WORLDWIDE assets of the Islamic banking andfinancial services industryare currently estimated approximately at US$1000 billion. More than 300 banks and financial institutions are providing their banking services under Islamic framework in more than 60 countries of Asia, Africa, Europe and America.
The Islamic banking system in Bangladesh started with the establishment of Islami Bank Bangladesh Limited (IBBL) in 1983. Currently, seven full-fledged Islamic banks and eleven conventional banks with their 24 Islamic banking branches are providing Islamic banking services. Internationally reputed banks like the Hong Kong and Shanghai Banking Corporation (HSBC) Ltd., Citi Bank N.A., Standard Chartered Bank and Commercial Bank of Ceylon have introduced Islamic products. A state-owned bond called Bangladesh Government IslamicInvestment Bond (BGIIB) has been issued by the central bank. In Bangladesh, the share of deposit mobilisation and investments of Islamic banking in the banking industry is 16 per cent and 20 per cent respectively. In order to fully comply with the Islamic Shariah rules in banking transaction all the banks have their own Shariah Council. Besides, Bangladesh Bank has formed a Central Shariah Council and introduced Guidelines for Islamic banking to maintain liquidity, books of accounts and preparation of financial statements and related issues. In addition, they are also advised to follow the accounting and auditing standards prescribed by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). There are 70 standards on accounting, auditing and governance along with the code of ethics and Shariah Standards of AAOIFI. Islamic ethical standards etc.
Deposit mobilisation
Like conventional banks, Islamic banks are also dependent on the depositors' money as a major source of funds and they follow Islamic Shariah-based approaches for mobilising deposits from the public. The deposit mobilisation approaches of Islamic banks do not only comply with the general banking rules of the country but also follow the Islamic Shariah rules. In mobilising deposits, Islamic banks adopt two forms of Shariah-based approaches viz. Al-Wadeah Approach and Mudaraba Approach. First, the term 'Al-Wadeah' means the banks receive deposits of money from people for safe-custody with the condition to repay the money back on demand by the constituent either through cheque, draft, pay order or by any other means acceptable in banking. But the banks can use the depositors' money at bank's risk and responsibility with the prior permission from the depositors.
In Islamic banking, current deposit account is conducted by the principle of 'Al-Wadeah'. In this account the depositors are not entitled to receive any profit or loss out of the utilisation of the funds by the banks. As per prevailing rules of the current account, the Islamic banks have the discretion to realise charges from the current account for safe-keeping money or for any other services if rendered.
Second, the term 'Mudaraba' means a form of contract of partnership in any venture, trade, industry or service aiming to earn profit. The total profit resulting from such investment will be distributed between the bank and the depositors as per pre-agreed ratio. Any loss incurred is to be borne entirely by the depositors. The profit sharing ratio between the bank and the depositors has to be agreed upon or declared before opening any account under the Mudaraba principles.
The general rules of banking to operate savings and time deposits account are also equally applicable in Islamic banking in addition to Islamic Shariah rules.
Deployment of funds
In ordinary parlance, investment means to buy shares, stocks, bonds and securities, which already exist in the capital market, particularly the secondary market. But this is not real investment because it is simply a transfer of existing assets. Hence this is called 'financial investment'. In Keynesian terminology, investment refers to real investment that adds to real capital. Investment thus includes new plant and equipment, infrastructure, building, inventories and stocks and shares of new companies. In line with the Islamic Shariah framework, Islamic banks offer different investment products according to their convenience as well as to fulfill the requirements of the clients.
Investment activities under Bai mode are done through market mechanism. The term 'Bai' means buying and selling of goods and 'Bai-Murabaha' means a form of contract between a buyer and a seller under which the seller sells certain quantity of specific goods permissible under Islamic Shariah and the laws of the land to the buyer at a cost plus agreed upon profit payable in cash or on any fixed future date in lump sum or by installments.
Bai-Muajjal is a form of contract between a buyer and a seller under which the seller sells certain quantity of specific goods permissible under Islamic Shariah and the laws of the land to the buyer at an agreed fixed price payable at a certain future date in lump sum or within a fixed period by fixed installments.
In Bai-Murabaha cost/purchase, price of goods and profit mark-up are to be declared to the buyer but in Bai-Muajjal mode of financing only sale price is declared to the buyer, profit and purchase price are not to be declared.
Bai-Salam is a contract between a buyer (the Bank) and a seller (the Client/Customer) under which the seller sells in advance certain commodities/products permissible under Islamic Shariah and the laws of the land to the buyer at an agreed price payable on execution of the said contract and the commodities/products are delivered as per specification, size, quality, quantity at a future time at a particular place. Here price is fully paid in advance in cash to the seller and the delivery of the commodities/goods is deferred.
The word Bai-Istisna means to manufacture. Bai-Istisna is a sale contract under which goods are manufactured and delivered to the buyer (the Bank) as per order placed by the buyer with proper specification of goods, agreed upon price and method of settlement.
In Bai-Salam, the price is paid in full in advance while it is not necessary in Bai-Istisna. However, Bai-Istisna is always applicable where goods are manufactured but Bai-Salam is applicable whether goods may be manufactured or otherwise procured.
In Islamic banking, Bai-As-Sarf mode of investment is applicable only fortrading foreign currencies.
'Mudaraba' is a contract of partnership in profit whereby one party provides capital (who is called 'Shahib-al-Maal') and the other party provides skill and labor (who is called 'Mudarib') to run a business. In banking, the bank is Shahib-al-Maal while the investment client is Mudarib. Shahib-al-Maal (bank) has no right to participate in the management of the business but all the goods purchased by the Mudarib (client) are solely owned by the 'Shahib-al-Maal' and the Mudarib can earn his share in the profit only in case he runs the business profitably. Mudarib is not entitled to claim his share in the assets themselves, even if their value has increased.
Besides the above mentioned modes of investment there is a scope to adopt more modes of investment under Shariah principles by continuous R&D by the Muslim scholars with a view to increasing the contribution of the Islamic banks and financial institutions in the economy. The modes of investments practicing by the Islamic banks carry some superiorities. First, some modes of investment (say, Mudaraba & Musharaka) do not create debt obligations for the investment clients of the banks. Second, due to the adherence and existence of Islamic Shariah principles in banking the unexpected or haram commodities/goods or any product which conflicts with the moral value of Islam can not be entered into the country by import financing as well as by manufacturing with the local projects. Third, all the investment facilities except Quard Hasana are backed by commodities/assets (like plant & machinery, buildings etc.). So these modes of investment have direct contribution to the production, employment, consumption, savings, inflation, misuse of funds etc. Forth, Profit & Loss Sharing (PLS) characteristics of investment modes encourage the entrepreneurs to come forward to make investment with the help of banks. This is the most remarkable risk bearing feature of Islamic banking system. Fifth, Islamic banking system is much more concerned about the profitability and creditworthiness of the customers because the bank will receive the return subject to the earnings of the customers. Sixth, through this system efficient allocation of resources can be achieved. Since Islamic banking system gives emphasis on the profitable and productive investment only. Finally, by availing investment facility under Shirkatul Meelk the entrepreneurs may get the opportunity to become the owner of the property which will be purchased with the contribution of risk bearing equity participation of the bank.
The author is a trainer in finance & banking. He can be reached at e-mail:saidur08@gmail.com
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