In the mid-1970s, following a wave of religious traditionalism across the Middle East, a long, dormant Islamic institution made a revival and once again burst onto the world stage. Known colloquially as Islamic banking, its introduction into the modern financial system promised a more pious alternative to conventional banking. Since this resurgence, Islamic banking has spread to a number of Muslim countries around the world. In many of these places, Islamic banks have even begun to compete more directly with conventional banks, and perhaps nowhere is this growing profile more apparent than in Bangladesh.
As the third largest Muslim country in the world, Bangladesh was a prime location for Islamic banks to take root. Very quickly the banks found themselves in a powerful symbiotic relationship, where they were able to provide services to the millions of Bangladeshi people escaping abject poverty. In this way, the rise of Islamic banking in the country parallels the economic rise of Bangladesh itself.
The banks’ success continues to be driven, in large part, by their ability to appeal to the traditional Islamic values of the country’s populace. Islamic banking codes are structured in compliance with Sharia law, known as Fiqh al-Muamalat, or Islamic Rules on Transactions. This arrangement produces an alternative to conventional banking systems that rethinks long-established principles of finance. Most noticeably, Islamic banking takes issue with the idea of charging interest, called riba. According to the Quran and the Sunnah, riba is forbidden because it is considered exploitative, potentially trapping borrowers in a debt cycle. Without interest, Islamic banks instead turn to a number of financial instruments that allow them to turn a profit from their transactions.
One of the most common of these instruments, known as Musharakah, is often used to replace the standard practice of a home mortgage. In a typical mortgage situation, the bank will loan a buyer enough capital to purchase a house, and then enter into an agreement where the buyer will pay the bank back, with interest, over an agreed span of time. Musharakah, on the other hand, is a completely different model designed to avoid charging interest. When a customer of an Islamic bank wants to buy a home, the bank purchases the home and rents it out to them. As rental payments accrue, the bank slowly hands over possession of the house and when the last payment is made the buyer has ownership of the house.
Aside from avoiding interest rates and debt cycles, there is a deeper philosophical viewpoint on transactions that Islamic banks take, namely that money has no intrinsic value and thus can’t be sold at a profit. All three of the major Abrahamic religions share this belief and used it to guide early financial practices. Islamic banking simply reincorporates this ancient practice into the modern financial system, which it accomplishes through the use of instruments like Musharakah. In Musharakah, when the bank buys the house it has a commodity of tangible value. When the banks rent the house back to the buyer it is providing a service based on a valuable commodity that the bank owns. Conventional mortgages, on the other hand, lack an exchange of tangible value. The banks loan money to you and charge interest on your debt payments, which effectively generates revenue from nowhere. The service the bank is providing you is not based on any value exchange but rather uses existing money to generate new revenue. Islamic banks pride themselves on operating only in positions where they are providing services based on real value as opposed to speculative value.
In addition to these philosophical views on commerce, Islamic banks make a poignant moral argument as well. In contrast to conventional banks, Islamic institutions will only provide service to enterprises they consider ethical. This means absolutely no business ties to alcohol, tobacco, adult entertainment, or weapons companies. Investing in these industries is considered haram (off-limits) according to Islamic sacred texts. For example, Islamic banks in Bangladesh will finance the import of fertilizers, but will not finance what’s used to grow tobacco—a very lucrative crop in the country.
However, the appeal of Islamic banking manifests itself in more ways than just as a more pious alternative to conventional banking. Islamic banks are often viewed by their clients as highly efficient and less corrupt, especially in Bangladesh. This reputation stems from that the fact that these banks generally have far fewer ties to the Bangladeshi government, which is widely regarded by the populace as severely corrupt. In fact, Islami Bank, the most influential Islamic bank in the country, was described by the executive of a prominent think-tank as the only bank where “bribery was not institutionalized.”
In terms of efficiency, Islamic banks boast much lower rates of non-performing loans (NPLs) than their competitors in the country. NPLs at conventional banks hovered around 9.2%, compared with just 4.3% at Islamic banks. This too can be partially attributed to government interference; many of the non-performing loans at conventional banks are from deals with politically-connected businesses. The other key to their efficiency is that Islamic banks are also generally more risk-averse than their competitors. In fact, high degrees of risk, or gharar, are not allowed. In technical terms, this means that Islamic banks will not invest in conventional derivatives since they require speculation about the future and could lead to excessive risks. This is largely why, following the international recession in 2008-2009, Islamic banks fared much better than their conventional counterparts.
While Islamic banking, in general, has been on the rise in Bangladesh, one bank in particular is surpassing them all. As the largest Islamic bank in the country, Islami Bank Bangladesh is currently unmatched. Founded in 1983 by Saudi and Kuwaiti hedge fund investors, it rose to prominence during the economic boom that swept through the country. Over the past twenty years, Bangladesh developed a flourishing manufacturing economy, especially in the production of textiles, where it comes second only to China. In fact, Bangladesh’s economic rise can be attributed to what many analysts have dubbed the “two Rs”: Remittances and Ready-made garments. By taking advantage of these industries, Islami Bank was able to distinguish itself, and today accounts for 90% of Islamic-banking assets and deposits. It also rose to become the largest private lender in the country, with a balance of over $10 billion.
Following up on these impressive figures, Islamic banking in Bangladesh still has a lot of room to grow in the future. According to Azizul Huq, a former vice-chairman of Islami Bank, Islamic banks will eventually overtake conventional banks in the country. Currently, Islamic banks only have a 20% market share. However, with public approval ratings for Islamic banks above 80%, it certainly appears within the realm of possibility. It also helps that Bangladesh’s population of 170 million is 90% Muslim, and only one out of every three people in the country currently has a bank account. In other words, Islamic banks are primed to take advantage of opportunities that will allow them to outcompete conventional banks in the country.
Competitors are starting to realize this and aren’t waiting to be left behind. With the explosive popularity of Islamic Banking in the past few decades, more conventional banks are beginning to offer a wide range of Islamic banking services themselves. Well known international banks, like Citi and HSBC, first broke into the field by creating so-called Islamic “windows,” where they offered Islamic banking services alongside their more standard services. Once these “windows” received enough attention, they considered opening up brick and mortar Islamic branches. This strategy has worked quite well for conventional banks, and now they have currently around 25 Islamic “windows” and 18 Islamic branches in operation around the country.
However, there is one major impediment to the growth of Islamic banking in the country, and that is the Bangladesh government. Several years ago, the Bangladesh Central Bank stopped issuing new Islamic banking licenses. This was a response to policymakers who argued that Islamic banks were too unregulated and that they needed time to draft new legislation. However, the freeze has been ongoing and new competitors are unable to enter the market. One of these competitors, Jamuna Bank, has been stuck in the bureaucratic pipeline for years and still has yet to receive their license. Frustrated by the lack of progress, the bank’s director, Shafiqul Alam, has decided to abandon plans for the company to move into Islamic banking services.
The uneasy relationship between the government and the Islamic banking industry rests on more than just regulatory problems though. Over the past few decades as Islamic banking in the country has grown, the political profiles of those banks have risen as well. Always weary of potential challenges to her authority, Prime Minister Sheikh Hasina quickly deemed the banks a political target. This paradigm was destined for confrontation, as the Islamic banks are famous for having few ties with the Bangladeshi government; thus, unlike other prominent banks, they are largely free from government influence. Islami Bank, in particular, has been a focus of much government scrutiny due to its association with the opposition party, Jamaat-e-Islami. Officially, Hasina has accused the bank of having financial ties to terrorism, but it’s more likely that she is just exploiting the opportunity to bring the bank under her control. Already she has placed inspectors at many branches to monitor the movement of bank officers.
Tensions rose to a head in 2017 when Hasina utilized military intelligence officers to initiate a boardroom coup d’etat at Islami bank, replacing the current board of directors with loyal supporters of her party. Under the watchful eye of the military officials, the old board members swore in their new replacements on the spot. This led to an uproar from agitated shareholders who protested that they had not been properly informed of the decision to elect a new board and thus were unable to send their own candidates.
Since the takeover, the number of loans at the bank has increased dramatically. Alarmingly, many of the loans issued had a high chance of default; the Bangladesh Central Bank even weighed in by saying that many of the loans were too risky. These developments have become so bad that the Saudi and Kuwaiti hedge funds, who initially financed the bank back in the eighties, have begun to relinquish their shares because they don’t consider their money safe anymore.
Following this unprecedented act of aggression from the government, the future of Islamic banking in Bangladesh is now in question more than ever. While there are a number of positive signs that highlight what could eventually become a massive banking market, the recent developments and the continued freeze on Islamic banking licenses are obstacles that may stymie the growth of the industry. Islami Bank’s new director is quick to point out the continued success and profitably of the bank, but this has done little to reduce the anxieties of shareholders and other business leaders. Ultimately, only time will tell if the Islamic banking industry in Bangladesh will be able to grow past the obstacles set forth by Hasina’s government.