Islamic banking and its monetary tools in Bangladesh
Md. Khairul Hasan, CSAA :
Islamic finance industry, over the last four decades, has witnessed an impressive growth and tremendous success across the globe thanks to its unique features like- asset based transactions, profit and loss sharing investment mechanism, risk-sharing tendency, linkage with real assets, and welfare-oriented activities. Islamic Shariah bans interest, products with excessive uncertainty, gambling, speculations, short-sales, as well as the financing of illicit activities harmful to society, which are strictly prohibited in the Islamic Banking System (IBS). Abolition of interest and a fixed rate of interest is replaced by a variable rate of return based on real economic activities makes it different from the conventional interest-based commercial banking.
Major deposit products of IBS in Bangladesh are- Al-Wadeah Current Deposit; Mudaraba Savings Deposit; Mudaraba Term Deposit; Mudaraba Special Deposit Account; and Mudaraba Savings Bond etc. Whereas popular financing modes are- Bai-Murabaha, Bai-Istijrar, Bai-Muajjal, Bai-Salam, Bai-Istisna, Bai-As-Sarf, Murabaha, Musaraka, and Hire Purchase under Shirkatul Melk.
Responding to the public demand for Islamic Finance, Bangladesh Government and Regulators, however, introduced some Islamic monetary policy tools for liquidity management of IBS. The Government has introduced ‘Bangladesh Government Islamic Treasury Bill (BGITB)’ to facilitate fund for Islamic Finance. Bangladesh Bank on behalf of the Government issued the non-tradable BGITB based on Murabaha to the purchase ordered on a competitive bidding auction basis to finance government internal procurement or imports from overseas countries for one month to one year tenure.
Bangladesh Bank can inject/sterilise liquidity temporarily into/from the banking system in case of liquidity shortfall/surplus via Repo (outright purchase)/Reverse Repo (through Bai-Muajjal and outright sale) of Taka denominated Bangladesh Government IjarahSukuk (BGIS) issued by the government treasury and its SPV.
The unrestricted Wakalah agreement is used as an alternative to Islamic Repo and Reverse Repo. Unlike the Repo and Reverse Repo systems, BB arrange an auction where participating Islamic banks (muwakkil) place their excess liquidity with BB (wakil), authorizing them to use the money in a profitable venture/way, usually against a fixed fee.
Bangladesh Bank Musharaka Certificates (BBMC) is an equity-based instrument that can be issued against the government or central bank’s ownership in profitable commercial banks enable to regulate domestic liquidity through open market operations. For this purpose an Open Market Operations Fund (OMOF) is established, and BBMCs can be issued against the OMOF.
Interbank Mudaraba Placement Fund refers to a mechanism whereby a deficit Islamic banking institution (i.e. an investee bank) can obtain investment from a surplus Islamic banking institution (investor bank) based on Mudaraba (profit sharing) principle. The period of investment ranges from a period of overnight to 12 months, while the rate of return is based on the rate of gross profit before distribution for investment of 1-year of the investee bank.
Commodity Murabaha is used to facilitate short-term interbank lending using transactions in commodities to structure an investment between two Islamic banks. A variety of this transaction is the Salam Sukuk, which uses forward commodity contract to generate longer term investment (usually three months).
Central Bank Wadiah (Trust) Certificate/Deposit is issued against funds placed by IBS at the central bank for various maturities. Remuneration is at the central bank’s discretion given the debt nature of the facility. Central banks may pay a bonus at maturity that is usually tied to a domestic financial benchmark.
There are two forms of Central Bank Papers-Musharaka Certificates issued against the central bank ownership of a pool of income earning assets; or Sukuk issued against the central bank ownership of real fixed assets. These papers are freely tradable with maturities of less than one year.
Similar to central bank papers, Government Papers are issued as Musharaka Certificate against government ownership of a pool of income earning assets, or as Sukuk issued against the government ownership of real assets. These instruments are freely tradable with maturities that can be structured (particularly for Sukuk) similar to those of domestic government securities.
Islamic Repurchase Agreements or Sale and Buyback usually involves two separate contracts, an outright sale of security at an agreed price and a forward purchase of security at a specified price and future date. This is an amalgamation of two pieces on Islamic banking appeared in the Bangladesh Bank’s Bangladesh Bank introduced Mudarabah Liquidity Support (MLS) to ensure financial stability and the resilience of Islamic Banks. The repayment tenure of the short-term loan will be 7 days, 14 days and 28 days. BB will provide the support under Mudarabah Contract to Shari’ah based banks maintaining a current account with BB, where it acts as the Investor and the banks act as investment managers under an agreed Profit Sharing Ratio (PSR).
Bangladesh Bank has also introduced Islamic Banks Liquidity Facility (IBLF) to aid the liquidity management and deepen the financial system for shari’ah based banking system. Shari’ah based banks maintaining current accounts with BB are eligible to participate in the IBLF, which is a framework of providing liquidity facility to Shari’ah based banks under the Mudarabah contract where BB acts as the Investor (Rab al Mal) and banks act as the investment manager (Mudarib) under an agreed Profit Sharing Ratio (PSR).
(The writer is an Islamic Banker and a Certified Shari’a Adviser and Auditor (CSAA) fellow of Bahrain based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
