An executive of IBBL (IBBL-1) also recognized similar cause:

“IBBL's deposit is very high due to people's Shari`ah preference, and the prudent
disbursement of those funds to different profitable as well as Shari`ah compliant
projects is the primary cause of IBBL's stable financial performance.”

Apart from all interviewees, two clients opposed that customers of IBBL do not evaluate the
level of Shari`ah performance and hence it has no impact on financial performance of the
bank. Client-6 argued that:

“I do not think so; devotees do not go to judge the depth of the Shari`ah compliance. Its
stability solely based on the loyal group and general belief of the common people
irrespective of performance.”

As some of the interviewees mentioned other reasons for stability in the financial
performance of IBBL but most of these are originated due to its strict Shari`ah compliance.
For example, devotion is created among the employees because of evaluating their works in
the bank as ‘Ibadah’. Thus, employees perform their duties providing their best efforts.
Similarly, investment clients do not think of making any fraud as they believe that they have
to be accountable for this activity to Allah (SWT) on the Day of Judgment. Therefore, the
level of Shari`ah compliance can be recognized to be the main drivers for the financial
stability of IBBL.
ix. Relationship: Shari`ah performance Vs. Financial profit in Bangladesh

Previous sections identified that Shari`ah performance paved the way of IBBL in achieving
better and stable financial profit. This section explores whether this is a general case or only
applies to IBBL. In other words, does more Shari`ah compliance always leads to better
financial performance for the Islamic banks in Bangladesh? Most of the interviewees (75%)
agreed that better Shari`ah compliance would warrant more financial profit, particularly in
Bangladesh. A small portion of them (12.50%) added additional issues for achieving
enhanced financial performance, 8.33% disagreed and client-9 unable to make any comment
on this point.

Executive of a regulatory body (R-1) argued how Islamic banks have proved their
performance:

“Well, not much to comment about this as this has already been evident from activities
of Islamic finance world. Shari`ah compliant banks have performed exceptionally even
during the period of crises. Following the Shari`ah laws, I think the financial institution
can minimize their risks to a great extent that eventually will lead them to even better
growth in future.”

An Executive of another Islamic bank (IB-1) emphasized:

“It is obvious that Islamic economic system is the most beautiful and just economic
system for the human kind. So it is certain that more Shari`ah performance in business
transactions will definitely lead to better financial performance.”

An executive of IBBL-4 argued providing an example how a conventional bank, after


converting to an Islamic bank, is earning profit though it was a losing concern before. He
stated:

“Shari`ah based banks are doing better in Bangladesh. For example, First Security
Bank Limited was losing when it was a conventional bank, but it is earning profits after
conversion to Shari`ah based bank.”

On the other hand, Client-6 again argued different perception that better financial
performance of IBBL is not for evaluation of its Shari`ah performance but other reasons
including its professionalism. He added:
“Overwhelmed majority of the people do not judge the Shari`ah performance rather
socio-religious belief, loyalty, reference groups role are important. IBBL is more
professional than any other Islamic Banks irrespective of actual Shari`ah compliance.”

Among others, the financial analyst emphasized on other factors for achieving recognized
financial performance, though he agreed that Shari`ah is the fundamental instinct for Islamic
banks. He argued:

“Better financial performance depends not only on Shari`ah based banking but also on
good corporate governance, effective internal control systems, the effectiveness of risk
management systems, better customer services, application of latest and advanced
technologies.”

Islamic banks get the additional favor of the clients because of Shari`ah performance
particularly in a Muslim majority country like Bangladesh. Endorsing the role of Shari`ah for
acquiring enhanced financial performance, an executive of a regulatory body (R-2)
emphasized that “…clients go to Islamic banks mostly to follow Islamic Shari`ah. So, if they
find any deviation from Shari`ah they do not like to stay with that bank. That is why the bank
that follows more Shari`ah gets better financial performance.” Therefore, the high
momentum of clients provides IBBL a dramatic flow of expansion. As an executive (IBBL-2)
uttered: “If the Islamic banks can prove that they are maintaining Shari`ah, then trust of the
people will grow which will lead to increase deposit, investment, and other banking
business….” Shari`ah compliance guides IBBL not to be extravagant and avoiding
“unnecessary cost and show-off”- TB-2 added.

5. Summary and Conclusion

Muslim-majority Bangladesh inherited interest-based economic and banking systems at its


independence. Islamic banking era started in 1983 with the inception of IBBL. Though
already eight Islamic banks have been established or converted to Islamic banking, there is no
separate Act for regulating these niche of banking. Therefore, Islamic banks have been facing
different challenges because of regulating under the same treatment of the traditional banks.
Amid this unfavorable regulatory environment, Islamic banking has been dominating in the
banking sector in Bangladesh. This paper endeavored to explore the reasons for this
supremacy of Islamic banks from the Shari`ah point of view.
This study evaluated the significance of Shari`ah compliance on the financial performance of
IBBL, as a case. Ullah (2014) observed that IBBL is the most Shari`ah compliant Islamic
banks among the sample banks in Bangladesh, and the financial performance of IBBL is
better than most of the traditional and other Islamic banks in Bangladesh. Responses of the
interviewees revealed that people choose IBBL due to its level of Shari`ah compliance and
extent of Shari`ah compliance dominantly influence the bank in achieving the financial
stability. Though interviewees recognized other necessary factors affecting the financial
performance of IBBL, most of them argued that Shari`ah be the only disposition that makes
the bank unique.

The level of Shari`ah compliance of IBBL attracts new customers and helps the bank
flourishing its business. All the interviewee clients expressed that performing interest-free
banking is the prime reason for choosing Islamic bank. In this regard, almost all the
interviewed clients stated that better Shari`ah standing of the IBBL was the cause that
influenced their banking choice. Among the nine clients, seven clearly mentioned that IBBL
complies more Shari`ah rules than other Islamic banks in Bangladesh. Moreover, clients
thoroughly examined the level of Shari`ah compliance before banking with IBBL. In
particular, the clients did not consider financial performance in choosing IBBL though the
financial position of the bank is better than most of the banks in Bangladesh. However, the
fact the study revealed that the level of Shari`ah compliance, among others, is the most
vibrant cause for the better and stable financial performance of the sample bank. Almost all
the interviewees argued that IBBL follows Shari`ah more than other Islamic banks in
Bangladesh. Better Shari`ah standing of IBBL creates various advantages to IBBL resulting
better financial performance.

Shari`ah compliance creates lots of internal strengths and external opportunities that facilitate
the Islamic bank in achieving superior financial performance (please see Figure 1). Among
others, internal strengths include ‘Accountability to Almighty’ of the directors, management,
and employees of the bank. Because of this accountability, all these people become aware of
the rights of parties concerned (Haq-qul-Ibad) particularly the employees and clients of the
bank. Appropriate policies and efficient management ensure the employee job satisfaction
that guarantees better customer services. In addition, continuous observation of the Shari`ah
supervisory board is a supplementary assurance of these accountabilities.
Figure 1: Shows the process Shari`ah compliance leads to outstanding financial performance

External • Client Friendly Islamic


Opportunities Environment • Deposit
• Social Welfare Banking Growth
• Customer satisfaction • Investment
• Others Growth
Shari`ah Financial • Branch
Compliance Performance Growth
• ROA,
• Efficient Management CAR,
• Employee Satisfaction ROE
• Better Customer • Others
Internal Services
Strengths • Others

Source: Developed by Authors

Waves of clients are the core external strengths of the Islamic banks in Bangladesh. Client
friendly Islamic environment and social welfare banking of IBBL help in attracting more
customers. On the other hand, clients are also accountable to Allah (SWT) for making
interest-free Shari`ah compliant financial transactions. Therefore, clients are supposed to
choose that Islamic bank which complies Shari`ah the most. More clients are interested in
depositing their funds at IBBL at a low profit or even without any profit. Interestingly, all the
banks, except for Islamic banks, faced severe fund shortages during last financial crisis. That
is why IBBL got the greater opportunity of income through prudent investment of these
funds. Furthermore, Islamic investments policies, diversification of products and client
selection giving priority to Islamicity instigate profitability of IBBL. Additionally, Islamicity
criteria of investment-client selection enhance recovery rates and helps to avoid investment
defaulters. Because of complying Shari`ah, IBBL cannot be extravagant in expenditures that
are also an added strength of enhancing financial performance.

Islamic banks follow the commandments of Allah (SWT) who govern the whole universe and
gives rise and fall where He likes. As Allah states in the Holy Quran, “Allah destroys interest
and gives increase for charities. Moreover, Allah does not like every sinning disbeliever” (Al-
Quran 2:276). The rate of growth of Islamic banking throughout the globe can be explained
as the reflection of this verse. Specifically, the financial performance of IBBL proves that
Allah (SWT) showers Barakah on IBBL, as the most Shari`ah compliant bank in Bangladesh,
as Allah (SWT) promised.
This paper expects to uphold the significance of Shari`ah in swelling the financial
performance of IBBL and simultaneously motivating the parties relating to Islamic banks in
enhancing the level of Shari`ah compliance. Moreover, this paper provides new insights into
the important of Islamic banks and their performance in relation to the choice of customers.
This study has been conducted in a Muslim-majority developing country but traditional
regulatory context. More studies may be conducted in a different context, e.g. developed
country, countries having Shari`ah law or separate Islamic banking law, to generalize the
findings of this study. Furthermore, evaluating the relationship between compliance with
Shari’ah and financial performance based on a qualitative method using interview responses
only is a challenging task where a quantitative approach supposed to suit best. Therefore,
further studies may be performed based on the quantitative approaches using financial
information of the Islamic banks.

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Appendix-1
Details of the interviewees
Interviewee Status Position Organization Education Age
1 Financial Analyst Manager R & R Hoq BBA, MBA, CA 34
2 Regulator-1 Senior Officer CSE BBA, MBA 35
3 Regulator-2 Deputy Director BB BBA, MBA 36
4 Regulator-3 Asstt. Professor BIBM BBA, MBA 39
5 IBBL Client-1 Associate Professor IIUC BBA, MBA 40
6 IBBL Client-2 Associate Professor IIUC M.Com, M.Phil 43
7 IBBL Client-3 IT Professional Toll, Australia BSc, MSc 40
8 IBBL Client-4 Associate Professor IIUC MBA, MPhil 42
9 IBBL Client-5 Lecturer IIUC BBA, MBA 35
10 IBBL Client-6 Asstt. Director IIUC BBA, MBA 38
11 IBBL Client-7 Professor IIUC MSc, MPhil, PhD 46
12 IBBL Client-8 Associate Professor CU BBA, MBA 40
13 IBBL Client-9 Asst Professor IIUC BBA, MBA 36
14 IBBL Employee-1 Officer IBBL BBA, MBA 32
15 IBBL Employee-2 Principal Officer IBBL BBA, MBA, CDCS 36
16 IBBL Employee-3 Senior Prin. Off. IBBL BSc, MSc 41
17 IBBL Employee-4 Senior Officer IBBL BBA, MBA 37
18 IB Employee-1 Senior Executive EXIM BBA, MBA 39
19 IB Employee-2 Senior Executive EXIM BBA, MBA, ACMA 37
20 IB Employee-3 Executive Officer EXIM BBA, MBA 39
21 IB Employee-4 FAVP EXIM BBA, MBA 40
22 TB Employee-1 Principal Officer PBL BBA, MBA 36
23 TB Employee-2 Officer DBBL BBA, MBA 37
24 TB Employee-3 AVP Jamuna Bank BBA, MBA 39
Appendix-2
Questionnaire
For Customers:

1. Why did you choose an Islamic bank (not an interest-based bank) for banking activities?
2. Why did you choose IBBL, But NOT another Islamic bank?
3. Did you compare financial performance before choosing IBBL?
4. Did you compare the Shari`ah performance of the Islamic banks before choosing IBBL?
5. Why does financial performance of IBBL better than other banks in Bangladesh?
6. Do you think IBBL obeys Shari`ah more than other Islamic banks in Bangladesh? Why or
why not?
7. Do you think that people choose IBBL due to its Shari`ah performance? Why or why not?
8. Do you think the financial performance (stability) of IBBL is better due to its Shari`ah
performance? Why or why not?
9. “More Shari`ah compliance leads to better financial performance”— Is it true for the Islamic
banks in Bangladesh?

Please send your reply to: hafij_1980@yahoo.com

For Bank Officers:

1. Why does financial performance of IBBL better than other Islamic banks in Bangladesh?
2. Do you think IBBL obeys Shari`ah more than other Islamic banks in Bangladesh? Why or
why not?
3. Do you think that people choose IBBL due to its Shari`ah performance? Why or why not?
4. Do you think the financial performance (stability) of IBBL is better due to its Shari`ah
performance? Why or why not?
5. “More Shari`ah performance leads to better financial performance”— Is it true for the Islamic
banks in Bangladesh?

Please send your reply to: hafij_1980@yahoo.com