Regulation and Supervision of Islamic Banks and Financial Institutions Bangladesh Perspective

Thoughts on Economics 59
Thoughts on Economics
Vol. 22, No. 03
Regulation and Supervision of Islamic Banks and
Financial Institutions: Bangladesh Perspective
Abdul Awwal Sarker
1
The role of a central bank is very crucial in guiding, supervising and
controlling the Islamic banks and financial institutions for smooth
development of the sector. This paper presents an explanation of the role of
Bangladesh Bank (Central Bank of Bangladesh) in accomplishing the above
task. There are seven fullfledged Islamic banks, one nonbank Islamic
financial institution and !! Islamic banking branches of ten conventional
banks operating in Bangladesh in tandem in line "ith the glorious Islamic
#hari$ah. %longside, one Islamic mutual fund, &overnment Islamic Investment
Bond and Islami Bank 'udaraba (erpetual Bond is also playing important
role in mobili)ing the financial resources on Islamic line in the stock
exchanges of the country. The rules, provisions etc, of the above instruments
have been discussed. %bove all, role of Bangladesh Bank has been critically
examined relating to the regulation and supervision of the Islamic banking
system of the country and some suggestions have been proposed for
enhancement of the capacity of the central bank in achieving its ob*ectives.
I Introduction
The second half of the twentieth century witnessed a major shifting of thining
in de!ising financial and "aning #olicy and framewor on the "asis of
$slamic %hariah. This new thought was institutionali&ed at the end of the third
'uarter of the century and emerged as a new #aradigm of "aning called
$slamic "aning. The esta"lishment of the $slamic (e!elo#ment )an *$()+
in ,9-5 in .eddah, /%0 ga!e an accelerating momentum to the $slamic
)aning mo!ement worldwide. %ince the esta"lishment of $(), a num"er of
$slamic )aning and financial institutions ha!e "een esta"lished all o!er the
world irres#ecti!e of 1uslim and non21uslim countries. 3!er the #ast few
decades, the $slamic financial industry has ra#idly e4#anded worldwide.
5urrently, a"out 300 $slamic "ans and financial institutions *$6$s+ ha!e "een
functioning in line with $slamic %hariah with total com"ined assets e4ceeding
,
7eneral 1anager, )angladesh )an Training 0cademy, 1ir#ur, (haa. 3#inions e4#ressed
in the 8a#er are #ersonal to the author and do not reflect in any way, the !iew of )angladesh
)an or 7o!ernment.
90 :egulation and %u#er!ision of $slamic )ans;;;;;;.
<% =2 trillion in more than -5 countries. This ra#id growth has gained
considera"le attention in international financial circles where !arious maret
#artici#ants ha!e recogni&ed their #romising #otentials.
To ta# the #otentials of the emerging $slamic marets and funds, a num"er of
glo"al financial institutions, including "ut not limited to, the world giants such
as /leinwort )enson, 5hemical )an, 0)N 0mro *Netherlands+,
5iti"an*<%0+, 0N> *0ustralia+ 7rindlays, ..8.1organ, 7oldman
%achs*<%0+, )aners Trust, 5hase 1anhattan, ?ong /ong and %hanghai
)aning 5or#oration *</+, (eutche )an *7ermany+, %ociete 7enerale
*6rance+, )N8228ari"us, and <nion )an of %wit&erland*<)%+22ha!e
esta"lished $slamic "aning %hariah com#ati"le ser!ices in se!eral countries.
0dditionally, many con!entional commercial "ans, in many 1uslim
countries, ha!e "een offering $slamic "aning ser!ices. These include among
others, )an 1isr in Egy#t, National 5ommercial "an, %audi 0merican )an
and %audi2)ritish )an in %audi 0ra"ia. $n 1alaysia, almost all commercial
"ans are offering $slamic "aning ser!ices through their windows after the
interest free "aning scheme was launched in ,993, in order to allow
con!entional "ans to offer $slamic "aning ser!ices. )angladesh is also not
indifferent in this mo!e.
II !enesis of Islamic Banking in Bangladesh
)angladesh is the third largest 1uslim country in the world with around ,30
million #o#ulations of which 90 #ercent are 1uslim. The ho#e and as#iration
of the #eo#le to run "aning system on the "asis of $slamic #rinci#le came into
reality after the 3$5 recommendation at its 6oreign 1inisters meeting in ,9-@
at %enegal to de!elo# se#arate "aning system of their own. 0fter 5 years of
that declaration, )angladesh esta"lished her first $slamic "an A$slami )an
)angladesh BimitedC in ,9@3. 0t #resent, in )angladesh, out of D- "ans, -
full fledged $slamic )ans and 22 $slamic )aning "ranches of ,0
con!entional "ans, ha!e "een woring in the #ri!ate sector on the "asis of
$slamic %hariah. 0longside, one non2"an $slamic financial institution named
E$slamic 6inance and $n!estment BimitedF *$6$B+ has also "een o#erating in the
system as $slamic N)6$ since 200,. $slamic "ans and non2"an financial
institutions in )angladesh since their ince#tion ha!e "een gaining #o#ularity
in s#ite of some #ro"lems in their o#eration.
0t #resent, - full2fledged $slamic "ans !i&. *,+ Islami Bank Bangladesh
Limited *$))BG,9@3+, 2+ The ICB Islamic Bank Limited (thethen %lBaraka
Bank +imited and ,riental Bank +imited)
2
*3))BG,9@-+, *3+ Al-Arafah
2
Formerly known as Al-Baraka Bank Bangladesh Limited.
Thoughts on Economics 9,
Islami Bank Limited *0$)BG,995+ H *D+ Social Investment Bank Limited
*%$)BG,995+H 5+ Shahjalal Islami Bank Limited *%.$)BG200,+H *9+ Export
Import Bank of Bangladesh Limited *EI$1 )anG200D+
3
and *-+ irst
Sec!rit" Islami Bank Limited *6%$)BG 2009+ and 22 $slamic "aning
"ranches of ,0 con!entional "ans
D
ha!e "een o#erating in )angladesh in line
with the $slamic %hariah. The first $slamic "an, $slami )an )angladesh
Bimited *$))B+ was esta"lished in 1arch, ,9@3 to conduct "aning acti!ities
on the "asis of the "asic tenets of $slamic %hariah. Bater, The 0l2)araa )an
Bimited *currently $5) $slamic "an Bimited+ was esta"lished as the second
interest2free $slamic "an in )angladesh in 1arch, ,9@-. The third and fourth
$slamic "ans of )angladesh namely 0l20rafah $slami )an Btd. and %ocial
$n!estment )an Btd. started their "usiness in )angladesh from %e#tem"er 2-,
,995 and No!em"er 25, ,995 res#ecti!ely. $n the year 200,, the fifth #ri!ate
sector $slamic "an J%hahjalal $slami )an BimitedJ started her "aning
o#eration. The si4th $slamic "an is the E4#ort $m#ort )an of )angladesh
Bimited. This traditional "an has con!erted her "aning #olicies and
#rinci#les in line with $slamic %hariah in 200D and started o#eration as an
$slamic "an. The se!enth $slamic "an con!erted in 2009 to resume o#eration
in line with the glorious $slamic %hariKah. The only foreign $slamic "an
#Shamil Bank of Bahrain EC $Islamic Bankers%# which is the largest
$slamic "an in the world o#ened a "ranch in (haa in 0ugust, ,99- *later on,
after se!eral stage of mergers, this "an is renamed now as Bank Alfalah
Limited o#erating in )angladesh as an interest "ased "an ha!ing one $slamic
"aning "ranch in (haa+. )esides, 22 $slamic "aning "ranches of ,0
traditional "ans ha!e "een o#erating in the country on $slamic %hariah "asis
from ,@th (ecem"er, ,995 alongside the $slamic "ans. These con!entional
"ans ha!e also esta"lished their own %hariah %u#er!isory 5ouncils to guide
their acti!ities conforming to $slamic #rinci#les.
III Islamic Banking Branches in "onventional Banks
3
Export Import Bank of Bangladesh Limited (EXIM Bank was a traditional
!ommer!ial "ank. It was !on#erted as a f$ll-%edged Islami! "ank on &
st
'$ly
())* after the appro#al of Bangladesh Bank.
D
+he ten !on#entional "anks are, -rime Bank Limited. /haka Bank Limited.
0o$th East Bank Limited. 'am$na Bank Limited. +he -remier Bank Limited.
Ara" Bangladesh Bank Limited. +he 1ity Bank Limited. 0tandard 1hartered
Bank. Bank Alfalah Limited and 20B1 Limited (Amanah Bran!h.
3ne of the im#ortant de!elo#ments in $slamic "aning in last few years has
"een the entry of some con!entional "ans in the maret and their use of
$slamic modes of financing through their $slamic "ranches, windows or units.
$t necessitates and encourages the glo"ali&ation of $slamic "aning, which
includes some of the giants in the "aning and finance industry. )angladesh
was not indifferent to this turning mo!e. 8resently, ,0 con!entional "ans
ha!e o#ened 22 $slamic "aning "ranches alongside their interest "ased
"ranches. These con!entional "ans should focus on the safeguards that ensure
the $slamic nature of these "ranches such as se#aration and com#liance with
%hariah. %e#aration of $slamic "aning "ranches includes se#aration of ca#ital,
accounts, staff em#loyed and office. ?owe!er, the most im#ortant thing is
com#liance with the dictates of %hariah. There should "e strong %hariah
su#er!isory "oards in order to #re#are the model agreement, to a##ro!e the
structure of e!ery new o#eration and lay down the "asic guidelines for each
and e!ery mode of financing. There must "e also some %hariah scholars
em#loyed to monitor the com#liance with %hariah in daily "asis. )esides,
there should "e an annual re!iew of the transaction carried out during the year.
The staff of the "ans should also go through training #rogram in order to
understand the "asic $slamic #rinci#les and the #hiloso#hy go!erning
commercial transactions in order to im#lement it in their day2to2day wor.
I# $evelopment of Islamic %on&Bank Financial Institutions in
Bangladesh
Non2"an 6inancial $nstitutions *N)6$s+ re#resent one of the most im#ortant
segments of financial system and #lay !ery im#ortant role in mo"ili&ing and
channeling resources in )angladesh. The N)6$s com#rise in!estment and
finance com#anies, leasing com#anies etc. The N)6$s num"ering 29 as of
3cto"er 200- *starting from $8(5 in ,9@,+ are regulated "y the 6inancial
$nstitutions 0ct, ,993 and the regulations made there under.
5
3ut of 29 non2
"an financial institutions, two N)6$s called &Islamic inance and
Investment Limited' and (ajj inance Compan" Limited ha!e "een
functioning in line with the $slamic %hariah since ,9 0#ril 200,.
9

Therefore, the de!elo#ment of $slamic "ans and $slamic N)6$s and their
growing acce#tance in the country in !iew, it is necessarily felt that without
regulatory standards, this #romising sector "e in struc in future. To ensure the
5
Bangladesh Bank. Ann$al 3eport ())4-)5.
9
Islami! Finan!e and In#estment Limited (IFIL ())&, A 0hort Introd$!tion
of Islami! Finan!e and In#estment Limited. /haka. ())&.
right direction and sustaina"le #osition of the $slamic "aning and financial
sector in the country, im#ortance of $slamic law on finance and enactment of
those has "een em#hasi&ed. Thus, the following discussions ha!e "een di!ided
into four sections. Section II highlights the status of $slamic law on finance
while Section III deals e4clusi!ely with the role of )angladesh go!ernment
and )angladesh )an and issued $slamic "onds and financial instruments in
formali&ing the $slamic financial system in the country. Section I# concludes
with remars and recommendations.
S'"(I)% II
I (he Status of Islamic *aw on Finance
+
7i!en the #rinci#le of #ermissi"ility, $slamic commercial law can e!ol!e
within the limits im#osed "y %hariah. :ecent history of the growth of the
$slamic financial sector "ased on new rulings of %hariah scholars is an
indicator of the ada#ta"ility of $slamic law to changed situations. Lhile
$slamic law can e!ol!e, other elements of the legal infrastructure lie laws and
statutes and dis#ute settlement institutions also need to "e strengthened. The
ada#ta"ility features of $slamic law along with the strengthening the legal
infrastructure is !ital com#onents of the de!elo#ment of the $slamic financial
sector.
3ne of the im#ortant determinants of financial de!elo#ment is ada#ta"ility of
law to changing conditions. 0da#ta"ility underscores the formalism of laws
and the a"ility of legal traditions to e!ol!e. %#ecifically, legal systems that
ada#t efficiently to the contracting needs of the economy foster de!elo#ment
of the financial system. The 'uestion of ada#ta"ility of the law to changing
circumstances is !ital to the de!elo#ment of $slamic financial system. $ssues
lie legal formalism, dynamism, and the efficiency with which laws can ada#t
to changing circumstances will determine to a large e4tent how this sector will
grow in the future.
$slamic law started with the ad!ent of $slam. The o!erall goal of the $slamic
law is to #romote welfare *masalih+ of manind. This goal in "road general
terms im#lies, among others, to ensure growth *ta)kiyah+ and justice *-ist+ and
in s#ecific terms relates to ma-asid al #hariah im#lying the #rotection of
religion, life, reason, #rogeny and #ro#erty. Thus, the o"jecti!e of $slamic
-
+his se!tion has "een hea#ily drawn from Ahmed 2a"i", Islami! Law.
Adapta"ility and Finan!ial /e#elopment. Islami! 3esear!h and +raining
Instit$te. Islami! /e#elopment Bank.
9D :egulation and %u#er!ision of $slamic )ans;;;;;;.
commercial law would "e to ensure one or se!eral of these goals. 6or
e4am#le, the goal of #rohi"ition of riba or interest is to ensure justice and
e'uity.
II Adaptabilit, of Islamic "ommercial *aw
3!er the centuries, $slamic law has e!ol!ed to a "ody of $a highly
sophisticated system of rules, covering the "hole field of "hat the
contemporary "orld perceives as la"F. $slamic laws and rulings regarding
human acti!ities can "e di!ided "roadly into twoG de!otional matters *fi-hul
ibadah+ and dealings or transactions *fi-hulmuamalah+. The rules and
#rinci#les of nominate contracts are a##lied to new conce#ts and #ro"lems and
"y the #rocess of analogy, a##lica"le solutions are arri!ed at. The most
common method of creating financial contracts has "een "y far the
com"ination of traditional nominating contracts to create new contracts.
E4am#les of these include the contem#orary financial murabahah *or
mura"ahah to the #urchase orderer+ a widely used instrument "y $slamic
financial institutions. The original sale contract *mura"ahah+ is used with
se!eral other conce#ts *#romise, guarantee+ to #roduce a financing tool.
%imilarly, traditional i*arah contract is used with a sale or gift contract to form
a financing instrument called Ei*arah "a i-tina. or Ei*arah muntahia bit
tamleek.. E'usharaka 'utanakissaF or diminishing musharaah associates
musharaah contract with that of a sale for financing #ur#oses. %imilarly,
contem#orary suu is a com#osite of multi#le transactionsMcontracts.
III Adapting "onventional Financial Products
0nother method of creating new contracts in the $slamic financial sector is to
ado#t and ada#t con!entional financial instrumentsM#roductsMcontracts that
meet the %hariah criteria. The con!entional contracts or #roducts can "e
modified "y remo!ing the undesira"le com#onents to mae them com#ly with
the %hariah #rinci#les. 6or e4am#le, e'uity "ased mutual funds ha!e "een
ado#ted "y $slamic financial institutions "y ada#ting the stocs that can "e
included in these funds. $n!estments in stocs are allowed if they fulfill certain
"usiness and financial criteria deri!ed from %hariah and fi'h. 0ccordingly,
in!estment in com#anies that deal with for"idden goodsMser!ices lie alcohol
and to"acco, gam"ling, #ornogra#hy, interest "ased financing institutions, etc.
is not allowed. The financial filter de!elo#ed on the "asis of $slamic shariah is
"eing used to weed out firms that ha!e unwarranted dealings with interest2
"ased transactions.
I# Prudential Regulations and Supervision Issues
The $nternational 1onetary 6und *$16+
@
in a study named /Islamic Banking0
Issues in (rudential 1egulations and #upervision/ highlighted !arious
techni'ues for "aning su#er!ision in an $slamic framewor and for smooth
de!elo#ment of $slamic "aning. They recommended that Jan a##ro#riate
regulatory framewor for "aning su#er!ision in an $slamic en!ironment
should "e designed to ensure thatG
Begal foundations for the su#er!ision of $slamic "an are in #laceH
$n!estment and other riss are ade'uately dealt with, taing into
account that financing through the 8B% modes adds an element of
com#le4ity to the already difficult tas of in!estment "aning and
0de'uate information is necessary for su#er!isory authorities to
e4ercise a more effecti!e #rudential su#er!ision and to ena"le the
#u"lic to mae reasona"ly informed in!estment decisions. 7reater
stress on these issues, #articularly during the licensing #rocess is liely
to strengthen financial system sur!eillance in countries where $slamic
"aning is followed.
To im#lement the a"o!e recommendations re#ort #laces some ways and means
which areG
a. $n order to #ro!ide the legal foundations for the su#er!ision of
$slamic "ans it is necessary that either the general "aning laws or
s#ecific laws #erforming to $slamic "ans define in detail the
nature of these "ans and their s#ecific o#erating relationshi# with
the central "an and other con!entional "ans, if a##lica"le.
". 1anagement of o#erational riss in $slamic "ans could usefully
"e addressed through an a##ro#riate rating system *501EB rating
is a measure of the relati!e soundness of a "an and is calculated
on a ,25 scale, with one "eing a strong #erformance. The acronym
stands for ca#ital, assets, management, earnings and li'uidity+.
c. $nformation disclosure should "e designed to reduce information
asymmetries due to the unrestricted 1udara"a contract "etween an
$slamic "an and its de#ositors and incenti!es for moral ha&ard due
@
Erri!o. L$!a and Farah"aksh. Mitra (&667, 8Islami! Banking, Iss$es in
-r$dential 3eg$lations and 0$per#ision8. 9ashington /.1.. +he
International Monetary F$nd (IMF. 9-:67:;).
to the fact that ca#ital !alue of and returns on in!estment de#osits
are not guaranteed.
d. 0n a##ro#riate licensing #rocess is just as necessary in an $slamic
"aning framewor to ena"le su#er!isory authorities to ensure that
new "ans are sound and sta"le. %ome "asic elements of an
a##ro#riate licensing #rocess areG
Trans#arencyG Baws, regulations, criteria and re'uirements for
a "aning license should "e #u"lished and a##lied in an e!en2
handed way.
%et the ground rulesG :e'uirement for a license should set rules
for cor#orate go!ernanceH esta"lish Jsuita"ilityJ standards for
ownersH esta"lish Jfit2and2#ro#erJ s#ecifications for "oards of
directors and managersH determine whether commercial and
industrial firms can own "ansH define the organi&ational
structure of the "an, including internal controls, internal and
e4ternal audit functions and any #ro!ision necessary to #resent
conflict of interests.
5a#ital re'uirementsG 1inimum le!els and com#osition of
initial ca#ital should "e set forth.
%#ecify acti!itiesG The sco#e of a "anKs acti!ities should "e
indicated, that is whether and to what e4tent the "an is
allowed to tae e'uity #ositions in non2financial enter#rises,
engage in securities, underwriting, licensing, factoring and
other acti!ities.
)usiness #lanG The license a##lication should include a
feasi"ility study and a "usiness #lan detailing the "anKs
strategy to attain #rofita"ility and maintaining it o!er the initial
#eriod of o#eration.
# Application of the Islamic *egal Infrastructure
0s #ointed out, most 1uslim countries ha!e ado#ted one of the Lestern legal
systems. The a"sence of a com#rehensi!e legal system for a long time resulted
in the lac of legal infrastructure institutions that can su##ort the use of
$slamic commercial law during contem#orary times. Lith the ad!ent of
$slamic finance, $slamic financial contracts are "eing used, "ut this is "eing
done in an alien legal en!ironment. E!en if indi!iduals agree to use $slamic
contracts, the laws and courts may not "e there to inter#ret and enforce the
Thoughts on Economics 9-
form of these contracts. %uccessful a##lication of $slamic law in contem#orary
financial transactions re'uires !arious su##orting legal infrastructure
institutions. %ome issues related to the de!elo#ment of $slamic law and legal
infrastructure institutions with res#ect to the financial sector are discussed
"elow.
,. 7ood documentation of contracts is im#ortant determinant of growth
and li'uidity of marets in financial #roducts. %tandardi&ed
documentation creates more #redicta"ility and certainty a"out the
characteristics of the financial contracts. 0gents in!ol!ed are "etter a"le
to understand their rights and o"ligations under the contract and
enhances the confidence to enter the maret and transact.
2. The standardi&ation of %hariah rules needs to tae #lace at two le!els.
6irst, at the national le!el, the rules go!erning economic transactions
can "e standardi&ed "y a national %hariah "ody. This "ody will "e
res#onsi"le not only for issuing rulings "ut also codifying them for
a##lication. E4am#les of national le!el %hariah "oardsMauthorities are
those e4isting in %udan and 1alaysia. The harmoni&ation of %hariah
rules within national "orders, howe!er, will not sol!e the #ro"lems of
glo"al $slamic financial transactions. There is a need for an
international "ody that can issue standardi&ed rulings on economic
transactions. Efforts "y 003$6$ are gi!en for this legal di!ersification.
)ut as 003$6$ is an institution dealing with mainly accounting and
auditing standards, there is need for a glo"al %hariah "ody that can
harmoni&e di!erse "odies of nowledge to one standardi&ed !ersion that
the $slamic financial industries around the world can use. Esta"lishment
of an international "ody to de!elo# different %tandards for %hariah
0##lication in 6inance $ndustry is ine!ita"le.
3. 0s most 1uslim countries ha!e ado#ted either the common law or ci!il
law framewor, their legal systems do not ha!e s#ecific lawsMstatutes
that su##ort the uni'ue features of $slamic financial #roducts. 6or
e4am#le, whereas $slamic "ans main acti!ity in trading *1ura"aha+
and in!esting in e'uities *1usharaa and 1udara"a+, current "aning
law and regulations in most jurisdictions for"id commercial "ans to
undertae such acti!ities. This calls for s#ecific laws and statutes that
can su##ort and #romote $slamic financial ser!ices industry. Lhile in
some countries se#arate $slamic )aning laws ha!e "een #assed *e.g.,
/uwait and 1alaysia+, in others $slamic "aning is co!ered under a
section of the e4isting "aning law *e.g., )angladesh and $ndonesia+.
The im#lications of these $slamic "aningMfinancial laws on the
9@ :egulation and %u#er!ision of $slamic )ans;;;;;;.
o#erations and growth of $slamic financial sector will de#end on the
ty#e of legal system in #lace.
D. 0s the laws and their im#lementation are codified under the ci!il law
regime, it would "e difficult to ha!e $slamic financing if new laws are
not enacted as the e4isting rules and regulations are geared towards
con!entional "aning #ractices. The $slamic "aning law enacted "y the
legislature will form the legal foundation for $slamic "aning and
financial dealings. The $slamic "aning laws #assed in ci!il law country
lie $ndonesia, howe!er, are worded in general terms and lac details of
the different $slamic modes of financing. E4am#les of such omissions
include the #rohi"ition of trading and taing e'uity #ositions and the
a"sence of resolution of the dou"le ta4ation in $slamic financial
transactions *e.g. in case of ijarah+. Lhile )an $ndonesia is trying to
fill some of the ga#s through some regulations, these may not hold in
the courts of law. %uch uncertainty in the laws related to $slamic
"aning will ha!e $slamic "ans at a disad!antageous #osition
com#ared to the con!entional "ans. Thus, there is a need for detailed
codification of the law that would include the $slamic #rinci#les for
financial transactions and the administrati!e #rocedures for carrying out
these acti!ities.
5. $slamic contracts and transactions under the common law regime may
ha!e #ro"lems of inter#retation as no #recedents on these acti!ities may
e4ist. 8romulgation of law in this system may not "e as effecti!e as in
case of ci!il law regime as the judges may de!iate from the statute if
the statute is incom#ati"le with the #recedents. 5ommon law regimes,
howe!er, #ro!ide more #redicta"le results under legal documentation
relati!e to the ci!il law system. Lhile in the ci!il law system, the courts
will inter#ret the contracts on the "asis of reasona"leness and fairness,
the 5ommon law system will consider the #ro!isions in a legal
document more weight irres#ecti!e of other considerations lie
materiality or fairness. 0s the sanctity of the contract is greater in the
common law system, there may "e lower legal ris in!ol!ed for $slamic
"aing instruments under this regime.
9. Bac of $slamic courts in most 1uslim countries that can enforce
$slamic contracts increases the legal riss of using these contracts. 0s
such, #artners in transactions a!oid using $slamic law as they want to
a!oid the im#racticalities or the uncertainty of a##lying classical
$slamic law. $n an en!ironment with no $slamic courts, $slamic financial
contracts include choice2of2law and dis#ute settlement clauses. $n such
cases, two a##roaches can "e taen. The first is to use %hariah as the
go!erning law as the $slamic financial contractsK legitimacy should "e
judged "y the #rinci#les of %hariah. To ensure such settlements the
contracts would include a clause indicating $slamic law to "e used for
settlement of dis#utes. The second a##roach is to use the law of the
country to settle dis#utes. $n the former a##roach, the contracts should
"e shielded from the legal en!ironment and dis#utes settled through
commercial ar"itration.
To ensure the growth of the $slamic financial industry, there is a need to ha!e
dis#ute settlement institutions or $slamic courts that understand the form of the
contracts so that these can "e inter#reted and enforced accordingly. Lhile the
whole court system can not "e e4#ected to change, a solution is to ha!e s#ecial
$slamic "ench that deals with, among others, financial transactions. $n this
regard, 1alaysia has ado#ted se!eral ste#s to "uild some legal infrastructure
institutions for $slamic financial industry. 0t the highest le!el, the ?igh 5ourt
in 1alaysia has dedicated high court judges to o!ersee litigations related to
$slamic "aning and finance. 6urthermore, to com#lement the court system,
the /uala Bum#ur regional 5entre for 0r"itration has "een enhanced to deal
with dis#utes on $slamic "aning and finance for "oth domestic and
international cases. To ensure the efficient functioning of the $slamic financial
sector, the 5entral )an of 1alaysia has also set u# a Baw :e!iew 5ommittee
to assess the common law "ased legislations and to assimilate the %hariah
#rinci#les.
S'"(I)% III
I Role of the Bangladesh !overnment and Bangladesh Bank
The o"jecti!es of the monetary #olicy are to secure sta"ility in the !alue of
money and regulate the "aning system #rudently. )angladesh )an issued
license in ,9@3 for esta"lishment of first $slamic "an in )angladesh A$slami
)an )angladesh BimitedC. The )angladesh 7o!ernment also #artici#ated in
esta"lishing first $slami )an "y taing 5N share in the #aid u# ca#ital. 6rom
the !ery "eginning, considering lac of $slamic financial marets and
instruments in the country, )angladesh )an granted some #referential
#ro!isions for smooth de!elo#ment of $slamic "aning in )angladesh. 0mong
the #referential #ro!isions, the following are im#ortantG
,+ $slamic "ans in )angladesh ha!e "een allowed to maintain their
%tatutory Bi'uidity :e'uirement *%B:+ at ,,.50N of the total de#osit
lia"ilities while it is fre'uently fi4ed and re2fi4ed around ,5N to 20N
-0 :egulation and %u#er!ision of $slamic )ans;;;;;;.
for the con!entional "ans. This discriminating #ro!ision had
facilitated the $slamic "ans to hold more li'uid funds for more
in!estment and there"y generate more #rofit.
2+ <nder indirect monetary #olicy regime, $slamic "ans were allowed to
fi4 their #rofit2sharing ratios and mar2u#s inde#endently
commensurate with their own #olicy and "aning en!ironment. This
freeness in fi4ing 8B% ratios and 1ar2u# rates had #ro!ided sco#e for
the $slamic "ans to follow the %hariah #rinci#les inde#endently for
reali&ing goals of $slamic %hariah.
3+ $slamic "ans could reim"urse ,0N of their #ro#ortionate
administrati!e cost on a #art of their "alances held with the )angladesh
)an. This facility has gi!en some sco#e for enhancement of their
#rofit "ase.
II Relationship between "entral Bank and Islamic Bank
0 study regarding JThe :elationshi# "etween 5entral )ans and $slamic
)ansC #re#ared "y $0$)
9
was su"mitted to the third E4#ert Be!el 1eeting on
$slamic )aning %tudies *(haa, ,9@9+

. The recommendations ado#ted "y
the meeting includeG
The #ro!ision of financial assistance "y the 5entral )ans in the
form of 1udara"a de#osits with the $slamic "ans and "y way of
#ro!iding refinance to the $slamic "ans under
1udara"aM1usharaa or any other $slamic mode of financeH
:efinance facilities on the "asis of 8B%H
3#ening of current accounts at the 5entral )ans with occasional
o!erdrawing facilities free of any charge and #artici#ation in the
"anKs clearing houseH
:egulation and %u#er!ision of $slamic "ans as a##lica"le in
interest2"ased "aning in res#ect of #ermission for esta"lishing
"ans or o#ening share ca#ital, a##ointment of directors and
auditors, foreign e4change regulations etc.H
Bower li'uidity re'uirements on the de#osits acce#ted "y $slamic
"ans till such time as a##ro#riate $slamic financial instruments
9
International Asso!iation of Islami! Banks (IAIB &676, 0t$dy 3eport. 8+he
3elationship "etween 1entral Banks and Islami! Banks< s$"mitted to the
third Expert Le#el Meeting on Islami! Banking 0t$dies held in /haka. &676

.
Thoughts on Economics -,
which can "e counted towards li'uidity re'uirements "ecome
a!aila"leH
6or ins#ection of the $slamic "ans, the 5entral )anKs #ersonnel
may "e ade'uately trained in %hariah2"ased "aning o#erations and
the central "aning authorities may consider #re#aring se#arate
guidelines for ins#ection, ee#ing in !iew the s#ecial character of
$slamic "ans.
III Role of Bangladesh Bank in Promoting Islamic Banking in
Bangladesh
<nlie )angladesh, in most 1uslim countries a s#ecial law is #assed #rior to
the esta"lishment of an $slamic "an, which s#ecifies the rules and regulations
for the institution willing to engage in "aning "usiness "ased on $slamic
#rinci#les. $n 1alaysia for e4am#le, the $slamic )aning 0ct ,9@3 was #assed
"y 8arliament #rior to the esta"lishment of the )an $slam 1alaysia )erhad in
,9@3 and this law a##lies to any $slamic "aning institutions wishing to
o#erate in 1alaysia. ?owe!er, des#ite ha!ing their own laws, $slamic )ans
in most 1uslim countries ha!e to conform to other laws and regulations.
%imilarly, in the case of dis#utes or legal actions "etween "ans and their
customers, matters are referred to ci!il courts. 6or instance, the commercial
transactions of $slamic )ans in 1alaysia come within the jurisdiction of the
ci!il court. Therefore, any legal #roceedings "etween $slamic )ans and their
customers are to "e handled "y the normal ci!il court.
Though there is no com#lete $slamic )aning 0ct till date for controlling,
guiding and su#er!ising the $slamic "ans in )angladesh, some $slamic
"aning #ro!isions ha!e already "een incor#orated in the amended )aning
5om#anies 0ct, ,99, *0ct No. ,D of ,99,+. )angladesh )an did not set u#
any se#arate (e#artment at its ?ead 3ffice to control, guide and su#er!ise the
o#eration of the $slamic "ans. $ns#ection and su#er!ision of the $slamic
"ans o#eration are "eing scrutini&ed "y the )angladesh )an as #er the
general guidelines framed for the con!entional "ans. %o, ensuring of the
im#lementation of %hariah #rinci#les in the $slamic "ans are "eing conducted
"y their own %hariah 5ouncils. The role of )angladesh )an in controlling,
guiding and su#er!ising the $slamic )ans in )angladesh in accordance with
$slamic %hariah is !ery minimal. $n o"ser!ing the %hariah im#lementation
status of the $slamic "ans, )angladesh )an e4amines only the re#ort of the
res#ecti!e "ansK %hariah 5ouncils. ?owe!er, the ins#ectors and su#er!isors
of )angladesh )an are not e'ually familiar with the technicalities of the
different o#erational methodologies of the $slamic "aning. This is "ecause of
the fact that there is no se#arate (e#artment to loo into this im#ortant matter
and any concerted effort to de!ise se#arate ins#ection and su#er!ision
guidelines for the $slamic "ans.
I# -easures Adopted b, Bangladesh Bank
:egarding the suggestions #ut forwarded "y the study re#ort of the $16,
)angladesh )an has already "een com#lying with the following guidelinesG
a. %ome legal #ro!isions ha!e "een incor#orated in the amended )an
5om#anies 0ct, ,99,.
". 6or analysis of the o#erational riss of the $slamic "ans, 501EB
rating framewor is "eing used "y the concerned (e#artment of
)angladesh )an.
c. $nformation is "eing disclosed "y the $slamic "ans as #er the same
format designed for the con!entional "ans. 0 worsho# was held in
)angladesh )an in ,995 on J$slamic )aning $ns#ection
1ethodologyJ to de!ise se#arate ins#ection methodology for the
$slamic "ans. ?owe!er, follow2u# research wor is going on this
issue in the )angladesh )an.
d. :egarding licensing #rocedures, )angladesh )an is #ursuing some
#rudential techni'ues. )ut, this will "e sounder if she follows the
guidelines recently su"mitted "y the $slamic )aning 6ocus 7rou#.
# Rapid '.pansion of Islamic Banks in Bangladesh and Role
of Bangladesh Bank/ I"B And IBB*
$n !iew of the ra#id e4#ansion of $slamic "ans in )angladesh, )angladesh
)an issued a letter
,0
to the $slamic "ans to carefully address and e4amine the
u#coming #ro"lems in due time. To hel# actuali&e those, )angladesh )an
identified the following #ro"lems and accordingly ad!ised all $slamic "ans
on 5th 1arch, ,99- to tae a##ro#riate measures on them through mutual
discussion and co2o#erationG
a. (e!elo#ment of an $nter2)an $slamic 1oney 1aret.
". 5onstitution of 5entral %hariah %u#er!isory )oard.
c. 8re#aration of draft $slamic )aning 0ct.
,0
Bangladesh Bank (&66=, Letter >o. ?@BI (-IE/ IE1-&:6=-()-(4. /ate, )4
Mar!h. &66=. Islami! E!onomi!s 1ell. 3esear!h /epartment. Bangladesh
Bank. 2ead @A!e. /haka.
Thoughts on Economics -3
d. Esta"lishment of $slamic $nsurance 5om#any.
e. (e!elo#ment of New 6inancial 8roducts in line with $slamic
%hariah.
f. 5onstitution of 5onsortiumM%yndicate "y the $slamic "ans for
large financing.
0i1 Ibcf and "entral Shariah Board in Bangladesh
$n res#onse to )angladesh )anKs call, 2Islamic Banks "onsultative Forum
0IB"F12 was constituted "y the $slamic "ans and "ans ha!ing $slamic
"aning "ranches or windows in ,99- to tae a##ro#riate decision on the
a"o!e identified areas. Bater on, A "entral Shariah Board of the Islamic
Banks in Bangladesh has also "een formed with the acti!e #artici#ation and
financial contri"ution of the said "ans and "aning "ranches. 1em"ershi# to
these forums is o#tional for the $slamic "ans and financial institutions.
0ii1 !overnment Islamic Investment Bond
$n 3cto"er, 200D, )angladesh )an has issued a 1udara"a "ond named
A!overnment Islamic Investment BondC on "ehalf of the go!ernment as a
first e!er $slamic financial instrument in )angladesh to facilitate the $slamic
"ans and financial institutions to in!est their funds
,,
*to "e calculated as an
outlet for maintaining %B:+. 7o!ernment $slamic $n!estment )ond has "een
#laying an im#ortant role in de!elo#ing the $slamic financial instruments in
)angladesh. $slamic "ans and financial institutions are acti!ely #artici#ating
to #ar their cash sur#luses and enhance their return on their in!estments *for
details of 7o!ernment $slamic $n!estment )ond please see Annex!re-I+.
0iii1 Focus !roup on Islamic Banking
:ecently, a Focus !roup on Islamic Banking has "een constituted in
)angladesh )an to de!elo# necessary guidelines to facilitate setting u# of
$slamic "an, $slamic "an su"sidiary or "ranches in )angladesh. )angladesh
)an has issued $slamic )aning guidelines in %e#tem"er 2009 and there"y t
is ho#ed now that im#lementation of this guideline will #a!e the way to "ring
the $slamic financial sector in close adherence to %hariah.
0iv1 -ember to the Islamic Financial Services Board/ -ala,sia
:ecently, )angladesh )an has "ecome mem"er to the $slamic 6inancial
%er!ices )oard, "ased on 1alaysia, the "ody esta"lished to issue #rudential
and su#er!isory standards for the $slamic "aning and finance industry. The
e4isting su#er!isory #rocess and #rocedures will "e redesigned to e!ol!e in
,,
/etailed of ?o#ernment Islami! In#estment Bond is gi#en at Annex$re-&.
-D :egulation and %u#er!ision of $slamic )ans;;;;;;.
line with the "est international $slamic standards. :egulatory and su#er!isory
standards, which can s#ecifically address the uni'ue #eculiarities of the
$slamic "aning o#erations, are necessary to #romote resilience and
com#etiti!eness of the $slamic "aning sector. $n this regard, the wor of the
$6%) would act as a catalyst to the de!elo#ment of a stronger and ro"ust
su#er!ision framewor in )angladesh.
0v1 3orking !roup on Islamic Banking
$n addition to that, a woring 7rou# on $slamic "aning has "een constituted
at )angladesh )an to im#lement %trategy O @ of )angladesh )an %trategic
8lan 20,0220,D. The woring grou# has "een woring to de!elo# $slamic
monetary and li'uidity instruments and su#er!ision Mins#ection manual for ))
su#er!isors.
0vi1 I"B A-"* Islamic -utual Fund
To facilitate the $slamic ca#ital maret in the country and to attract the
in!estors who want to in!est in %hariah2"ased financial #roducts, the
go!ernment owned $n!estment 5om#any E$n!estment 5or#oration of
)angladesh *$5)+ has introduced E$5) 015B $slamic 1utual 6undF
,2
for
Taa ,00 million in 2005 with the a##ro!al of the %ecurities and E4change
5ommission. $5) 5a#ital 1anagement Bimited, a su"sidiary of $5) is the
s#onsor and $5) is the Trustee P 5ustodian of the 6und. $5) 015B
,3
is
acting as the 0sset 1anager of the 6und. *for details of E$5) 015B $slamic
1utual 6undF please see Annex!re-2+.
0vii1 IBB* -udaraba Perpetual Bond 0-PB1
$slami )an )angladesh Bimited has issued a "ond named 1udara"a
8er#etual )ond *18)+ of Taa 3,000 million in 3cto"er, 200- which is the
first of its ind with a !iew to ser!e multi#le #ur#oses lie creating a !i"rant
"ond maret in )angladesh, creating new a!enues of in!estment for the
#ros#ecti!e $slamic in!estors etc. 6rom the !iew#oint of the $slami )an, the
main #ur#ose of the "ond issue is to raise fund to maintain the ca#ital
ade'uacy re'uirement ratio of the )an. 0s #er the e4isting re'uirement of
)angladesh )an, all commercial "ans are re'uired to maintain ca#ital
ade'uacy Q,0N of the ris weighted assets of the "an *#re!iously 9N+. Lith
the go!ernment #olicy of encouraging the #ri!ate sector to "e the engine of
economic growth, the #ri!ate sector need for finance has increased
significantly from the "aning sector during the last two decades.
,2
/etailed of BI1B AM1L Islami! M$t$al F$ndCis gi#en at Annex$re-(.
,3
AM1L stands for Asset Management 1ompany Limited.
The #ur#ose of the issuance of the 18) is to enhance the a"ility of the "an to
mae further in!estments "y increasing the 5a#ital 0de'uacy :atio. 3ne of
the main o"jecti!es is to utili&e the fund to "e raised in #ros#ecti!eM#rofita"le
sectors. $t is to "e mentioned that through the issuance of the 18), $))B is
going to #lay a #ioneering role in creating a "ond maret in )angladesh, as
this will "e the first of its ind in the country. $t is worthwhile to mention that,
through the issuance of 18), $))B will "e a"le to reduce its cost of fund
su"stantially, which will ultimately "e "eneficial for the staeholders. $t is to
"e further mentioned that, the fund raised through issuance of 18) will "e
utilised in the #rofita"le in!estment #rograms of the )an to mae the )an
more #rofita"le. $n addition to the income deri!ed from de#loyment of
1udara"a fund, the "ondholders will "e entitled to get a rate of #rofit
e'ui!alent to ,0N of the rate of di!idend to "e declared "y the $slami )an
)angladesh Bimited. *for details of 1udara"a 8er#etual )ond please see
Annex!re-)+.
S'"(I)% I#
I "oncluding Remarks and Recommendations
8romotion, regulation and su#er!ision of the $slamic "ans in accordance with
the recent guidelines, laws and regulations seem inade'uate since these are
"asically "ased on the con!entional wisdom and #ractices. These regulatory
and su#er!isory systems, undou"tedly hel#s to control their all2out o#erations
with a !iew to reducing the #ossi"ility of their failure, #romoting the #u"licFs
confidence in the "aning system and ensuring its sta"ility. )ut, in case of
$slamic "ans, in addition to those, %hariah im#lementation in the acti!ities of
the "ans must also "e ensured "y the regulators and su#er!isors. Bac of
enforcement and su#er!ision in line with $slamic %hariah may lead the $slamic
"ans into systemic %hariah distress. The growing integration of financial
marets on the e!e of financial glo"ali&ation, es#ecially with their
so#histicated marets and their inno!ati!e instruments necessitates the
de!elo#ment of new $slamic financial architecture to co#e with the challenges
#osed "y them.
$nade'uacies of e4isting rules, regulations and guidelines with res#ect to
$slamic "ans hinders the su#er!isory staffs and regulators to ac'uire #ro#er
understanding of this new areas of ris assessment. They ha!e "een a##lying
core conce#ts of con!entional su#er!ision without differentiation to
con!entional and to $slamic "ans. This way of similar su#er!ision for
con!entional and $slamic "ans can not "e justified "ecause it does not tae
into consideration of some #eculiar characteristics of the $slamic "ans.
?owe!er, to ensure soundness of the financial and o#erational conditions of
the $slamic "ans, central "ans should de!elo# s#ecific rules and regulations.
$t is to "e mentioned here that, Ewhile financial soundness may "e enough for
retaining the confidence of clients of a con!entional "an, in the case of an
$slamic "an, %hariah com#liance is e'ually im#ortant. 0n $slamic "an could
fail as much due to non2com#liance with the %hariah as for financial
im#rudence. Therefore it should "e ensured that all acti!ities of an $slamic
"an com#ly with %hariah #rinci#lesF.
,D

II Recommendations
,. 0##ro#riate Begal 6ramewor for $slamic )ans and $slamic 6inancial
$nstitutionsG 5entral "ans or regulatory and su#er!isory authorities should
de!elo# a##ro#riate and full2fledged legal framewor for controlling,
guiding and su#er!ising the $slamic "aning and $slamic N)6$ system. $t
is not sufficient to insert some words or sentences on $slamic "aning
methodology in the )an com#anies 0ct.
2. )asel $$, Begal and :egulatory %tandards: )asel $$ also re'uires $slamic
"ans to meet legal and regulatory standards as s#ecified in )asel $$. %ome
o#ine that $slamic "ans should not "e su"ject to all regulatory measures
s#ecified "y )asel $$, "ut they should "e su"ject to regulations similar to
cor#orations due to the #artici#ation of the in!estments de#ositors in the
ris of $slamic "ans.
,5
There are se!eral reasons for $slamic "ans to
com#ly with the )asel $$ regulations. $slamic "ans are at the stage of
growth and their si&es are normally small to medium. $n order for them to
gain international recognition, )asel $$ com#liance "ecomes a cornerstone.
The standards de!elo#ed "y 003$6$ and $6%) should "e added to the
)asel $$, then the regulatory framewor #rescri"ed "y the )asel
5ommittee of )aning %u#er!ision will "ring standardi&ation for the
$slamic "ans.
,9

,D
Al-'arhi Ma"id Ali and ID"al M$nawar (())&, Islami! Banking, Answers to
0ome FreD$ently Asked E$estions. @!!asional -aper >o. *. ())&. Islami!
3esear!h and +raining Instit$te. I/B.
,5
2assan M.F.. 1howdh$ry M.A.M.. 8Islami! Banking 3eg$lations in Light of
Basel II.8. -ro!eedings of the Fifth 2ar#ard 3esear!h For$m on Islami!
Finan!e. April &(. ())*
,9
0arker A A (())4, Islami! Banking in Bangladesh, A!hie#ements and
1hallenges. 'o$rnal of Islami! E!onomi!s and Finan!e. Gol. &. >o. &. '$ly-
/e!em"er ())4. a 2alf-yearly 'o$rnal of Islami Bank +raining and 3esear!h
A!ademy (IB+3A. /haka. Bangladesh.
Thoughts on Economics --
3. 5entral %hariah %u#er!isory 5ouncil at )angladesh )an: To ad!ise
)angladesh )an on %hariah matters and to formulate and im#lement
uniform %hariah #rinci#lesMrulesMregulation for all the $slamic )ansM
$slamic "ranches of con!entional "ansM $slamic su"sidiary com#anies
o#erating in the country, it is necessary to constitute a 5entral %hariah
%u#er!isory 5ouncil *5%%5+ at )angladesh )an to "e #erformed under
the )oard of (irectors of )angladesh )an. The "road functions of the
5entral %hariah %u#er!isory 5ouncil may "e grou#ed asG
a+ To study the rulings of $slamic %hariah #re!iously issued "y the
%hariah councils of the $slamic "ans and financial institutions in an
attem#t to mae decisions identicalH
"+ To su#er!ise the acti!ities of the $slamic "ans and financial
institutions to ensure conformity with the rulings of the $slamic
%hariah. $n addition, it has to draw the attention of the concerned
#arties and )oard of (irectors of )) to any #otential !iolation of these
acti!itiesH
c+ To issue legal religious o#inions on "aning and financial 'uestionsH
d+ To study matters related to financial and "aning o#erations in
res#onse to re'uests for ad!ice from the $slamic "ans and financial
institutionsH
e+ To conduct %hariah audit and ins#ection of s#ecific "ranchesMoffices of
the $slamic "ans and financial institutions with the hel# of the officers
of ()$ *(e#artment of )aning $ns#ection+ and su"mit ins#ection
re#ort with recommendations to the )oard of (irectors there"y
ensuring %hariah com#liance "y the $slamic "ans and financial
institutions
f+ To #lan, design, conduct and manage different training courses,
seminars, %ym#osia on %hariah and financial matters with the hel# of
the :esearch (e#artment and )angladesh )an Training 0cademy.
g+ To assess the #resent status of %hariah com#liance "y the $slamic
"ans and financial institutions, identify #ro"lems and suggest
remediesH
h+ To collect, #rocess and #reser!e data on $slamic economics, )aning
and finance with the hel# of the %tatistics (e#artmentH
i+ To collect informationM#u"lished data and "oos on $slamic "aning
with the hel# of )anKs Bi"rary.
-@ :egulation and %u#er!ision of $slamic )ans;;;;;;.
D+ 0 %e#arate K$slamic )aning (e#artmentK at )angladesh )an: 0 se#arate
K$slamic )aning (e#artmentK may "e esta"lished at )angladesh )an to
conduct com#rehensi!e research in !arious fields of $slamic Economics,
finance and "aning, to conduct field sur!eys on different $slamic )aning
and finance issues from time to time, collect data from the field
le!elMconcerned institutions and #re#are #a#ersMre#orts on the "asis of
dataMinformation collected and sur!eys conducted, Eto ins#ect a sam#le of
documents relating to o#erations, such as contracts and accounting records
to ensure com#liance of the o#erations with the a##ro!ed models and
juridical rules, and to issue directi!es to officials of $slamic "ans and
$slamic non2"an financial institutions, in the form of circulars, circular
letters, and "ulletins, drawing their attention to common mistaes from a
%hariah #oint of !iew and ways of a!oiding themF.
,-
The %hariah2"ased
audit may also "e done through this de#artment. This de#artment should
ha!e a num"er of EulamaF in the field of $slamic juris#rudence, who are
well !ersed in financial, legal and accounting issues.
5+ 5a#acity )uilding 8rograms for the :egulators and %u#er!isors: The most
acute #ro"lem is a general scarcity of 'ualified #eo#le e'ually con!ersant
with the #resent ins#ection techni'ues and %hariah as#ects of $slamic
"aning. This constraint in turn is a contri"uting factor to other
weanesses such as reluctance to ado#t #ro#er guidelines and also to
conduct regulatory and su#er!isory functions in line with the %hariah
#rescri#tions. Therefore, ca#acity "uilding #rograms for the regulators and
su#er!isors of the central "ans should "e undertaen. (ifferent training
#rograms for the officers of su#er!ision de#artments is often conducted
solely on2the2jo" in a less than systematic manner so that sills are
ac'uired in a hit2or2miss fashion. $nade'uacies in training and
de!elo#ment affect the su#er!isorFs a"ility to "uild a silled,
nowledgea"le, and com#etent staff. $n addition, off2the2jo" training
should "e conducted in a systematic fashion. To ha!e the nowledge on
$slamic "aning regulation and su#er!ision, central "ans can get hel# of
the $slamic :esearch and Training $nstitute of $slamic (e!elo#ment )an
as they ha!e already e4celled in research in $slamic economics, "aning
and finance and de!elo#ed different training materials of effecti!e "aning
su#er!ision in line with %hariah with the com"ination of intellectual
resources of e4#erts in fi-h almuamalah and financial sectors as well.
,-
0l2.arhi 1a"id 0li and $'"al 1unawar *200,+G o#. cit.
9+ %e#arate %u#er!isory $nstitutionsM0gencies: $n most of the industrial
countries of the west and in %outh /orea, there are se#arate
institutionsMsu#er!isory agencies that jointly su#er!ise the acti!ities of
"ans and financial institutions through cor#orate leadershi# "uilt u#on the
#rinci#les of delegation of #ower and co2ordination. They wor
simultaneously "ut there is clear delineation of the res#onsi"ilities. $n the
<nited %tates for e4am#le, there are as many as si4 se#arate agencies that
su#er!ise and control "ans without conflicts. $n 7ermany, the 6ederal
%u#er!ision 3ffice *6%3+ is a se#arate legal entity enjoying authority
though it has close functional relationshi# with the (eutche )undes )an,
central "an of the country. $n )angladesh, the central "an, )angladesh
)an is the single organi&ation that shoulders the entire res#onsi"ilities of
"an and non2"an financial institutionFs su#er!ision irres#ecti!e of
con!entional and $slamic. $n the conte4t of hea!y res#onsi"ilities,
)angladesh )an may consider gi!ing the su#er!isory res#onsi"ilities for
$slamic "ans and $slamic financial institutions u#on a se#arate #ri!ate
su#er!isory institution.
-+ )udget for : P ( on $slamic )aning and 6inance: %ufficient research
and de!elo#ment "udget may "e allocated and or earmared "y the $slamic
"ans and $slamic N)6$s to carryout research wor on $slamic "aning
and finance. They may also esta"lish an 0#e4 E$slamic )aning and
6inance :esearch and Training 0cademy *$)6:T0+ to this end an
e'ui!alent of )angladesh $nstitute of )an 1anagement.
@+ :esearch .ournal on $slamic )aning and 6inance: 4uality research
journals on $slamic "aning and finance may "e #u"lished incor#orating
em#irical findings on the de!elo#ment of $slamic "aning and finance
acti!ities in the country. This endea!or may fulfill the nowledge ga# and
disseminate the ideas among the financial sector #artici#ants to moti!ate
them to con!erge towards the $slamic financial system.
R'F'R'%"'S
,. 0hmed ?a"i" *200D+G $slamic Baw, 0da#ta"ility and 6inancial
(e!elo#ment, $slamic :esearch and Training $nstitute, $slamic
(e!elo#ment )an.
2. 0l2.arhi 1a"id 0li and $'"al 1unawar *200,+G $slamic )aningG 0nswers
to %ome 6re'uently 0sed Ruestions, 3ccasional 8a#er No. D, 200,,
$slamic :esearch and Training $nstitute, $slamic (e!elo#ment )an *$()+,
.eddah, /%0.
@0 :egulation and %u#er!ision of $slamic )ans;;;;;;.
3. )angladesh )an *200D+G 5ircular and guidelines related to 7o!ernment
$slamic $n!estment )ond *7$$)+.
D. )angladesh )an, 0nnual :e#ort 2005209.
5. Errico, Buca and 6arah"ash, 1itra *,99@+G J$slamic )aningG $ssues in
8rudential :egulations and %u#er!isionJ, Lashington (.5., The
$nternational 1onetary 6und *$16+, L8M9@M30.
9. ?assan 1./., 5howdhury 1.0.1., J$slamic )aning :egulations in Bight
of )asel $$.J, 8roceedings of the 6ifth ?ar!ard :esearch 6orum on $slamic
6inance, 0#ril ,2, 200D
-. $5) 0sset 1anagement 5om#any Btd.G )rochure and 8ros#ectus of $5)
015B $slamic 1utual 6und and 0nnual :e#orts P 0ccounts 6S 0-,
(haa.
@. $nternational 0ssociation of $slamic )ans *$0$)+ ,9@9G %tudy :e#ort,
JThe :elationshi# "etween 5entral )ans and $slamic )ansC su"mitted to
the third E4#ert Be!el 1eeting on $slamic )aning %tudies held in (haa,
,9@9

.
9. $slami )an )angladesh BimitedG $nformation 1emorandum on 8ri!ate
8lacement of 1udara"a 8er#etual )ond, 200- and 8ros#ectus on :e#eat
8u"lic 3ffer of 1udara"a 8er#etual )ond, 200-.
,0. $slamic 6inance and $n!estment Bimited *$6$B+ 200,G 0 %hort $ntroduction
of $slamic 6inance and $n!estment Bimited, (haa, 200,.
,,. $slamic 6inance and $n!estment Bimited *$6$B+, 0nnual :e#ort 2005
,2. %arer 0 0 *2005+G $slamic )aning in )angladeshG 0chie!ements and
5hallenges, .ournal of $slamic Economics and 6inance, Vol. ,, No. ,, .uly2
(ecem"er 2005, a ?alf2yearly .ournal of $slami )an Training and
:esearch 0cademy *$)T:0+, (haa, )angladesh.
Thoughts on Economics @,
A%%'56R'&I
Bangladesh !overnment Islamic Investment Bond 0Islamic Bond1
17
$n )angladesh, financial resource mo"ili&ation through issuance of $slamic
financial instruments is at a nascent stage. <#till 200D, no $slamic "an or
financial institution has issued any $slamic financial instruments lie "onds,
de"entures, mutual funds in the #rimary or secondary maret for mo"ili&ing
financial resources. They were fully de#endent on the de#osited funds.
?owe!er, after a long research and discussion, )angladesh )an has issued a
1udara"a )ond named as 2Bangladesh &overnment Islamic Investment Bond
(Islamic Bond)3in 3cto"er, 200D on "ehalf of the go!ernment to facilitate
$slamic "ans and financial institutions es#ecially to in!est their funds to "e
considered as li'uid assets for meeting re'uirement of %B:. This "ond is an
a##ro!ed security for the #ur#ose of regulating the %B: as well as #ro!iding
an outlet for in!estment or #rocurement of funds "y the %hariah2"ased "ans.
This "ond is also o#en for in!estment "y any #ri!ate indi!iduals, com#anies or
cor#orations.
The salient features of the $slamic $n!estment )ond are summed u# "elowG
,. This 7o!ernment $slamic $n!estment )ond *7$$)+ will "e go!erned "y the
$slamic %hariah i.e. the $slamic )ond will "e go!erned on the #rinci#les of
1udara"a.
2. The 7$$) mean the document of definite !alue issued in the name of their
owners against funds they #ay to the issuer or )angladesh )an.
3. 8rofit %haring :atios *8%:s+ relating to the )ond may "e determined
se#arately for each deal. )angladesh )an will act as 1udari".
D. <nder the :ules, any indi!idual, #ri!ate or #u"lic com#anies, $slamic
"ans and financial institutions may #urchase the "ond. 0ny non2resident
)angladeshi may also in!est in the "ond from hisMher N65( account
maintained with any "an in )angladesh.
5. The minimum amount of in!estment may "e Taa ,,00,000.00 *one
hundred thousand and multi#les thereof+ and the rate of return to "e gi!en
to the $n!estors are as followsG
,@
)angladesh )an *200D+G 5ircular and guidelines related to 7o!ernment $slamic $n!estment
)ond *7$$)+.
a. 6or the #eriod of in!estment of si4 monthsG 8%: is @0G20 in which
@0 N #rofit will "e gi!en to the "ond holders and 20N will "e
retained "y the )angladesh )an.
". 6or the #eriod of in!estment of one yearG 8%: is 90G,0 in which 90
N #rofit will "e gi!en to the "ond holders and ,0N will "e retained
"y the )angladesh )an.
c. 6or the #eriod of in!estment of two yearsG 8%: is 95G05 in which
95 N #rofit will "e gi!en to the "ond holders and 5N will "e
retained "y the )angladesh )an.
9. 7$$) may "e used as collateral for a!ailing loan or in!estment from any
financial institutions. $n this case, "ond must "e recorded in the %u"sidiary
7eneral Bedger *%7B+.
-. 7$$) is 'ualified securities for the #ur#ose of com#lying with the li'uid
assets re'uirement to "e maintained "y the "ans and non2"an financial
institutions. Lith regard to this, the )angladesh )an may #ro!ide the
discount window facility for "ans and financial institutions to "uy or sell
7$$) with )angladesh )an.
@. There is a #ro!ision in the :ules that the "ond holders will get interim #rofit
on the maturity date of the "ond. This interim #rofit will "e adjusted after
finali&ation of the in!estment accounts. The interim #ro!ision of #rofit is
"ased on the recei!ed monthly #rofit reali&ed on the in!ested funds in the
$slamic "ans or financial institutions *as #er 5lause No. -2" of the :ules+.
The interim #rofit rates will "e gi!en as followsG
a. 6or 92month 7$$)G 2N less from reali&ed a!erage rate of #rofit
generated through financing of the $slamic in!estment "ond
#roceeds.
". 6or ,2year 7$$)G ,.5N less from reali&ed a!erage rate of #rofit
#roceeds.
c. 6or 22year 7$$)G ,N less from reali&ed a!erage rate of #rofit
#roceeds.
9. The trading of the 7$$) will "e "ased on the interim #rofit rate deri!ed
from the in!estments of those with the $slamic "ans. The interim #rofit
rate will "e re!iewed on monthly "asis.
Thoughts on Economics @3
,0. The formula for calculation of the #rofit element to "e #aid to the "ond
in!estors is as followsG
8 prt 0k1 9 :
LhereG
T 8rofit #aya"le to the "ond in!estorH
# T 8rinci#al in!estment to the 7$$)H
r T :ate of monthly #rofit recei!ed *in N #er annum+ from the
in!estment of "ond #roceeds for 9 months "ondH
t T "ond #eriod *num"er of days in!ested+
/T 8rofit sharing ratio to "e a##lied to the )ond in!estor, and
ST 395 days.
,,. 7$$) may not "e a transfera"le instrument for more or less than its face
*nominal+ !alue. $f it is returned to the )angladesh )an "efore maturity,
then the "ond2holder may "e eligi"le to get only the #rinci#al amount
in!ested. No #rofit will "e allowed for the #eriod "efore or after maturity
of the "ond, if not enchased on maturity.
7o!ernment $slamic $n!estment )onds are #laying an im#ortant role in
de!elo#ing the $slamic "aning system of )angladesh, where"y $slamic
"ans and financial institutions are acti!ely #artici#ating to #ar their cash
sur#luses.
A%%'56R'&II
I"B A-"* Islamic -utual Fund
1utual 6und #resently is one of the fastest growing sectors through out the
world. $n )angladesh, $5) is the har"inger of mutual funds. 3ut of the total
,3 mutual funds, $5) and its su"sidiary alone floated ,, mutual funds in the
maret. These mutual funds are "asically con!entional fund which in!est their
funds "oth in e'uity and de"t securities. $slamFs #rohi"ition against #aying and
charging interest #re!ent 1uslims from in!esting in securities that draw their
income from those acti!ities. $n $slam interest is !iewed as ri"a and usury
"ecause of its #otential for e4#loitation of the "orrower "y the lender. $n
addition, the $slamic shariah law for"ids any in!ol!ement in or ties to
gam"ling, #ornogra#hy, to"acco, wea#ons, alcohol etc. 0s the con!entional
funds in!est and draw their income, among others, from the a"o!e mentioned
com#anies and de"t securities, $5) 0sset 1anagement 5om#any Bimited has
@D :egulation and %u#er!ision of $slamic )ans;;;;;;.
float the a"o!e fund to in!est its funds according to the shariah law. $t may "e
mentioned here that there are o!er ,00 $slamic mutual funds in the glo"al
e'uity marets of which half originated in the 1iddle East.
The $5) 015B $slamic 1utual 6und
,9
was esta"lished under a trust deed
e4ecuted "etween the $5) 5a#ital 1anagement Bimited *$51B+ as E%#onsorF
and the $n!estment 5or#oration of )angladesh *$5)+ as ETrusteeF. The Trust
(eed was e4ecuted on .uly ,5, 200D. The fund was registered with the
%ecurities and E4change 5ommission *%E5+ on 0ugust 2D, 200D %ecurities
and E4change 5ommission *1utual 6und+ :ules, 200,. The fund was
launched to #ro!ide interest free return to the in!estors "y in!esting the funds
only in %hariah 5om#liant instruments. $5) 015B $slamic 1utual 6und is a
closed2end mutual fund of ,0 years tenure. The fund is listed with the (haa
%toc E4change limited *(%E+ and 5hittagong %toc E4change Bimited
*5%E+. The units of the fund are transfera"le and traded in "oth the
E4changes. 0s #er $ncome Ta4 3rdinance ,9@D, income of the fund is ta42free
u#to certain le!el and in!estments 'ualify for ta4 credit. $n!estment acti!ities
of the fund started from mid of the 6S 05. The fund declared di!idend Q,2.00
#er unit of Taa ,00.00 each for 200920-, which is much higher than the
#receding yearFs le!el.
Advantages in investing in I"B A-"* Islamic -utual FundG 7enerally
in!estment in mutual funds enjoys some ad!antages com#ared to in!estment
made directly in other securities of the ca#ital maret. $n!estors of this $5)
015B $slamic 1utual 6und will "e a"le to enjoy the following ad!antagesG
a. 0s the fund will "e in!ested in shariah com#ati"le securities, there
shall "e no sco#e of haram earnings and as a result the income in the
hand of the in!estors will totally "e halal.
". 0s the sale #roceeds will "e in!ested in the di!ersified #ortfolio, there
will "e a minimum ris in in!estment.
c. (i!ersified #ortfolio of the fund hel# the small in!estors access to the
whole maret which is difficult at indi!idual le!el.
d. )y channeli&ing small in!estors sa!ing, this mutual fund will add
li'uidity to the maret.
e. 0s the fund will "e #rofessionally managed under #rudent guidelines,
the fund is acce#ted to "e a"le to achie!e the target o"jecti!es.
,9
$5) 0sset 1anagement 5om#any Btd.G )rochure and 8ros#ectus of $5) 015B $slamic
1utual 6und and 0nnual :e#orts P 0ccounts 6S 0-, (haa.
f. The in!estors can sa!e a great deal in transaction cost as heMshe has
access to a larger num"er of securities "y #urchasing a single unit of
mutual fund.
g. $n!estment in the fund would 'ualify for in!estment ta4 credit under
section DD*2+ of the $ncome Ta4 3rdinance ,9@D.
h. 1anagement and o#eration of mutual funds are su"ject to #rudential
guidelines. %E5 regularly monitors the #erformance of such funds. The
laws go!erning mutual funds re'uire e4hausti!e disclosure to the
regulator and general #u"lic. 0s a result, the in!estors will "e a"le to
now the #erformance of the fund and accordingly they can "e a"le to
tae con!enient entry and e4it o#tions.
i. $ncome will "e e4em#ted from ta4 to a certain le!el in the hand of the
indi!idual in!estors.
Investment PoliciesG The scheme has "een designed for a s#ecific sectoral
o"jecti!e i.e. to #ro!ide interest free return to the in!estors "y in!esting the
fund only in shariah com#liant instruments. Therefore, the fund shall in!est
"oth in listed and non2listed securities. Lhile in!esting in securities the
following criteria are to "e o"ser!edG The "asic "usiness of the com#any
should "e in consistence with the shariah law. 0lthough no uni!ersal
consensus e4ists among contem#orary shariah scholars on the #rohi"ition of
com#anies, most shariah "oards ha!e ad!ised against in!estment in com#anies
in!ol!ed in the acti!ities ofG a+ con!entional "ans, insurance and leasing
com#aniesH "+ alcoholH c+ #or related #roducts, d+ to"accoH e+ wea#ons and
defenseH and f+ entertainment *hotel, casinosMgam"ling, cinema, #ornogra#hy,
music etc.+.
Screening of acceptable companiesG 0fter remo!ing com#anies with
unacce#ta"le #rimary "usiness acti!ities, the fund may in!est in the remaining
com#anies ifG
a. The total de"t of the in!estee com#any is e'ual to or less than 33N of
the trailing ,2 month a!erage maret ca#itali&ation of the com#any.
". The sum of cash or interest "earing securities of the in!estee
com#anies is less than or e'ual to 33N of the trailing ,2 month
a!erage maret ca#itali&ation of the com#any.
c. The accounts recei!a"le is less than or e'ual to D5N of the total assets
of the com#any.
The fund may also in!est in other shariah com#liant instruments as and when
they are a!aila"le for in!estment. %#ecificallyG
a. $n 8artici#ation Term 5ertificates, 1udara"a 5ertificates, 1usharaa,
1ura"aha, Term 6inance 5ertificates and all other asset "aced
securities.
". $n contracts, securities or instruments of com#anies, organi&ations, and
esta"lishments issued on the #rinci#les of )aiF 1uFajjal, )aiF %alam,
$stisnaFa, 1udara"a, 1ura"aha and 1usharaa.
c. $n the form of ri"a2free cash de#osits with $slamic "ans of financial
institutions with the o"ject of maintaining sufficient li'uidity to meet
the day to day re'uirement and to tae ad!antage of suita"le
in!estment o##ortunities as and when they arise.
d. $n other instruments that may "e allowed "y the :ules and confirmed
as shariah com#liant "y the fundFs shariah ad!isor from time to time.
The fund will ado#t a conser!ati!e strategy and will try to out2#erform the
inde4 through maret timing and security selection. 0 #art of the fund will also
"e used to tae ad!antage of the short term trading o##ortunities that may
arise from time to time. The 015 will mae the in!estment decisions "ased
on "est judgment su##orted "y documents and analysis. The fund shall get the
securities #urchased or transferred in the name of the mutual fund.
#aluation Polic,G the fund intends to determine its N0V #er unit on the last
"usiness day of each wee "y di!iding the !alue of the net asset of the fund
*the !alue of total assets less total lia"ilities as #er :ule 90 of the mutual fund
rules, 200,+ "y the total num"er of units outstanding. 6ollowing the !aluation
criteria, the fund will use the following formula to deri!e N0V #er unitG
Total N0V TV0 U BT
N0V #er unit T Total N0VMNo. of units outstanding.
LhereG
V0 T Value of total assets of the fund as on date
BT T total lia"ilities of the fund as on date.
V0 T Value of all securities in !ault V Value of all securities #laced in lien V
5ash in hand and at "an V Value of all securities recei!a"les V :ecei!a"les of
#roceeds of sale of in!estments V (i!idend recei!a"les, net of ta4 V $ncome
recei!a"les, net of ta4 V $ssue e4#enses amorti&ed as on date V 8rinting,
#u"lication and stationery e4#enses amorti&ed as on date.
BT T Value of all securities #aya"le V 8aya"le against #urchase of in!estment
V 8aya"le as "roerage and custodial charges V 0ll other #aya"le related to
Thoughts on Economics @-
#rinting, #u"lication and stationery V 0ccrued deferred e4#enses with regard
to management fee, trustee fee, annual fee, audit fee, and safe ee#ing fee.
$ividend Polic,G The accounting year of the fund shall "e .uly 0, to .une 30
and the first year2end shall "e .une 30, 2005. The other #olicies related to
di!idend #olicy areG a+ the fund shall distri"ute minimum @0 #ercent of the
annual net income of the fund as di!idend at the end of each accounting #eriod
after maing #ro!ision for "ad and dou"tful in!estments. The fund shall create
a (i!idend E'uali&ation :eser!e *(E:+ "y a##ro#riation from the income of
the fund. "+ "efore declaration of the di!idend, the asset management
com#any shall mae a #ro!ision in consultation with the auditors if maret
!alue of in!estments goes "eyond the ac'uisition cost and the method of
calculation of this #ro!ision will "e incor#orated in the notes of accounts. c+
sur#luses arising sim#ly from the !aluation of in!estments shall not "e
a!aila"le for di!idend. d+ di!idend warrants will "e dis#atched within 30 days
from the declaration of such di!idends. e+ "efore registration for transfer of
ownershi#, a transferee shall not #ossess the right to any di!idend declared.
Risk -anagementG $n!estment in securities maret always "ears riss.
$n!estment in this fund also in!ol!es certain ris factors. The in!estors should
carefully consider the following riss in e!aluating the offer and also for
taing a decision whether to in!est or notG
a. the #erformance of the fund is directly related with the macroeconomic
conditions #articularly the ca#ital maret situation of )angladesh
". since the ca#ital maret of )angladesh is highly !olatile, there is no
assurance of achie!ing the stated o"jecti!e of the fund
c. due to small num"er of listed securities in "oth the stoc e4changes, it
may "e difficult to in!est the fundFs assets in a widely di!ersified
#ortfolio as and when re'uired to do so
d. as there is a limited sco#e of in!estment under shariah law in
)angladesh, it would "e difficult for the fund manager to swa#
"etween asset classes if and when re'uired
e. stoc maret trends show that the #rice of almost all the listed
securities mo!e in un#redicta"le direction which may affect the !alue
of the fund. moreo!er, there is no guarantee that the maret #rice of
shares of the fund will fully reflect their underlying net asset !alues.
f. $f the com#anies fail to #ro!ide e4#ected di!idend, this may affect the
return of the fund.
@@ :egulation and %u#er!ision of $slamic )ans;;;;;;.
g. 6or in!esting in #re2$83 #lacement securities i.e. in unlisted e'uity
securities "y the fund may in!ol!e li'uidity ris.
h. <ncertainties lie #olitical and social insta"ility may affect the !alue of
the fundFs assets.
i. 0d!erse natural climatic condition may ham#er the #erformance of the
fund.
j. (ue to inade'uate su##ly of shariah com#liant securities, full
in!estment of the fund may re'uire com#arati!ely longer time which
may affect the #rofita"ility of the fund.
. 0s only the halal income shall "e considered as income of the fund,
this may lead to the lower income f the fund as com#ared with that of
traditional mutual funds.
Shariah "ompliance AuditorG The auditor of the fund will also act as shariah
com#liance auditor, and will com#lete shariah com#liance audit of the fund
for each accounting #eriod within 30 days from the date of closing of
0ccounting Sear, and will issue a shariah com#liance audit re#ort.
Procedure of Redemption9 winding upG
a. the mutual fund shall "e redeemed on maturity on the e4#iry of the ten2
year tenure of the fund from the date of first listing.
". The fund may also "e wound u# on the ha##ening of any e!ent, which
in the o#inion of the trustee, re'uires the scheme to "e wound u#
c. The fund may also "e wound u# if the 5ommission so directs in the
interest of the unit2holders.
A%%'56R'&III
Islami Bank Bangladesh *imited: -udaraba Perpetual Bond 0-PB1
;<

$slami )an )angladesh Bimited has issued a "ond named 1udara"a
8er#etual )ond *18)+ of T. 3,000 million which is the first of its ind with a
!iew to ser!e multi#le #ur#oses lie creating a !i"rant "ond maret in
)angladesh, creating new a!enues of in!estment for the #ros#ecti!e in!estors
etc. 6rom the !iew#oint of the $slami )an, the main #ur#ose of the "ond
issue is to raise fund to maintain the ca#ital ade'uacy re'uirement ratio of the
)an. 0s #er the e4isting re'uirement of )angladesh )an, all commercial
20
$slami )an )angladesh BimitedG $nformation 1emorandum on 8ri!ate 8lacement of
1udara"a 8er#etual )ond, 200- and 8ros#ectus on :e#eat 8u"lic 3ffer of 1udara"a
8er#etual )ond, 200-.
"ans are re'uired to maintain ca#ital ade'uacy Q ,0N of the ris weighted
assets of the "an *#re!iously 9N+. Lith the go!ernment #olicy of
encouraging the #ri!ate sector to "e the engine of economic growth, the
#ri!ate sector need for finance has increased significantly from the "aning
sector during the last two decades.
The #ur#ose of the issuance of the 18) is to enhance the a"ility of the "an to
mae further in!estments "y increasing the 5a#ital 0de'uacy :atio. 3ne of
the main o"jecti!es is to utili&e the fund to "e raised in #ros#ecti!eM#rofita"le
sectors. $t is to "e mentioned that through the issuance of the 18), $))B is
going to #lay a #ioneering role in creating a "ond maret in )angladesh, as
this will "e the first of its ind in the country. Through the issuance of "ond,
$))B is going to create an in!estment a!enue for the #ros#ecti!e in!estors of
the ca#ital maret. $t is worthwhile to mention that, through the issuance of
18), $))B will "e a"le to reduce its cost of fund su"stantially, which will
ultimately "e "eneficial for the staeholders. $t is to "e further mentioned that,
the fund raised through issuance of 18) will "e utilised in the #rofita"le
in!estment #rograms of the )an to mae the )an more #rofita"le. $n
addition to the income deri!ed from de#loyment of 1udara"a fund, the
"ondholders will "e entitled to get a rate of #rofit e'ui!alent to ,0N of the rate
of di!idend to "e declared "y the $slami )an )angladesh Bimited.
Advantages for the Issuer
a. The issuer $))B will issue a new financial #roduct leading to im#ro!e
financial dee#ening.
". The issuer can access a new source of fund.
c. The re#utation of $))B will gradually "e enhanced.
d. The issuance of "ond will "olster the national effort to de!elo# a "ond
maret.
Benefits for the Investor
a. The in!estor of the "ond will "e a"le to in!est in a %hariFah com#ati"le
#er#etual lucrati!e in!estment instrument.
". $n!estment in "onds will ena"le the in!estors to di!ersify their
$n!estments.
-a=or Features of the Issue
Name of the )an $slami )an )angladesh Btd.
%i&e of the issue Taa ,,500 million *#ri!ate #lacement+
<nit 8rice Taa ,,000
Term 8er#etual
8rofit (istri"ution a+ 18) will carry ,.25 weightage for distri"ution of 8rofit.
"+ Not less than 95N of the income generated "y de#loyment
of 18) fund and
c+ 0n additional rate of #rofit e'ui!alent to ,0N of the rate of
di!idend to "e declared "y the $slami )an )angladesh
Bimited e!ery year. No #ortion of di!idend will "e
distri"uted to the 18) holders.
8ayment of 8rofit 0nnually
1aret Bot 5 unit of 18) amount to T. 5,000.
5redit :ating 18) has "een rated as 0V "y 5redit :ating $nformation and
%er!ices Bimited *5:$%B+.
Trustee $n!estment 5or#oration of )angladesh *$5)+.
1anager to the $ssue $5) 5a#ital 1anagement Bimited *0 su"sidiary com#any of
$5)+.
Issuer Bank: The $))B commenced its %hariFah2"ased interest free $slamic
"aning o#erations in the year ,9@3 as a #u"lic limited com#any formed under
5om#anies 0ct, ,9,3 with a mission to esta"lish $slamic )aning through the
introduction of a welfare oriented "aning system and to ensure e'uity and
justice in the field of all economic acti!ities. The )anFs cor#orate head'uarter
is situated in its own ,@ storied modern "uilding at D0, (ilusha 5M0, (haa,
)angladesh. The )an has @ *eight+ >onal offices and ,-9 )ranches in the
country as on 3,2,222009.
Placement Strateg,: 5onsidering the #resent situation #re!ailing in the
ca#ital maret, the )an intends to raise T.,,500 million through #ri!ate
#lacement with commercial "ans, in!estment "ans, financial institutions,
insurance com#anies and indi!iduals.
(rusteeG $n!estment 5or#oration of )angladesh *$5)+ has "een a##ointed as
the Trustee to the 18). $5) has a##lied to %E5 for :egistration to act as the
trustee to this )ond, which is under acti!e consideration of %E5. The role of
Trustee is to #rotect the rights of in!estors.
Thoughts on Economics 9,
Rights of the InvestorsG <nlie the interest "ased traditional )ond, 18) will
"e a su"ordinated e'uity instrument. ?owe!er, 18) as a 1udara"a
instrument will get #riority o!er the shareholders in res#ect of getting #rofit
and also refund of #rinci#al in case of li'uidation of the "an. The
)ondholders will howe!er stand su"ordinated to the (e#ositors in res#ect of
the #ayment of "oth #rofit and refund of #rinci#al. The 18) will "e listed
with "oth )ourses of the country and will remain freely transfera"le
de#ending on the maret demand su"ject to the consent of the %E5. ?owe!er,
the )ondholders will not "e entitled to enjoy any rights and #ri!ilege as
enjoyed "y the shareholders e4ce#t statutory re'uirements.
"laim of the BondholdersG The claim of the "ondholders will come in the
form of the securities #ro!ided "y the issuer and the securities there"y
constituted shall *su"ject as hereinafter #ro!ided+ "ecome enforcea"le in any
of the following e!entsG
a. $f the 5om#any is in default in the #ayment of any income, which
ought to "e #aid in accordance with the terms and conditions,
#rescri"ed "y the $nformation 1emorandum of 1udara"a 8er#etual
)ond *18)+.
". $f the 5om#any ceases to carry on its "usiness, or threatens to do so
without the consent of the )ond ?olders.
c. $f a court order is made or a s#ecial resolution #assed for winding u# of
the 5om#any.
d. $f the 5om#any defaults on the #erformance or o"ser!ance of any of
co!enants, conditions or #ro!isions "inding u#on the $slami )an
)angladesh Btd. for issuance of 1udara"a 8er#etual )ond *18)+ and
the 5om#any fails to #erform fully or rectify the "reach of any
co!enants, conditions or #ro!isions within 30 *thirty+ days from the
recei#t of a written notice from the Trustee re'uiring it to do so.
e. $f the com#any sto#s #ayment or has ceased or is una"le to mae the
#ayments and it a##ears to the Trustee that the further #ursuance "y the
com#any of his "usiness will endanger the security here"y created.
$t may "e mentioned that $))B has already agreed to create floating charge to
the e4tent of Taa 3,000 *three thousand+ million on the #resent and future
assets of the )an in fa!our of the Trustee in order to secure the interest of the
)ond holders. $n addition to that it will also #ro!ide cor#orate guarantee
through which the )ond holders will ha!e their claim on other assets, the
#ro!ision of which will "e clearly delineated in the res#ecti!e deeds M
indenture. 1oreo!er, at the time of li'uidation, the )ondholders will get
#reference o!er the claim of the %tocholders.
Investors Protection: The Trustee is entrusted with the critical res#onsi"ility
of monitoring and ensuring that the interest and rights of the "ondholders are
fully #rotected.
6nit Price: The unit #rice of the 18) will "e T. ,,000 *Taa one thousand+.
-arket *ot: The 1aret Bot will consist of 5 unit of 18) amounting to T.
5,000.
(enure of the Bond: The 18) will "e #er#etual in nature. Therefore, there
will "e no fi4ed maturity #eriod for redem#tion.
Profitabilit, and Return on -PBG $slami )an )angladesh limited has "een
o#erating #rofita"ly since its ince#tion. 0ll 1udara"a 6und holdersM 1udara"a
de#ositors of the )an will share income which is deri!ed from in!estment
acti!ities i.e. income from use of 1udara"a 6unds. $ncome under this category
will mean and include 8rofit, (i!idend, 5a#ital gain, :ent and any other
income deri!ed from in!estments. The )an will in!est the fund collected
through the sale of 18) under 1udara"a 8rinci#les of $slamic %hariah, which
is "ased on #rofit and loss sharing with the (e#ositors. Estimated :ate of
8rofit on 18) for 2009 "ased on the actual #erformance of the )an for the
last 5 *fi!e+ years is furnished "elowG
%l.
No.
8articulars 2009 2005 200D 2003 2002
, 8rofit on 1udara"a
%a!ings )ond *@
years+ at ,.25
weightage
,0.@5N ,0.39N @.@,N ,0.0DN ,0.-9N
2 (i!idend (eclared 25N 25N 20N 20N 25N
3 ,0N of rate of
di!idend
2.50N 2.50N 2.00N 2.00N 2.50N
D :ate of 8rofit on
18) *, V 3+
,3.35N ,2.@9N ,0.@,N ,2.0DN ,3.29N
5 :emars )ased on 6inal :ate of 8rofit and entitlement will "e "ased
on record date M )oo closure.
8rocedure for calculation of #rofit on 1udara"a (e#ositsG Le distri"ute
$n!estment $ncome as #er ratio "etween 1udara"a (e#osit and 5ost free
(e#osit. Then the share of 1udara"a (e#ositors can "e distri"uted "etween
(e#ositors and 1anagement *1inimum 95.00N+. Le collect de#osit #roduct
from the "ranches. 0fter com#utation of #roduct we con!ert #roduct into
weighted #roduct. Then we distri"ute share of 1udara"a de#osit of
$n!estment $ncome among the different ty#es of (e#osit. Then we get #rofit
rate as #er the following formulaG
:ate of 8rofit 8.0 T
0mount of total #rofit of any (e#osit #roduct
I ,00
Total 8roduct of any (e#osit
%ince $))B will distri"ute #rofit to the )ondholders from 7ross $n!estment
$ncome *"efore deducting any e4#enditure+ so there is less #ossi"ility of
incurring any loss "y the )ondholders.
Special Feature of -PB: 18) will "e treated as one of the com#onents of
1udara"a 6und and shall "e go!erned "y the rule and #rinci#les of utili&ation
P distri"ution of #rofit of such funds as in !ogue in $))B.
Securit, and enforcement:
,. The )onds issued hereunder shall consist of
series from 00,00,00, to 30,00,000 units of T. ,000 each aggregating
to T. 3000 *Taa three thousand+ million which are secured "y
creation of ,st chargeMmortgage on fi4ed and floatingMfinancial assets
*in!estments, recei!a"les etc.+ to the e4tent of T. 3,000 million on the
assets of $))B.
2. $n consideration of the 1udara"a 8er#etual )onds *18)+ aggregating
T. 3,000 *three thousand+ million the com#any has already agreed to
create floating charge to the e4tent of T. 3,000 million on the #resent
and future assets of the )an in fa!our of the Trustee in order to secure
the )ond holders.
3. The "ond will "e further secured "y the cor#orate guarantee of $))B.
D. The security there"y constituted shall *su"ject
as hereinafter #ro!ided+ "ecome enforcea"le in any of the following
e!entsG
a+ $f the 5om#any is in default in the #ayment of any income, which
ought to "e #aid in accordance with the terms and conditions,
#rescri"ed "y the $nformation 1emorandum of 1udara"a
8er#etual )ond *18)+.
"+ $f the 5om#any ceases to carry on its "usiness, or threatens to
do so without the consent of the )ond ?olders.
c+ $f a court order is made or a s#ecial resolution #assed for winding
u# of the 5om#any
9D :egulation and %u#er!ision of $slamic )ans;;;;;;.
d+ $f the 5om#any defaults on the #erformance or o"ser!ance of any
of co!enants, conditions or #ro!isions "inding u#on the $slami
)an )angladesh Btd. for issuance of 1udara"a 8er#etual )ond
*18)+ and the 5om#any fails to #erform fully or rectify the
"reach of any co!enants, conditions or #ro!isions within 30
*thirty+ days from the recei#t of a written notice from the Trustee
re'uiring it to do so.
e+ $f the com#any sto#s #ayment or has ceased or is una"le to mae
the #ayments and it a##ears to the Trustee that the further
#ursuance "y the com#any of his "usiness will endanger the
security here"y created.
05. 0t any time "efore the security here"y constituted "ecomes
enforcea"le, the Trustee may u#on the a##lication in writing "y the
5om#any and at the e4#enses of 5om#any "ut only if in the o#inion of
the Trustee the interest of the )ond ?olders shall not "e #rejudiced,
may do or concur in doing all or any of the acts in regard to the
charged assetsG
a+ %ell, call in, collect or con!ert or concur in selling, calling in,
collecting or con!erting all or any of the charged assets on such
terms as may seem e4#edient with full #ower to mae any such
sale for fulfilling any o"ligation due to the )ondholder*s+
"+ :etransfer, release, surrender or a"andon on such terms as may
seem e4#edient to the Trustee any of the charged assets which
in the o#inion of the Trustee is not re'uired for the "usiness of
the com#any or #ur#oses incidental thereto or which may ha!e
"ecome un#rofita"le or source of loss or damage to the
com#any.
c+ E4change any #art or #arts of the charged assets for any other
assets suita"le for the #ur#ose of the com#any and u#on such
terms as may deem e4#edient and either with or without
#ayment or recei#t of money for 'uality or e4change.
d+ 0ssent to the modification of any contracts or arrangement that
may "e su"sisting in res#ect of any of the charged assets.
(ransferabilit,: 0s #er a##ro!al of the )angladesh )an the )ond will ha!e
to "e listed with the %toc E4changes after o"taining necessary #ermission
from the %E5 and will "e freely transfera"le lie the e4isting shares "eing
traded in the stoc maret through electronic de!ice of 5()B. 1oreo!er,
$slami )an )angladesh Bimited will meet all the conditions to get the 18)
listed with the %toc E4changes. $t may "e mentioned here that %hares of
$slami )an )angladesh Bimited are already listed with (haa %toc
E4change *as one of the (%E 20 )lue 5hi# 5om#anies+ and 5hittagong %toc
E4change *as one of the 5%E "est 30 5om#anies+. 0##lications for the listing
of the )onds *18)+ in "oth (%E and 5%E ha!e already "een made and the
"ourses ha!e gi!en their #rimary consent regarding listing of the same with
the consent of %E5.
"redit Rating: 5redit :ating $nformation and %er!ices Bimited *5:$%B+ has
rated the )ond as A0VC which means that this category of securities are
adjudged to "e of good in!estment 'uality and offer ade'uate safety for timely
re#ayment of financial o"ligations.
*ock In ProvisionG There is no #ro!ision of loc in #eriod for the in!estors of
"ond *18)+.
(rust $eed: 0 Trust (eed has "een e4ecuted "etween issuer $))B and the
Trustee *$5)+. )ondholders are entitled to the "enefits of and are "ound "y
and deemed to ha!e recei!ed notice of the #ro!isions of the Trust (eed. The
Trust (eed sets out the rights of the )ondholders and the res#onsi"ilities of
the trustee.
Future Borrowings: The )an shall "e entitled, from time to time, to mae
further issue of "onds and other such instrument to the #u"lic, mem"ers of the
)an andMor to any other #erson*s+ andMor to raise further funds andMor a!ail of
further financial andMor guarantee facilities from financial institutions, "ans
andMor any other #erson*s+ on the security of its #ro#erties with a notice to the
Trustees "ut without any further a##ro!al from the "ondholders.
Audited Accounts: The audited financial statement as on 3,
st
(ecem"er, 2009
re#resent true and fair financial #osition of the )an and ha!e "een #re#ared
in conformity with $nternational 0ccounting %tandards ado#ted in )angladesh.
$t is worth mentioning that the )an has not suffered any material ad!erse
change in its "usiness #ros#ects or incurred any su"stantial or unusual loss or
lia"ility.
Risk Factors and -anagement Perception Regarding RiskG $slami )an
)angladesh Bimited is one of the most successful and leading "ans among
the 8ri!ate 5ommercial )ans *85)s+ in )angladesh. Lith a #rofessional,
dedicated and honest team of management ha!ing long e4#erience,
commenda"le nowledge and e4#ertise in $slamic "aning, the "an has
achie!ed success among its #eer grou# within a short s#an of time. Lith all its
resources, the management of the "an firmly "elie!es that the "an would "e
a"le to encounter #ro"lems that may arise "oth at micro and macro economic
le!els. ?owe!er, the #ros#ecti!e ris factors and the #lan of the management
to reduce such riss are gi!en "elowG
"redit RiskG There is a ris that the issuer would fail to satisfy the terms of
the o"ligation with res#ect to the timely #ayment of #rofit. This may result
#artial loss of money for the in!estors. 1anagement #erce#tionG Very soon
after its ince#tion, $))B has "een enjoying !arious credit lines with a num"er
of local and international financing institutions. $n its entire o#erating history,
it has not delayed any #rofit or #rinci#al re#ayment schedule, let alone non2
#ayment. 5onsidering the im#ecca"le trac record of $))B in the re#ayment
of de"t o"ligations, it is e4#ected that it would "e a"le to maintain it in future
as well "ecause of its stringent and #rudent financing and o#erating #olicy.
*i>uidit, Risk: The 18) will "e listed in the %toc E4changes and as such
the )ondholders would "e in a #osition to freely transfer the )onds and o"tain
fund in case of needs. 1anagement #erce#tionG The #ro#osed "ond issue is
freely transfera"le. ?ence, the in!estors can transfer their holdings, fully or
#artially whene!er they want.
Industr, RiskG Entrance of a new com#etitor lie new "an or financial
institution or e4#anding ser!ices of e4isting com#etitors may increase the
maret com#etitor and may ad!ersely affect the #rofita"ility of the "an.
1anagement #erce#tionG 6inancial institution is a fast growing industry in the
country, which has witnessed a su"stantial growth rate. 3!er the years, $))B
has registered healthy growth in its "aning "usiness. The $))B holds the
highest maret share of de#osits and in!estments among 8ri!ate 5ommercial
)ans *85)s+. 0mong D@ "ans, the growth rate of $))B is much higher than
the o!erall maret growth. )eing a first2generation )an in the #ri!ate sector,
$))B has "een maintaining commenda"le growth of de#osits and in!estments,
which is much "etter than the growth trends in the industry mainly due to the
huge customer #artici#ation. $))B has the largest networ of "ranches among
8ri!ate 5ommercial )ans. ?ence, it is e4#ected that on the edge of its
strategic #lanning, im#ro!ed customer ser!ice, higher #ersonnel sill and
#roducti!ity and inno!ation, the "an "e well #oised to maintain its growth
and #rofita"ility in future.
Income (a.: 0s #er e4isting $ncome Ta4 #olicy, the "ondholders will ha!e to
#ay the income ta4 at the #re!ailing rate a##lica"le for cor#orate P indi!idual,
as the case may "e. ?owe!er, since the 18) is a new #roduct, therefore, to
facilitate and encourage the in!estment in the 18), $))B has already a##lied
to the chairman of National )oard of :e!enue *N):+ for the following ta4
"enefits to the 18) holdersG
Thoughts on Economics 9-
a. :e"ate "y way of in!estment allowance for ta4ation #ur#ose.
". 8rofit earned on 1udara"a 8er#etual )ond *18)+ as ta4 free income
u# to T. 25,000H
c. $n case of income e4ceeding T. 25,000, the whole income shall "e
ta4ed at the rate of ,0N at source and considered as the full and final
discharge of the ta4 lia"ility on the total income from 18).

Regulation and Supervision of Islamic Banks and Financial Institutions Bangladesh Perspective

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Thoughts on Economics 59

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