Bangladesh has developed a sizeable Islamic finance industry but a
lack of sharia-compliant instruments such as sukuk is limiting further growth
of the sector, a report by a standard-setting body found, reports Reuters (2
June 2014).
With a predominantly Muslim population of 160 million,
Bangladesh has developed Islamic finance with only marginal
regulatory adjustments; the industry has doubled in size in the past four
years.
The central bank has a small short-term sukuk (Islamic bond)
programme which issues six-month tenors to help Islamic banks manage their liquidity, but a wide range of tenors is not available and there
are no corporate sukuk, according to the report.
THE REPORT GOES ON:
Sukuk would help to diversify funding sources and make up for
the limited scope of the Islamic money market, but issuance of sukuk would
require more specific rules, said the report by the Malaysia-based Islamic
Financial Services Board (IFSB).
"The larger policy issue in Bangladesh is the adequacy
and scope of the legal and regulatory framework in providing an appropriate
enabling environment," it said.
Islamic banks,
which follow religious principles such as a ban on interest payments, now
represent 18.9 percent of total bank deposits in Bangladesh, the report said.
Bank deposits, excluding interbank deposits, totaled 6.33 trillion taka ($82
billion) in March this year, according to the central bank.
The banks include Islami Bank Bangladesh Limited (IBBL) , set
up in 1983 as the country's first Islamic bank and its largest privately owned
commercial bank.But Islamic banks ran into liquidity constraints in 2010 when
their combined advances-to-deposit ratio exceeded a ceiling set by the central
bank, prompting the regulator to monitor their liquidity profiles to detect
maturity mismatches.
This problem was addressed in 2011 when the central bank
launched an Islamic interbank money market, but the dominant share of IBBL
limits the market's efficiency, the report said.
"Its relative size may impact on the effectiveness of
the interbank market, and the central bank should take a further look at this
issue."
The central bank has set statutory liquidity requirements for
Islamic banks at half of what is required for conventional banks, boosting
their profitability but leaving the core issue of the money market's depth
unaddressed.
"This privilege has the critical flipside that the
instruments of Islamic banks for their liquidity risk management are very
limited. In cases of sizeable and unexpected deposit withdrawals, Islamic banks
may face a liquidity crunch."
The report also said a sharia-compliant lender-of-last-
resort facility and Islamic deposit insurance should be developed by
regulators. The central bank, which did not respond to Reuters queries about
its Islamic finance strategy, has said it plans to expand its short-term sukuk
programme.
"Introduction of another similar instrument of
three-month tenor for further facilitation is at the final stage," central
bank governor Atiur Rahman said in a speech in April.
