OVERVIEW ON BANKING SYSTEMS

The practice of banking was of great necessity in all ages, and the
invention of Islamic banking permits a Muslim to take the
advantages of a bank, and to adhere with the Islamic Shariah as
well. The main difference between Islamic and non-Islamic
banking is that an Islamic banking system is an interest free
banking system, which emphasizes the prohibition of Riba -
interest. It’s the basic difference between the both banking
systems.

Mainstrea Bank is a financial intermediary profit making

m institution.
Bank

Mainstrea Banking is the functions of a bank, which is

m conveyed through the activities of a banker.
Banking
system

Islamic A shariah based bank which follows the principls

Bank of Islam and avoids receipt and payment of
interest.

Islamic Islamic banking means banking according to the

Banking principles of Islam.(Ribah-free banking)
system
History:
In World:
The first modern experiment with Islamic banking was
undertaken in Egypt under cover without projecting an Islamic
image—for fear of being seen as a manifestation of Islamic
fundamentalism. The pioneering effort, led by Ahmad Elnaggar,
took the form of a savings bank based on profit-sharing in the
Egyptian town of Mit Ghamr in 1963. This experiment lasted until
1967, by which time there were nine such banks in the country.
In 1975, the Islamic Development Bank was set-up with the
mission to provide funding to projects in the member countries.
Islamic Development Bank (also known as IDB), is a
multilateral development financing institution located
in Jeddah, Saudi Arabia. It was founded by the first conference of
Finance Ministers of the Organization of the Islamic Conference
(OIC), convened 18 December 1973. The bank officially began its
activities on 20 October 1975. The present membership of the
Bank consists of 56 countries

In Bangladesh:
Bangladesh is one of the largest Muslim countries
in the world. The people of this country are deeply committed to
Islamic way of life as enshrined in the Holy Qur'an and the
Sunnah. Many people in Bangladesh are not interested to involve
in banking as they offer interest. To provide banking facilities to
these Islamic minded people, Islami Bank Bangladesh Limited was
established in March 13, 1983, which started functioning with
effect from March 30, 1983.
Principles
Islamic banking has the same purpose as conventional banking
except that it operates in accordance with the rules of Shariah,
known as Fiqh al-Muamalat (Islamic rules on transactions). The
basic principle of Islamic banking is the sharing of profit and loss
and the prohibition of riba (usury). Common terms used in Islamic
banking include profit sharing (Mudharabah), safekeeping
(Wadiah), joint venture (Musharakah), cost plus (Murabahah), and
leasing (Ijarah).

The common Shariah concepts are as follows:

Wadiah (Safekeeping)

Wadiah means custody or safekeeping. In a Wadiah arrangement,

you will deposit cash or other assets in a bank for safekeeping.
The bank guarantees the safety of the items kept by it.

Mudharabah (Profit sharing)

Mudharabah is a profit sharing arrangement between two parties,

that is, an investor and the entrepreneur. The investor will supply
the entrepreneur with funds for his business venture and gets a
return on the funds he puts into the business based on a profit
sharing ratio that has been agreed earlier.

Murabahah (Cost plus)

A Murabahah transaction involves the sale of goods at a price

which includes a profit margin agreed by both parties. However,
in Murabahah, the seller must let the buyer know the actual cost
for the asset and the profit margin at the time of the sale
agreement.

Musyarakah (Joint venture)

In the context of business and trade, Musyarakah refers to a

partnership or a joint business venture to make profit. Profits
made will be shared by the partners based on an agreed ratio
which may not be in the same proportion as the amount of
investment made by the partners. However, losses incurred will
be shared based on the ratio of funds invested by each partner.

Ijarah (Leasing)

Ijarah means lease, rent or wage. Generally, Ijarah concept means

selling the benefit of use or service for a fixed price or wage.
Under this concept, the Bank makes available to the
customer the use of service of assets / equipments such as
plant, office automation, motor vehicle for a fixed period and
price.

Services of Islamic Banks:

Islamic Banking Institutions are offering a wide range of Shariah

Compliant products & services in the following areas:

 General Banking: General services of a bank are

performed by Islamic banks like collecting deposit, giving loan,
discounting bills etc.
  Consumer Banking: Islamic banks in Banks also
provide loans for consumer products.

 Corporate /SME Banking: In Bangladesh, Islamic

banks also start corporate and SME banking.

 Investment Banking: Islamic Banks also works as

investment banks by providing short and long term loans to
various industries.

 Trade Finance: Islamic Banks also helps our import

export trade by giving loan, issuing Letter of credits, giving
assurance and transferring money.

Others Services:
Islamic banks in Bangladesh are also providing people with the
following services-

• Bonds & Guarantees,

• Letters of Credit

• Remittances

• Online banking

• ATM/debit card

• Safe deposit lockers and

• Utility bill payments

 • Collection of export bills

• Inter-Bank funds transfer facility through ATM,

• Lockers

• Deposit accepting ATMs etc.

Problems and Challenges of Islamic Banking

The Islamic banks in the world have been facing a number of

challenges. Side by side, the Islamic banking in Bangladesh is also
facing numerous problems of challenges.

First, they have not yet been successful in devising an interest-

free mechanism to place their funds on a short-term basis. They
face the same problem in financing consumer loans and
government deficits.

Second, the risk involved in profit-sharing seems to be so high

that almost all of the Islamic banks in Bangladesh have resorted
to those techniques of financing which bring them a fixed assured
return. As a result, there is a lot of genuine criticism that these
banks have not abolished interest but, they have, in fact, only
changed the nomenclature of their transactions.

Presently 60%-70% investments of Islamic banks are made on

mark-up basis (Murabaha and Bai-Muajjal etc.). As a result, the
ideal modes of investment (Mudaraba and Musharaka) are quite
absent in their practices.
Third, the Islamic banks do not have the direct support of the
Central bank in Bangladesh, do not have the necessary expertise
and trained manpower to appraise, monitor, evaluate an audit the
projects that are required to finance. As a result, they can not
expand despite having huge excess financial liquidity. The
implementation of an interest-free banking in Banking raises a
number of questions and potential problems.

However, some of the topical problems being faced

by the Islamic banks are:

• Absence of an organized Islamic inter-bank money market

• Absence of full-fledged legal framework for Islamic banking

• Lack of co-ordination and co-operation among the Islamic

banks

• Lack of Shariah-compatible regulatory and supervisory

standards

• Inappropriate organization of the Shariah Councils and weak

follow-up of

• the Shariah implementation status of the Islamic banks

• Lack of corporate governance in the Islamic banks

 • Lack of Coordinated Research Work on Islamic Economics,
Banking and finance

The above problems are some of the burning problems

confronting the Islamic banks in Bangladesh. However it is felt
that much operational work and in-depth research work has to be
undertaken to allow the Islamic banks to flourish with highest
quality and strength

Some Islamic Banks in Bangladesh:

Islamic banking
system in Bangladesh has begun with the establishment of Islami
Bank Bangladesh Ltd and now there are eight Islamic banks in
Bangladesh of which two are owned by foreign groups. All of the
Islamic banks in Bangladesh are commercial banks and no bank is
owned or operated by the government. The names of the Islamic
banks in Bangladesh are given below:

1. Islami Bank Bangladesh Limited

2. Shahjalal Islami Bank Limited
3. Export import Bank of Bangladesh
Limited
4. Al-Arafah Islami Bank Limited
5. Social Islami Bank Limited
6. Bank Al-Falah Limited
 7. First Security Isalmi Bank Limited
8. ICB Islamic Bank Limited

Aims and Objectives:

Islamic banks have some unique aims and

objectives. Some of these are described below-

To conduct interest-free banking:

As taking interest is forbidden in
Islam, Islamic Banks have offered interest free banking which
helps pious people participate in banking business.

To establish participatory banking:

In normal banking system the
relationship between banker and client is that of debtor and
creditor but in Islamic banking, banks participate in their client’s
business as partners.

To invest on profit and risk sharing basis:

Islamic banks provide
money to their client as capital and deal in the financial activities
of clients in profit and loss sharing process instead of charging
interest.
To establish a welfare-oriented banking system:
These banks strive to establish a welfare-
oriented banking system by providing wadiah, mudarabah and other facilities.

To extend co-operation to the poor, the helpless and the low-

income group for their economic upliftment:
islamc banks offer interest free PLS banking that helps the poor to
have money in easy condition thats how

To play a vital role in human development and employment

generation:
These banks give loans to unemplyoed people like investor as
profit loss sharng basis which help them to achieve this aim.

To contribute towards balanced growth:

Development of the country through investment operations particularly
in the less developed areas these banks try to contribute towards alanced
growth.

To contribute in achieving the ultimate goal of Islamic economic

system:
Proper sharing out of assets which is the crucial aim of the Islamic
banks of Bangladesh, is also the ultimate goal of Islamic economy. It enables
them to contribute in achieving ultimate goal of islamic economic system.
Contribution to the economy of Bangladesh
Islamic banking system is contributing to the economy of our
country through many Islamic banks by various economic and
social activities. These activities are described at below:

1. Collecting savings and forming capital: Islamic banks

collect savings of people by promising of safety and profit
through different schemes and they lend the money in need
of business.

2. Proving loan: Islamic banks provide loan through various

schemes to the people. These loans are used in many
constructive fields which strengthen our national economy

3. Agricultural development: In order to buy fertilizer, seeds

and essential instruments Islamic banks provide loans to the
farmer at easier conditions. Such kinds of assistances help to
increase agricultural productivity.

4. Investment: As a major sector Islamic banks make

investment in the fields of trade and business and it helps to
increase nation’s productivity and Gross Domestic Product
(GDP).

5. Employment: Many unemployed people get employment in

the Islamic banks. Moreover many employment scopes are
created through the expansion and establishment of
businesses and industries with the help of Islamic banks.
6. Industrialization: Industrialization is very significant to the
economy of any country. Islamic banks provide assistance in
establishment, expansion and modernization of various kinds
of industries.

7. Maintaining economic stability: Central bank sometimes

takes various kinds of policies to maintain economic stability.
Islamic banks help the central bank in maintaining economic
stability by following the policies.

8. Assistance to government: Islamic banks provide

important information about the money circulation in the
banks individually which play a very important role in
making economic decision.

9. Developing living standard: Through creating

employment directly and indirectly and increasing per capita
income, Islamic banks help to develop living standard.

10. Others: Besides above Islamic banks contribute to the

economy by creating exchange medium, loan-deposit and
advising respective parties.
PEOPLE’S VIEW TOWARDS ISLAMIC BANKING IN BANGLADESH

Positive view:

1. Lower level of risk of investment

2. Reduced chance for devaluation of money

3. Profit provided through various accounts is Halal

4. Beneficial to society

5. Beneficial to national economy

Negative view:

1. No difference between modern and Islamic banking

2. Gets more advantages using the name of Islam

3. Unclear Conception of Islamic banking

4. Provides lower profit

Conclusion:
Because of the prohibition of interest in Islam, Islamic
Banking had been introduced which enables the pious Muslim
people to involve in banking system. Avoiding interest and
conducting banking business in profit and loss sharing basis,
Islamic banking have been successful to attract clients and
expand its activities all over the world since its introduction in
1963 in Egypt.