| June 2
June 2 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.
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.
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, totalled 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 commmercial 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.
The central bank is also developing an Islamic refinancing
mechanism to increase Islamic bank lending to small and
medium-sized businesses, and will encourage greater use of
risk-sharing modes of finance, Rahman said.
($1 = 77.4250 Bangladesh takas)
(Editing by Andrew Torchia)