Islamic-financing industry is bouncing back strongly after a slump mainly due to the Covid-19 pandemic. It is projected to grow to nearly US$5 trillion by 2025 from over $3 trillion as of now. The buoyant projection was made at the fourth Islamic Financial Services Board (IFSB) Innovation Forum in Qatari capital Doha two weeks ago. The board is an international standard-setting organisation promoting the Islamic financial services industry by issuing global prudential standards and guiding principles.
It has defined that Islamic- financing industry includes banking, capital markets and insurance sectors. The Islamic Financial Services Industry (IFSI) Stability Report 2022, prepared and released by the board last month, showed that global IFSI was estimated at US$ 3.06 trillion in 2021. It registered a growth of 11.30 per cent over the value worth $2.75 trillion in 2020.
The report also showed that Islamic banking occupies 69 per cent of the global Islamic- financing service. The share of Sukuk or Islamic bond was 25 per cent followed by Islamic funds assets (5.0 per cent). The rest 1.0 per cent went to Takaful or Islamic insurance industry. The region-wise breakup of the industry showed that 52 per cent of the total market was concentrated in the six-country Gulf Cooperation Council (GCC). Southeast Asia's share was 23.5 per cent in the past year followed by 17.40 per cent in the Middle East and South Asia and 2.10 per cent in Africa. The rest 4.50 per cent was in other regions (Europe and Central Asia).
Islamic finance delivers the banking and other financial services in conformity with the principles of Islamic law, also known as Sharia law, which strictly prohibit riba or interest. That's why Islamic banking is known as interest-free banking. This is the main difference with the conventional banking where interest is the key. Instead of charging fixed-rate interest on lending, the concept of shared risk and reward is the main rule which compels banks to develop a clear understanding of what is being financed. Sharia law also forbids usury (exorbitant interest), uncertainty and speculation and stresses transparency in any financial transaction. And there is a necessity of tangible presence of assets for any transaction, which means financing must be linked to real assets. There is a spirit of partnership between the financier and entrepreneur also. Returns on investment have to be linked with risks. Investing or financing in any immoral, unethical, harmful and problematic business is also not allowed. That's why Islamic finance is defined as 'equity-based, asset-backed, ethical, sustainable, environmentally and socially responsible finance.' It 'promotes risk sharing, connects the financial sector with the real economy, and emphasises financial inclusion and social welfare.'
A number of factors are there behind the spread of the Islamic financial services across the world. Shifting global geopolitics, global financial crisis, economic recessions, wealth concentration, increased socioeconomic disparities and spread of corruption in the last two decades played vital roles in this connection. Conventional or Western lending and financing approaches of 'use of money to make money' expanded the complex structure of gaining profits only. Thus, global conventional financial market becomes more speculative in nature, raising risks in return on investment. Islamic financing provides an alternative approach of low-risk, low-profit with real- world financial transactions. Moreover, the ethical aspects and welfare approach of Islamic financing attract many non-Muslims also.
Bangladesh is one of the leading countries in Islamic banking although it is still far behind in overall Islamic- financial services. Currently, the share of combined deposits of Islamic banks in Bangladesh accounted for 26 per cent of total deposits of the entire banking sector, according to Bangladesh Bank quarterly review report on the country's Islamic- banking segment. The ratio stood at 28.50 per cent in terms of investment or loans and advances in the country's banking sector at the end of fiscal year 2021-22 (FY22). At present there are 10 full-fledged Islamic banks, nine conventional banks with some Islamic- banking branches and 14 conventional banks with Islamic banking windows. ISFI Stability Report put Bangladesh in the eighth place in top 15 countries having a more-than-15-percent share in Islamic-banking assets in their total domestic banking sector assets in 2021. Iran and Sudan have 100-percent Islamic banking followed by Saudi Arabia (78 per cent), Brunei (58 per cent), Kuwait (51.90 per cent), Malaysia (31.5 per cent), Qatar (28.1 per cent), Bangladesh (26.30 per cent), Djibouti (25.1 per cent) and UAE (23.90 per cent).
The report also showed that Bangladesh shared 2.70 per cent of the Global Islamic Banking Assets last year. It also added that assets of the Islamic- banking sector in Bangladesh, Pakistan and Palestine registered improved double-digit-growth performances of 20.9 per cent, 30.6 per cent and 12.1 per cent, respectively, as in the last quarter in 2021. "In Bangladesh, the growth was due mainly to strong public demand," said the report. "Also, policy support by the Bangladesh Bank provided opportunities for Islamic banks to participate in raising funds for infrastructural and industrial projects."
Bangladesh is, however, far behind in Islamic bonds. The country's first Sukuk or Islamic bond was issued in 2020. Bangladesh Bank, on behalf of the government, has issued the maiden sovereign investment Sukuk to raise Tk 80.00 billion for implementation of the safe water-supply project in the country. Two more Sukuk was also issued in the past year. The total amount of issued Sukuk reached Tk 180 billion at the end of June 2022. Unlike a non-Islamic bond, where the bondholders receive fixed interest on maturity for financing the capital, a Sukukholder gets a share of the income generated by the assets. There is also a Bangladesh Government Islamic Investment Bond (BGIIB), introduced in 2004, although only Islamic banks are able to invest in this bond. The amount is still small.
Thus the main challenge for Bangladesh is to diversify the Islamic financial services by focusing on other segments of Sharia-based financing such as Islamic capital market, Islamic insurance or Takaful and microfinance. It needs to learn from the experiences of the countries like Malaysia, Qatar and the UAE in this connection. This will help to enhance the country's share in the global Islamic financial market.
