Md. Fariduddin Ahmed
Former Managing Director and CEO  
Islami Bank Bangladesh Limited & Exim Bank Limited

Interviewed by Akhlaqur Rahman Sachee, Team MBR

In this edition of the IDLC Monthly Business Review on Islamic Finance in Bangladesh: En Route to New Horizons, the MBR team had the privilege of talking to the industry expert, Md. Fariduddin Ahmed. Mr. Ahmed was Managing Director and CEO of Islami Bank Bangladesh Limited (2007–2010) and EXIM Bank Limited (2011–2012). He started his career as a probationary officer at Sonali Bank Limited in the year 1977. He has been playing various important roles in numerous advisory committees, forums, and boards working on Islamic banking for years. He is currently serving as one of the Independent Directors of ICB Islamic Bank Limited.

Akhlaqur Rahman Sachee: Islamic finance in Bangladesh accounts for around 30% of the total market for financial services, and the sector is expanding at a faster rate than average. What are the factors do you think fueling the growth of this sustainable finance market?

Md. Fariduddin Ahmed: The country’s first Islamic bank, Islami Bank Bangladesh Limited (IBBL), keeping in view the goals and objectives of Islamic Shariah (the Maqasid Al Shariah), at its initial state in the year 1983, designed and introduced a retail banking model. This model paved the way for the lower strata and all sections of the masses to flock to this bank to open deposit accounts with a paltry sum of one hundred taka and also avail of a small amount of investment. This strategy, combined with other innovative dissemination programmes like organising local seminars before the opening of the branches and personal contact with the people associated with the social and educational institutions, in addition to the publicity through the national media, arouses immense interest in Islamic banking. IBBL, the pioneer in the establishment of Islamic banking in the country, realised the importance of expatriate remittances at the right time and deployed representatives in the overseas centres to remit through banking channels. This resulted in a huge accumulation of deposits in millions of accounts over a short period of time. Needless to say, IBBL still occupies the top position in securing wage earners’ remittances. IBBL has designed and redesigned its business models many times over the years to meet the needs of the economy and the demands and requirements of its clients. The micro-investment scheme of IBBL, known as the Rural Development Scheme (RDS), accommodates millions of clients.

The distinguishing characteristics, benefits, and curses of Riba (interest) in religious and economic contexts were clearly explained to people of all religions. This strategy attracted people of all castes and creeds to accept the new concept of banking with intense zeal. The above background, combined with the dedicated services of the employees, upholding ethical standards, proper regulatory compliance, and good corporate governance practices, better return on investment of funds than their conventional counterparts, lower cost of doing business with Islamic banks, support and good wishes of the regulatory authorities and all other stakeholders, and quick expansion of operating units, is attributable to the faster growth of Islamic banking in Bangladesh. Undoubtedly, the immense success of IBBL paved the way for other full-fledged Islamic banks and branch or window-based Islamic banking units to start their operations.

Akhlaqur Rahman Sachee: Islamic banking possesses more than one-fourth of the banking assets and liabilities in Bangladesh. However, the Islamic capital market and the Islamic insurance (Takaful) market have not flourished to the extent that Islamic banking products have flourished. What are the underlying reasons, you think, responsible for the scenario?

Md. Fariduddin Ahmed: When it comes to the overall financial and economic systems of Bangladesh, insurance and capital markets lag behind the country’s banking expansion, and the same is true for Islamic finance. Actually, it takes time for anything to fully blossom. And this is happening in the development of other areas of Islamic finance in Bangladesh as well. Islamic banking already possesses a significant portion of the total banking market share. At the same time, we are observing that other segments of Islamic finance, like Islamic capital markets, Islamic insurance, Islamic microfinance, etc., are growing gradually. In recent years, we have observed the amazing advancement of the Islamic capital market in Bangladesh with the trading of Islamic equity and Sukuk. Two Islamic indices to serve as the Shariah compliant free float-adjusted broad market benchmarks have been launched on the country’s two stock exchanges. However, Shariahcompliant stocks are limited. Most companies obtaining finance from Islamic banks and IFIs are not listed on the stock exchanges. Moreover, banks cannot make an unlimited amount of investment in the capital market. They have to follow the regulations of the Bangladesh Bank and the Bangladesh Securities and Exchange Commission in this respect. Takaful companies also have to follow the rules set by their regulators.

Akhlaqur Rahman Sachee: In Bangladesh, Islamic banking products are skewed more toward asset-based financing or debt financing, i.e., Murabahah, Ijarah, and Salam modes of financing. But we all know that the true spirit of Islamic finance is inherent in equity-based instruments like Mudharabah and Musharakah. What can be done to increase equity-based investments in the Islamic banking sector?

Md. Fariduddin Ahmed: Mudaraba deposits from Islamic banks and IFIs account for roughly 90% of total deposits. And in this process, if any loss is incurred, that has to be borne by the Mudaraba depositors. Therefore, to safeguard the stake of the deposit holders, the IBs and IFIs have to pursue prudent fund management policies. Risk management is the sine qua non in investment operations. Theoretically, investment under the Mudaraba and Musharaka modes is riskier than that of other secured modes. However, during the last four decades, the so-called secured modes of investment could not effectively thwart the creation of non-performing investments. Asset quality could have been better if Mudaraba and Musharaka modes were introduced with due precautions. For better risk management, IBs and IFIs should prepare investment plans by sector, security, geographical area, and modes of investment wise vis-à-vis their fund composition. Equity financing cannot in any way be mixed up with financing under Mudaraha and Musharaka modes.

Akhlaqur Rahman Sachee: Trust issues and misconceptions regarding Islamic financial products and services pose major challenges for Islamic financial institutions. How can Islamic financial institutions overcome the issues?

Md. Fariduddin Ahmed: Proper Shariah compliance is the solution. The first and foremost requirement is the commitment of the management. The second is preparing Standard Operating Procedures (SOP) and Product Program Guidelines (PPG). The third is knowledge and skill development of the employees, duly assessing their needs. Fourth, enhance the commitment level of the workforce through continuous motivation and incentives. Fifth, becoming a member of the national and international standard-setting organisations like the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB). Last but not least, well-thoughtout programmes to educate customers about Islamic finance.

Akhlaqur Rahman Sachee: A vast majority of the population needs to be brought under the umbrella of financial inclusion. Would you please tell us how Islamic financial institutions can reach out to more unbanked people?

Md. Fariduddin Ahmed: Islamic banks in Bangladesh formulated visionary policies from the very inception. Inclusivity was the main issue of their business and expansion plans from the very beginning. Still, they are pursuing that goal. We have already talked about the issues of how Islamic banking was first introduced in Bangladesh. Fortunately, modern technologies have made it easy and congenial not only for banks but also for all developmental agencies.

Akhlaqur Rahman Sachee: In recent times, we have observed that the Sukuk (Islamic Bond) market is flourishing. What can be done to attract international Sukuk investors to strengthen our position in foreign direct investment (FDI)?

Md. Fariduddin Ahmed: The commencement of Sukuk as part of the diversified bond and capital market instruments was a phenomenon. Both public and private sectors have come forward in this regard. In fact, in a recent large Sukuk issue, overseas investors participated in the equity of the concerned mother company. Anyway, by bringing innovation and restructuring to Sukuk markets like Malaysia and Indonesia, we may attract more FDI.

Akhlaqur Rahman Sachee: A legal, regulatory framework is conducive to the development and sustainability of any industry. Do you think that the current regulatory framework is adequate for the Islamic banking and finance industry?

Md. Fariduddin Ahmed: Amendments/additions/ modifications in several clauses of the Banking Companies Act, 1991 have filled up the vacuum in this respect. Bangladesh Bank Guidelines-2009 on Islamic Banking has further strengthened it. These guidelines are under the process of revision and standardisation. A separate chapter has also been incorporated into the ICCD Guidelines for Shariah Audit. Besides, Bangladesh Bank has introduced the following money market instruments/refinance arrangements: 1) Bangladesh Government Islamic Investment Bond (BGIIB), 2) Islamic Inter-Bank Fund Market (IIFM), 3) Islamic Refinance Fund Account, and 4) Bangladesh Government Investment Sukuk (BGIS). However, a separate Islamic Banking Act containing standard concepts, meaning, definition, and interpretation of the Islamic finance terms and terminologies will bring uniformity in the implementations and operations, proper governance by the regulators, and smooth handling of lawsuits, particularly recovery of stuck up investments.