Regulation and Performance of Islamic Banking in Bangladesh

Abu Umar Faruq Ahmad

M. Kabir Hassan

Executive Summary This article examines current legal and regulatory issues of Islamic banking in Bangladesh. The most important issue in this context is the lack of a well-defined regulatory and supervisory framework for Islamic banks for their effective functioning in line with the tenets of Shariah. Other major issues come from the absence of an interbank Islamic money market, following the same policy and guidelines for Islamic and conventional banking by the Bangladesh Bank, presence of a discriminatory legal reserve requirement for Islamic and conventional banking, prevalence of a restrictive environment in the capital market, and the lack of legal support and protection of Bangladesh Bank to avoid the associated risks of Islamic banks. For this purpose, it is suggested that Islamic banks in Bangladesh should have an independent banking act that controls, guides, and supervises their functions and provide legal support to the parties concerned. 2007 Wiley Periodicals, Inc.

Abu Umar Faruq Ahmad is an independent Islamic legal advisor with research interests in the development of Shariah-compatible products and instruments. He received an LL.B. in Shariah from the Islamic University of Medina, Saudi Arabia, in 1984, and in 2003 he received an LL.M. (Honors) in law from the University of Western Sydney, where he completed his research on Islamic banking in Bangladesh. At present, he is undertaking his doctoral thesis entitled Law and Practice of Modern Islamic Finance in Australia at the University of Western Sydney Law School with a UWS Postgraduate Research Award. Mr. Ahmad has spoken at several national and international forums, including the Sixth Harvard University Forum on Islamic Finance and the Twelfth Annual Global Finance Conference (Global Finance Conference 2005) at Trinity College Dublin where he served as the Conference Program Committee member. He has received a number of research grants to speak at these world forums on Islamic banking and finance from international organizations and the University of Western Sydney, Australia. He has been the chairman of the Shariah Advisory Board at the Islamic Co-operative Finance Australia Limited (ICFA) since its inception in 1999. Currently, he is a lecturer of Islamic legal studies at Sule College, Sydney [aufahmad@gmail.com]. M. Kabir Hassan is a tenured professor in the Department of Economics and Finance at the University of New Orleans, Louisiana, and currently holds a visiting research professorship at Drexel University in Philadelphia, Pennsylvania. He is editor of the Global Journal of Finance and Economics. Dr. Hassan has edited and published many books along with articles in refereed academic journals, and is coeditor (with Mervyn K. Lewis) of Islamic Finance: The International Library of Critical Writings in Economics (Edward Elgar, 2006). A frequent traveler, Dr. Hassan gives lectures and workshops in the United States and abroad, and has presented over 100 research papers at professional conferences [mhassan@uno.edu].
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INTRODUCTION Banking in the form in which it exists today is comparatively of recent origin. Before the advent of modern banking, direct finance, where the owner of capital deals directly with the user of capital, was the customary mode of transference of funds from savers to investors. Perhaps the With the progress of trade and industry and increased financing most striking requirements of productive enterprises, direct finance proved an feature in the inadequate mechanism for such transference and banks emerged on the scene to undertake financial intermediation between savers and structure of modern banking investors. Furthermore, in modern times, they emerged as organizations that engage in any or all of the various functions of banking and finance is the use of credit (i.e., receiving, collecting, transferring, paying, lending, investing, dealing, exchanging, and servicing money and claims to money both institutions of domestically and internationally; Woelfel, 1993, p. 69). In its more accumulated specific sense, however, the term bank refers to institutions providing wealth. deposit facilities for the general public. Perhaps the most striking feature in the structure of modern banking and finance is the use of credit institutions of accumulated wealth. Loans based on deposit funds provide financial support of a wide variety of business and industrial enterprises. By means of this credit function, banks occupy a very important position in a modern economy. Through the process of financial intermediation between savers and investors, they exert immense employment and income generation effects, which ultimately help in economic advancement and social welfare. Another social welfare aspect of banks is through the provision of a return to depositors who are mainly small savers and include such weaker sections of the society as widows, disabled orphans, and the aged who could otherwise make no profitable use of their savings. Furthermore, the banks are manufactories of credit (Kniffin, 1937, p. 31) that serve the community and keep the wheels of commerce and industry revolving. By offering opportunities for investment and safe custody of deposits, they stimulate the habit of saving and discourage hoarding or the unproductive use of surplus wealth, thus promoting investment and the growth of capital. A wise banking policy may go a long way toward mitigating the shocks of an economic crisis, while a banking system, if badly constructed or badly handled, is capable of inflicting great harm on trade and industry and may even upset the whole economy. We describe the banking system and the regulatory conditions of Islamic banking in Bangladesh in this article. Specifically, we focus
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on the shortcomings of the regulatory framework and how the deficiencies can be overcome. We also enumerate how Islamic banking can be made a viable alternative banking system in Bangladesh. In this regard, we explain the main differences between a conventional interest-based banking system and an interest-free Islamic banking system. We utilize data collected from the Bank Scope and Individual Banking financial statements to The Government of Bangladesh show the operational differences of these two banking systems in Bangladesh. We finally conclude the article with specific policy rechas attached ommendations. much importance to expanding banking activities.

THE BANKING SYSTEM OF BANGLADESH

Current Status of Banking System

The Government of Bangladesh has attached much importance to expanding banking activities. In the decade after liberation, there was a tremendous growth of bank branches and expansion of bank business in both volume and dimension. In order to foster the economic growth and socioeconomic development of the country, the Bangladesh government in 19721 nationalized the countrys banking system, with the exception of branches of eight foreign banks. More recently, however, significant changes have taken place in the banking system of the country. Government policy has become one of encouraging the private sector to play its due role in the economic development of the country, and the government has allowed the setting up of commercial and investment banks in the private sector. In response to the new policy, a number of private commercial and investment banks have been set up and have started functioning. Overall, the banking system of Bangladesh now consists of Bangladesh Bank (BB) as the central bank, and 51 commercial banks comprising four nationalized commercial banks (NCB), five government-owned specialized banks, 29 domestic private banks, and 13 foreign commercial banks. The system is dominated by the four nationalized commercial banks, which together controlled more than 54% of deposits and operated 3,612 branches (58% of the total) as of June 30, 2001. Of the five government-owned specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to meet the credit needs of the agricultural sector, while two others (Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangtha) are for extending term loans to the industrial sector. The fifth bank (Karmasangstan Bank) provides loans to the youth with the sole purpose of reducing unemployment of skilled and semiskilled workers in the country. Of the 51 local and foreign banks, six are Islamic and the
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Banking regulations provide a working framework for banking companies that accept deposits from the public for lending or investment.

rest are conventional banks.2 All private- and public-sector banks operating in Bangladesh with different paid-up capital and reserves having a minimum aggregate value of Tk. 5 million and conducting their affairs to the satisfaction of Bangladesh Bank have been declared as scheduled banks in terms of Section 37 (2) of the Bangladesh Bank Order 1972. Currently, in terms of Section 13 of the Bank Companies Act 1991, the minimum aggregate value is Tk. 200 million.3 The six Islamic banks operating in the private sector are Islami Bank Bangladesh Limited, Al-Baraka Bank Bangladesh Limited, Al-Arafah Islami Bank Limited, Social Investment Bank Limited, Shamil Bank of Bahrain E.C., and Shahjalal Bank Limited. Shamil Bank of Bahrain E.C. (previously known as Faysal Islamic Bank of Bahrain E.C.) is a foreign bank and is the largest Islamic bank in the world. It opened a branch in Bangladesh in 1998. In addition to these Islamic banks, two other private banksPrime Bank Limited and Dhaka Bank Limitedhave opened two Islamic banking branches and an Islamic banking counter, respectively, to deal with the Islamic banking business parallel to their conventional interest-based banking operations since the commencement of the banks in 1995. Also, four Islamic insurance companies (Islamic Insurance Bangladesh Limited, Islamic Commercial Insurance Limited, Takaful Insurance Company Limited, and Far East Islamic Life Insurance Company Limited) are functioning as Islamic financial institutions in Bangladesh.4
Banking Regulations in Bangladesh

Banks and financial institutions in Bangladesh are governed by the Bank Companies Act 1991, the Bangladesh Bank Order 1972, the Securities and Exchange Commission Act 1993, and the Income Tax Ordinance 1984. Banking regulations provide a working framework for banking companies that accept deposits from the public for lending or investment. The task of regulating and monitoring both conventional and Islamic banking systems of Bangladesh is given to Bangladesh Bankthe central bank of the country. As such, Bangladesh Bank has legal authority to supervise and regulate all the banksincluding Islamic banksin Bangladesh. In addition to performing the traditional central banking roles of note issuance and being banker to the government and banks, it formulates and implements monetary policy, manages foreign exchange reserves, and supervises banks and nonbank financial institutions. Its prudential regulations include: minimum capital requirements, limits on loan concentration and insider borrowing and guidelines for asset classification and income recognition. Bangladesh Bank has the power to impose penalties for noncompliance and also to intervene in the man254
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agement of a bank if serious problems arise (Sarker, 1998). It also has the delegated authority of issuing policy directives regarding the foreign exchange regime. It has an issue and a banking control department to carry out its broad objectives, which include: 1. To regulate the issue of the currency and the keeping of In general terms, reserves; 2. To manage the monetary and credit system of Bangladesh, a policy of equal with a view to stabilizing domestic monetary value; treatment for all 3. To preserve the par value of the Bangladesh Taka; conventional and 4. To promote and maintain a high level of production, employ- Islamic banks is ment, and real income in Bangladesh and to foster growth and being followed by development of the countrys productive resources for the Bangladesh national interest.5 Bank. It follows from the above that the Islamic banks in Bangladesh, being part of the financial system, are subject to the regulation and supervision of Bangladesh Bank. In general terms, a policy of equal treatment for all conventional and Islamic banks is being followed by Bangladesh Bank. However, in view of the lack of Islamic financial markets and instruments in the country, Bangladesh Bank had granted some preferential provisions for the development of Islamic banking in Bangladesh. Among these provisions, the following are of great importance: 1. Since there are no profit-and-loss-bearing securities in Bangladesh, Islamic banks have been allowed to maintain their Statutory Liquidity Requirement (SLR) with Bangladesh Bank6 at the rate of 10% of their total deposit liabilities (Cash Reserve Requirement [CRR] at 5% and Supplementary Reserve Requirement [SRR] at 5% in approved securities), whereas the requirement is 20% for conventional banks in Bangladesh. This discriminating provision had allowed the Islamic banks to divert some liquid funds for investment and thereby generate extra profit. 2. Under the indirect monetary policy regime, Islamic banks were allowed independent scope to fix their profit-and-loss sharing (PLS) ratios and markups commensurate with their own policy and banking environment. This freedom in fixing PLS ratios and markup rates has provided scope for Islamic banks to follow the Shariah principles independently. 3. Islamic banks could reimburse 10% of their proportionate administrative cost on a part of their balances held with Bangladesh Bank. This facility has given some scope for enhancement of their profit base (Hassan & Chowdhury, 2004).
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ISLAMIC BANKING REGULATIONS IN BANGLADESH

The Legal Framework of Islamic Banks in Bangladesh

Unlike Bangladesh, in most Muslim countries a special law is passed prior to the establishment of an Islamic bank that specifies the rules and regulations for the institution willing to engage in banking busiIn Bangladesh, ness based on Islamic principles. In Malaysia, for example, the Islamic there is no sepa- Banking Act 1983 was passed by Parliament prior to the establishrate Islamic ment of the Bank Islam Malaysia Berhad in 1983, and this law applies banking act or to any Islamic banking institutions wishing to operate in Malaysia any specific laws (Haron, 1997, p. 174). However, despite having their own laws, or independent Islamic banks in most Muslim countries have to conform to other regulations that laws and regulations. Similarly, in the case of disputes or legal actions control, guide, between banks and their customers, matters are referred to civil and supervise courts. For instance, the commercial transactions of Islamic banks in the functions of Malaysia come within the jurisdiction of the civil court. Therefore, any legal proceedings between Islamic banks and their customers are Islamic banks. to be handled by the normal civil court (Haron, 1997, p. 181). In Bangladesh, there is no separate Islamic banking act or any specific laws or independent regulations that control, guide, and supervise the functions of Islamic banks (Ahmad, 2004). Bangladesh Bank exercises authority over Islamic banks under laws and regulations engineered to control and supervise traditional banks whose goals and functions are different from Islamic banks. Moreover, Bangladesh Bank did not set up any separate department to control and supervise the operation of Islamic banks. Inspection and supervision of Islamic banks operation are being scrutinized by Bangladesh Bank as per general rules and guidelines set for conventional banks. However, all existing Islamic banks of the country are incorporated as companies limited by shares; thus, they are subjected to the Companies Law of the country. They were incorporated as interest-free Shariah-based commercial banks and public limited companies with limited liabilities as well, under the Companies Act 1994 (Act No. 18 of 1994, Section 2). Besides, all kinds of commercial banking services of Islamic banks in Bangladesh are provided by them with their branches to their customers following the provisions of the Bank Companies Act 1991 (Act No. 14 of 1991), Bangladesh Banks directives, and the principles of Islamic Shariah. Among the provisions in these Companies Laws are the effects of incorporation, matters related to finance, management and control of the company, and liquidation. The Bank Companies Act 1991 empowers Bangladesh Bank to issue licenses to carry out banking business in Bangladesh. Pursuant to
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Section 31 of the Act, before granting a license, Bangladesh Bank needs to be satisfied that the following conditions are fulfilled: that the company is or will be in a position to pay its present or future depositors in full as their claims accrue; that the affairs of the company are not being or are not likely to be conducted in a manner detrimental to the interest of its One of the most important present and future depositors; and that, in the case of a company incorporated outside requirements in Bangladesh, the government or law of the country in which it this regard is that is incorporated provides the same facilities to banking compa- the Islamic banks nies registered in Bangladesh as the government or law of have to have Bangladesh grants to banking companies incorporated outside their own constiBangladesh and that the company complies with all applicable tutions called provisions of the Bank Companies Act 1991.7 Memorandums Licenses may be cancelled if the bank fails to comply with the above provisions or ceases to carry on banking business in Bangladesh. Beside the Acts mentioned above, the Securities and Exchange Commission in Bangladesh exercises powers under the Securities and Exchange Commission Act 1993. It regulates financial institutions engaged in capital market activities. Bangladesh Bank exercises powers under the Financial Institutions Act 1993 and regulates institutions engaged in financing activities. There are also various requirements to be adhered to by the Islamic banks like other companies in Bangladesh once they are established under the Companies Acts. One of the most important requirements in this regard is that the Islamic banks have to have their own constitutions called Memorandums and Articles of Association. Articles of Association for an ordinary company basically contain provisions that specify the nature, objectives, and capital structure of the company; regulations on the allotment and issue of shares; call on shares; how the capital may be altered, the calling of general meetings; and the procedure at those meetings. They also prescribe rules for the powers, duties, manner of appointment, share qualification, and proceedings of directors; the secretary and company seal and how dividends are to be declared and reserves provided. In addition to these common provisions, Islamic banks in Bangladesh usually include two more clauses or articles in their Articles of Association. First, there is a clause that prescribes that their operations are free from any element of interest. Second, a clause is included pertaining to the appointment of a Shariah Council/Board.
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The Development of Legal Framework of Islamic Banks in Bangladesh

The laws and regulations that regulate the banking system in Bangladesh were designed to govern the interest-based financial institutions and are thus not applicable to Islamic banks. However, although Islamic banks in Bangladesh have been granted licenses by The setting up of Bangladesh Bank subsequently, at their recommendation, several the internal and clauses were incorporated in the Bank Company Act regarding the mechanism of Islamic banking. Also, some necessary amendments Islamic economics division have been made in the countrys Income Tax Ordinancethe Income Tax Ordinance 1984 (XXXVI of 1984)allowing the under the amount of profit shared by the investment clients with the Islamic Department of banks as expenditure and the amount of profit paid on Mudarabah Research by deposits by the Islamic banks as expenditure. Section 29 of the aforeBangladesh Bank is a major said Ordinance (as amended up to June 2002) reads, under the subdevelopment title Deductions from income from business or profession, In computing the income under the head Income from business or profession, the following allowances and deductions shall be allowed, namely:
. . . the amount of any interest paid or any profit shared with a bank run on Islamic principles in respect of capital borrowed for the purposes of the business or profession; Provided that if any part of such capital relates to replenishing the cash or to any other asset transferred to a newly set-up industrial undertaking whose income is exempted from payment of tax, the amount shall be proportionate part of the interest so paid or the profit so shared having regard to the proportion of such capital so used; any sum paid or credited to any person maintaining a profit and loss sharing account or deposit with a bank run on Islamic principles by way of distribution of profits by the said bank in respect of the said account of deposit.8

Alongside the development of a legal framework of Islamic banking, Bangladesh Bank provides other forms of cooperation with Islamic banks. The setting up of the internal and Islamic economics division under the Department of Research by Bangladesh Bank is a major development in this regard (Ahmad, 2006). Another development, as mentioned earlier in this study, is the special provision that has been made by Bangladesh Bank for the Statutory Liquidity Reserve (SLR) requirement of Islamic banks. In case of need, Bangladesh Bank, as the lender of last resort, may place funds in Mudarabah accounts with
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Islamic banks and share profit in line with the principles of the distribution of profits to Mudarabah depositors. Other major developments include: 1. Incorporating some legal provisions in the amended Bank Companies Act 1991; 2. Using the CAMEL-rating framework9 by Bangladesh Bank for The philosophical foundation of analysis of the operational risks of Islamic banks; and 3. Conducting research in order to devise a separate Islamic an Islamic finanbanking inspection methodology for Islamic banks. cial system, with
banking the

In terms of providing legal support for solving various problems aris- most developed ing from interest-free banking transactions in the present traditional part, goes regulatory system of the country, Bangladesh Bank saw value in havbeyond the ing an independent Islamic Banking Act like Malaysia, Turkey, Jorinteraction of dan, and Kuwait. Such law would incorporate provisions relating to factors of prothe licensing of Islamic banks; the financial requirements and duties duction and ecoof Islamic banks; ownership, control, and management of Islamic nomic behavior. banks; restriction on business, and powers of supervision and control over Islamic banks. A letter issued by Bangladesh Bank to all the Islamic banks and banks having Islamic banking branches and counters on March 15, 1997, sought suggestions on six major areas related to the development of Islamic banking in Bangladesh, including (1) formation of an Islamic money market, (2) establishing a central Shariah Board, (3) preparing an Islamic Banking Act, and (4) constitution of consortiums/syndication by the Islamic banks for large financing.10 After receiving feedback on these issues, Bangladesh Bank subsequently prepared a draft Islamic Banking Act to be included in the Bank Companies Act 1991. Following approval from the Ministry of Law, Justice, and Parliamentary Affairs, introduction of the proposed Islamic Banking Act bill in the Parliament is at an advanced stage.

CONCEPTUAL DIFFERENCES BETWEEN ISLAMIC AND CONVENTIONAL BANKS The philosophical foundation of an Islamic financial system, with banking the most developed part, goes beyond the interaction of factors of production and economic behavior (Nienhaus, 1994). Whereas the conventional financial system focuses primarily on the economic and financial aspects of transactions, the Islamic system places equal emphasis on the ethical, moral, social, and religious dimensions, to enhance equality and fairness for the good of society
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Table 1. Cost of Fixing the Year 2000 Problem Conventional banking

1. The functions and operating modes of conventional banks are based on man-made principles. 2. The investor is assured of a predetermined rate of interest.

Islamic banking
1. The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah. 2. In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur). 3. It also aims to maximize profit, but subject to Shariah restrictions. 4. In the modern Islamic banking system, it has become one of the service-oriented functions of the Islamic banks to collect and distribute zakah. 5. Participation in partnership business is the fundamental function of the Islamic banks. 6. Its scope of activities is wider when compared with a conventional bank. It is, in effect, a multipurpose institution. 7. The Islamic banks have no provision to charge any extra money from the defaulters. 8. It gives due importance to the public interest. Its ultimate aim is to ensure growth with equity. 9. For Islamic banks, it is comparatively difficult to borrow money from the money market. 10. Since it shares profit and loss, Islamic banks pay greater attention to developing project appraisal and evaluations. 11. Islamic banks, on the other hand, place greater emphasis on the viability of the projects. 12. The status of the Islamic bank in relation to its clients is that of partners, investors, and traders. 13. Strictly speaking, an Islamic bank cannot guarantee all its deposits.

3. It aims to maximize profit without any restriction. 4. It does not deal with zakah.

5. Lending money and getting it back with interest is the fundamental function of the conventional banks. 6. Its scope of activities is narrower when compared with an Islamic bank. 7. It can charge additional money (compound rate of interest) in case of defaulters. 8. In it, the banks own interest very often becomes prominent. It makes no effort to ensure growth with equity. 9. For interest-based commercial banks, borrowing from the money market is relatively easier. 10. Since income from the advances is fixed, it gives little importance to developing expertise in project appraisal and evaluations. 11. Conventional banks place greater emphasis on creditworthiness of the clients. 12. The status of a conventional bank in relation to its clients is that of creditor and debtors. 13. A conventional bank has to guarantee all its deposits.

as a whole (Akkas, 1996). The similarities between the two systems are that banks in an Islamic system, although controlled by the rules of Shariah, essentially perform the same functions as those in a conventional system; that is, they act as administrators of the economys payments system and as financial intermediaries (Ebrahim & Joo,
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2001). They are needed in both systems for the same reasonfor the exploitation of imperfections in financial markets. These imperfections include imperfect divisibility of financial claims, imperfect information, transaction costs of search and acquisition, diversification by the surplus and deficit units, and existence of expertise and economies of scale in monitoring transactions (Iqbal & Mirakhor, 1987, p. 3). Financial intermediaries in an Islamic system that oper- Financial interate in accordance with Shariah can reasonably be expected to exhibit mediaries in an economies of scale with respect to these costs, as do their counterIslamic system parts in a conventional system. Just as in the latter system, the Islamic that operate in depository financial intermediaries transform the liabilities of business accordance with into a variety of obligations to suit the tastes and circumstances of the Shariah can reasurplus units (Hassan & Tarek, 2001; Siddiqi, 1983). sonably be
expected to

Due to the nature of their operation, on the other hand, there are difexhibit ferences between Islamic and conventional banking. Conventional economies of banking has been defined as accepting, for the purpose of lending scale with or investing, deposits of money from the public, repayable on respect to these demand or otherwise, and withdrawable by cheque, draft, order or costs, as do their otherwise (Meenai, 1998, p. 3). Islamic banking has been defined counterparts in a by the International Association of Islamic Banks (IAIB) as the conventional Islamic Bank basically implements a new banking concept in that it system. adheres strictly to the rules of Islamic Shariah in the fields of finance and other dealings. Moreover the Bank functioning in this way must reflect Islamic principles in real life. The Bank should work towards the establishment of an Islamic society. Hence, one of its primary goals is the deepening of religious spirit among the people.11 Thus, it is evident that Islamic banking is different from conventional banking in terms of its mission and objectives, and the obligations toward society greater than conventional banks, for the following reasons: 1. To achieve certain philosophical missions of Islamic banking (that is, since God is the Creator and Ultimate Owner of all resources, institutions or persons have a vicegerency role to play in society. Therefore, Islamic banks are not free to do as they wish; rather, they have to integrate moral values with economic action.); 2. To provide credit to those who have the talent and the expertise but cannot provide collateral to the conventional financial institutions, thereby strengthening the grass-roots foundations of society; and 3. To create harmony in society based on the Islamic concept of sharing and caring in order to achieve economic, financial, and political stability (Hassan & Adnan, 1998, 1999).
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Conventional banking is essentially based on the debtor-creditor relationship between the depositors and the bank on the one hand and between the borrowers and the bank on the other, with interest as the price of credit, reflecting the opportunity cost of money. In Islamic banking, the creditor should not take advantage of the borrower (AlOmar & Abdel-Haq, 1996). When money is lent out on the basis of financial rela- interest, often it leads to some kind of injustice. The first Islamic printionships in ciple underlying such kinds of transactions is:
Islam have been participatory in nature and the institution of interest replaced by a principle of participation in profit and loss.
Deal not unjustly, and you shall not be dealt with unjustly [2:279].

Accordingly, commercial banking in an Islamic framework is not based on the debtor-creditor relationship (Hassan & Tariq, 1992). The second principle regarding financial transactions in Islam is that there should not be any reward without taking a risk. This principle is applicable to both labor and capital (Ahmad, 1993). As no payment is allowed for labor, unless it is applied to work, there is no reward for capital unless it is exposed to business risk (A. Ahmad, 1995, p. 17; Hassan, 1999). Financial intermediation in an Islamic framework has been developed on the basis of the above two principles. Consequently, financial relationships in Islam have been participatory in nature and the institution of interest replaced by a principle of participation in profit and loss (Chapra, 1985). That means a fixed (or predetermined) rate of interest is replaced by a variable rate of return based on real economic activities (Mangla & Uppal, 1990, pp. 179, 185, 215). The distinct characteristics that provide Islamic banking with its main points of departure from the traditional interest-based commercial banking system are: (a) the Islamic banking system is essentially a profit-and-loss sharing system and not an interest banking system and (b) investment (loans and advances in the conventional sense) under this system of banking must serve simultaneously both the benefit to the investor and the benefit of the local community as well. The distinguishing features of the conventional banking and Islamic banking are summarized in Table 1. In spite of the differences between the Islamic and conventional banks, both have something in common. Since Islamic banks do not rent money, and therefore do not charge interest, they have developed some investment techniques such as bai murabahah, musharakah, and mudarabah in order to invest money and make profit (Haron, 2004). In

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Table 2. Asset Quality Ratios for Bangladesh Banking System (Average 19942001 Period) Islami Bank Bangladesh Limited (IBBL) Public
Loan Loss Reserve/ Gross Loans Loan Loss Provision/ Net Interest Revenue Loan Loss Reserve / Impaired Loans Impaired Loans/ Gross Loans NCO/Average Gross Loans NCO/Net Income Before Loan Loss Provision 7.29 62.33w n.a. n.a. 1.02 3.07b 36.56 18.00w 14.75 0.09

Specialized Governmental Credit Islamic Commercial Institutions

4.47 51.42 63.03 10.35b 0.89w 3.64 33.54 30.23 11.18 0.27b 13.38w 0.12b 179.11b 32.22 0.08

47.00

35.73w

35.49

1.63

27.48b

b: best outcome w: worst outcome Data Source: Bank Scope (2003).

any of these techniques, profitability and installment of repayment are identified beforehand. In addition, some Islamic banks practice certain forms of leasing. Many of the services handled by conventional banks and not related to interest, such as letters of credits, collections, foreign exchange, financial advising, and the like, are performed by Islamic banks. Some Muslim banks handle a large percentage of the Islamic banks money in the commodities markets. If it is considered that banks and financial institutions measure their success in terms of return on assets (ROA), the commodity transaction can be developed to achieve the goals of the parties concernedthe Islamic bank, the conventional bank, and the client of the conventional bank (Qasim, 1986, pp. 1920).

OPERATIONAL DIFFERENCES BETWEEN ISLAMIC AND CONVENTIONAL BANKS We have collected balance-sheet and income-statement data on the banking system in Bangladesh. The primary source of data is Bank Scope, and the secondary source of data is the Islami Bank Bangladesh Limited. Table 2 shows the average asset quality ratios for the Bangladeshi Banking System, classified by type of institutions, and the same indices for Islami Bank Bangladesh Limited (IBBL). The first ratio, Loan Loss Reserve/Gross Loans, indicates how much of the total portfolio has been provided for but not charged off.
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There is very little difference among public, commercial, and Islamic banks in Loan Loss Provision/Net Interest Revenue is the relationship loan loss reserve between provisions in the profit-and-loss account and the interest income over the same period. Ideally, this ratio should be as low as ratio.

Given a similar charge-off policy, the higher the ratio is, the poorer the quality of the loan portfolio. In this case, specialized governmental credit institutions have the worst ratio (Huq, 1996). The Government of Bangladesh uses these outlets to direct credit to socially desirable sectors, and hence they have less than normal performances. There is very little difference among public, commercial, and Islamic banks in loan loss reserve ratio. The IBBL shows worse performance compared to other commercial banks, but better than the specialized governmental credit institutions sector.

possible. In a well-run bank, if the lending book is higher in risk, this would be reflected by higher interest margins. If the ratio deteriorates, this means that risk is not being properly remunerated by margins. There is not much difference between public and private commercial banks in this ratio. Specialized governmental credit institutions have the best ratio, but it does not reflect their good performance because they are making enough loan loss provision in their financial statements. The IBBL has the worst ratio, even worse than those of Islamic banks as a group. Loan Loss Reserve/Impaired Loans (nonperforming loans) relates loan loss reserves to nonperforming or impaired loans. The higher this ratio is, the better provided the bank is, and the better the loan quality. The Islamic banks have the best performance according to this ratio, followed by private commercial banks and public banks. Impaired Loans (nonperforming loans)/Gross Loans is a measure of the amount of total loans, which are doubtful. The lower this figure is, the better the asset quality. Islamic banks show the best ratio, followed by private commercial banks and public commercial banks. Net Charge-Off (NCO), or the amount written off from loan loss reserves less recoveries, is measured as a percentage of the gross loans. It indicates what percentage of todays loans have been finally been written off the books. The lower this figure is, the better the performance. In this measure, the Islamic banks performance is less than the other banks. Finally, NCO/Net Income Before Loan Loss Provision measures charge-offs against income generated in the year. The lower this figure is, the better the performance. The private commercial banks have the best performance in this measure.
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Table 3. Capital Ratios for Bangladesh Banking System (Average 19942001 Period) Islami Bank Bangladesh Limited (IBBL) Public
Equity/Total Assets Equity/Net Loans Equity/Customer and Short-Term Funding Equity/Liabilities Capital Funds/ Total Assets Capital Funds/ Net Loans Capital Funds/ Customer and ShortTerm Funding Capital Funds/ Liabilities 5.32b 13.59b 2.71 4.76

Specialized Governmental Credit Islamic Commercial Institutions

4.38 10.60 3.31 5.76 1.96w 2.82w

6.47b 5.63b n.a. n.a.

3.03 2.79 2.71 4.76

5.19 4.60 4.38b 10.60b

3.87 3.46 3.31 5.76

2.49w 1.26w 1.69w 2.40w

n.a. 5.63

3.03 2.79

5.19b 4.60b

3.87 3.46

2.15w 0.97w

b: best outcome w: worst outcome Data Source: Bank Scope (2003).

In summary, we cannot conclusively argue which type of bank has the best asset quality performance. There is basically no difference between Islamic banks and private commercial banks. The fact that the specialized governmental credit institutions have better asset quality than others is not surprising, because these institutions are subsidized by the government. Table 3 shows various measures of capital ratios. All the capital ratios are ways of looking at the equity funding of the balance sheet and of looking at capital adequacy. For example, the Equity/Total Assets ratio measures the amount of protection afforded to the bank by the equity they invested in it. The higher these ratios are, the more the protection. Equity/Net Loans measures the equity cushion available to absorb losses on the loan book. Equity/Customer and ShortTerm Funding measures the amount of permanent funding relative to short-term, potentially volatile funding. The higher the ratio is, the better the performance. Equity/Liabilities is simply another way of looking at the equity funding of the balance sheet and is another way of looking at capital adequacy. In capital ratio measures, Islamic banks are in general the best capitalized, followed by commercial and public banks. Commercial banks have better capital ratios than those
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Table 4. Operations Ratios for Bangladesh Banking System (Average 19942001 Period) Islami Bank Bangladesh Limited (IBBL) Public
Net Profit Margin Net Interest Income/ Average Assets Other Operating Income/Average Assets Noninterest Expenses /Average Assets Pretax Operating Income/Average Assets Nonoperating Items and Taxes/Average Assets Return on Average Assets (ROAA) Return on Average Equity (ROAE) Dividend Pay-Out Income Net of Distribution/Average Equity Nonoperating Items/ Net Income Cost to Income Ratio Recurring Earning Power
b: best outcome w: worst outcome Source: Bank Scope (2003).

Specialized Governmental Credit Islamic Commercial Institutions

1.03 0.76 1.77b 1.52b 2.45b 2.78 1.47b 0.62w 0.85b 52.97b 0.24w 0.15w 0.42w 3.19w 3.81w

1.41 1.00

1.00 0.85

2.29 2.30

1.21 1.89

2.04 2.19b

1.00

0.27

1.03

0.15 0.85 17.92 46.88

0.06b 0.21 7.16

0.57 0.45 7.04w 19.45 0.24w 123.19 71.31 2.24

0.10 3.33w

11.95 41.39 58.98 1.87

8.74 27.18 89.86w 0.25

49.45b 43.03 64.49b 2.57b 2.67w

of public commercial banks. The specialized banks have the worst ratio. The IBBL has the best capital adequacy performance among all commercial banks and specialized banks. Table 4 presents the operational ratios for the Bangladeshi banking system. The first three ratios, Net Interest Margin, Net Interest Income/Average Assets, and Other Operating Income/Average Assets, are measures of productivity of the assets (Ahmed, 1999; Hassan & Abdel-Hamid, 2003). The net interest margin is expressed as Net Interest Income/Earning Assets. The higher the ratio, the cheaper the funding or the higher the margin the bank is commanding. Higher margins and profitability are desirable so long as the asset quality is being maintained. Other Operating Income/Average Assets
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shows fee income earned by the banks. As long as this is not volatile trading income, it is a lower risk form of income. Commercial banks show the best performance in this category. Islamic banks still have to catch up with their conventional counterparts in improving their operational performance. The fourth ratio, Noninterest Expenses or Overheads Plus Provi- Islamic banking funding operasions, gives a measure of the cost side of the banks performance relative to the assets invested. The lower the ratio is, the better the per- tions are differformance. Islamic banks have the best performance in this category. ent from those of
private commer-

Pretax Operating Income/Average Assets measures the operating per- cial banks, and formance of the bank before tax and unusual items. This is a good we find Islamic measure of profitability unaffected by one-off nontrading activities. banks have The higher this value is, the better the performance. Again, commer- more nonoperatcial banks show the best outcome, followed by Islamic banks. Non- ing income than operating Items & Taxes/Average Assets measures the costs and tax commercial as a percentage of assets. The lower the ratio is, the better the perforbanks do. mance. Public banks have the lowest ratio, because they are owned by the government and do not pay taxes directly. The commercial banks have the worst ratio, because they have to pay taxes to the Exchequer. Return on Average Equity (ROAE) and Return on Average Assets (ROAA) measure the performance relative to equity and assets, respectively. There is no difference between private commercial banks and IBBL in ROAA, but private commercial banks have better ROAE precisely because their leverage ratios are higher than IBBL. Islamic banks and public commercial banks have almost similar performance ratios. Income Net of Distribution/Average Equity is the return on equity after deducting the dividend from the return and it shows by what percentage the equity has increased from internally generated funds. The higher the ratio is, the better the performance. Commercial banks present the best performance, followed by IBBL. Nonoperating Items/Net Income shows the percentage of unusual income generated by banking activities. Islamic banking funding operations are different from those of private commercial banks, and we find Islamic banks have more nonoperating income than commercial banks do. Cost to Income Ratio measures the overheads or costs of running the bank. It is a measure of efficiency, and the higher the ratio is, the worse
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Table 5. Liquidity Ratios for Bangladesh Banking System (Average 19942001 Period) Islami Bank Bangladesh Limited (IBBL) Public
Interbank Ratio Net Loans/Total Assets Net Loans/Customer and Short-Term Funding Net Loans/Total Deposits and Borrowing Liquid Assets/ Customer and Short-Term Funding Liquid Assets/ Total Deposits and Borrowing
b: best outcome w: worst outcome Source: Bank Scope (2003).

Specialized Governmental Credit Islamic Commercial Institutions

230.48 52.61b 61.99b 61.99b 32.80b 32.80b 65.92w 89.50w 89.42w 4.96w 4.96w

54.67 66.57 57.18b

57.35

55.59

64.35

65.46

31.47

63.94

65.45

32.77

14.60

27.55

54.67

14.51

27.54

the performance. The IBBL has the best performance ratio, followed by the private commercial banks and public banks (Hassan & Muzahidul, 2003). Recurring Earning Power measures tax profits, adding back provisions for bad debts as a percentage of total assets. In other words, this is a measure of asset performance without deducting provisions. The commercial banks have the best performance in this measure, followed by Islamic banks and public commercial banks. In summary, commercial private banks have the highest operating performance, followed by Islamic banks and public banks. Specialized governmental credit institutions and public banks do not have comparably good performance results. Even thought they are nonprofit organizations, they should improve their performance to ensure their existence in the long run. Finally, IBBL shows better ratios than the Islamic banks average. Table 5 shows the liquidity ratios for the Bangladeshi banking system. With the exception of Net Loans/Total Assets, Islamic banks present the higher values, confirming the fact that the Islamic banks have excess liquidity. Net Loans/Total Assets indicates what percentage of the assets of the bank are tied up in loans. The higher the ratio is, the less liquid the bank is. Net Loans/Customer and Short-Term Funding is another measure of liquidity, with a high number showing a
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worse liquidity measure. The higher Net Loans/Total Deposits and Borrowing is, the lower the liquidity of the bank is. The higher Liquid Assets/Customer and Short-Term Funding is, the higher the liquidity. Specialized governmental credit institutions are highly illiquid. The IBBL has ratios similar to the Islamic banking sector average.
Islamic banks in Bangladesh should recognize the fact that their success in abolishing interest has been only partial and they have a long way to go in their search for a satisfactory alternative to interest.

THE PROSPECTS OF ISLAMIC BANKS IN BANGLADESH The future of Islamic banks hinges, by and large, on their ability to find a viable alternative to interest for financing all types of loans. Therefore, Islamic banks in Bangladesh should recognize the fact that their success in abolishing interest has been only partial and they have a long way to go in their search for a satisfactory alternative to interest. Simultaneously, Islamic banks need to improve their managerial capabilities by training their personnel in project appraisal, monitoring, evaluation, and performance auditing (Hassan & Mahmood, 2001). Moreover, the future of Islamic banks in Bangladesh also depends on developing and putting into practice such accounting standards that provide timely and reliable information of the type that the Islamic banks would require for profit sharing, rent sharing, or cost-plus financing. These standards are yet to be developed. The Islamic banks would have to work hard to pursue their clients to accept these standards so that a reliable information base is established. In this light, Islamic banking in Bangladesh would be regarded as Islamically successful in the future if it succeeds simultaneously both in eradicating interest from its transactions and in promoting commerce and trade. Islamic banks may and should concentrate exclusively on acceptable and profitable economic activity, such as trading, for instance, in commodities, property investment, property development, and asset leasing. They should solicit deposits for direct investment in those activities and trade, therefore, as quasi-investment banks. At the same time, they cannot, like any other financial institution, ignore the realities and costs of inflation, which permeate the international economy. They can best solve this problem by being profitable enough to meet the need to maintain the value of their depositors funds. It might be argued that Islamic banks can become complacent and take it for granted that they have a captive market in the Muslim masses who will come to them on religious grounds. Such complacency seems more pronounced in countries with only one Islamic bank. Many Muslims find it more convenient to deal with
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The future of Islamic banking in Bangladesh depends upon it proving its usefulness to the nation from the point of view of socially responsible investments.

conventional banks and have no qualms about shifting their deposits between Islamic banks and conventional ones depending on which bank offers a better return. This might suggest a case for more Islamic banks in those countries, so as to force the banks to be more innovative and competitive. Another solution would be to allow the conventional banks to undertake equity financing and/or to operate Islamic counters or windows, subject to strict compliance with Shariah rules. It is also suggested that some specialized Islamic financial institutions such as mudarabah banks, murabahah banks, and musharakah banks establish in the country to compete with one another and provide the best possible services for the clients. Both the survival and vitality of Islamic banks depend ultimately on the quality of the services offered to clients (Khan, 1986). Failure to provide the full range of high-quality services will inevitably mean that clients will switch from the Islamic counters to conventional banks (Khan, 270). The Islamic banks should, as a first step, learn from the techniques and experience of conventional banking in order to improve their marketing techniques and define and deliver services to clients. Second, the Islamic banks must institute a formal, structured staff-training program. The staff needs training in the relevant areas of Islamic law, as well as in conventional financial techniques (Ahmad, 2001). The future of Islamic banking in Bangladesh depends upon it proving its usefulness to the nation from the point of view of socially responsible investments. There will always be a question mark over the real difference between it and conventional banking. It is important for people to see that Islamic banking gives a tangible form to its religious ideology. The problems and challenges it faces are to prove that it is possible to be both economically productive and compassionate, to seek both economic self-interest and the interest of others, and to show that there is no contradiction between ethics and professionalism, competence in ones field, and a permanent commitment to good work in that field. From this perspective, it might be better if Islamic banks were not floated within the conventional banking framework. Instead, the conventional banking systems operational mechanism ought perhaps to be examined and converted into a PLS system, in view of the likely beneficial impact of the latter on the economy. However, so long as Islamic banks are to operate within the conventional banking framework, the following recommendations seem pertinent.

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Future Policy and Strategy

Islamic banks must simultaneously promote the image of their Islamicity and their solvency as banks. Pilot schemes in some selected areas should be started to test innovative ideas with PLS modes of financing as a major component. Islamic banks should demonstrate that their banking practices are guided by profitability criteria that rest on an efficient allocation of resources and provide true market signals through PLS modes. At the same time, they should monitor and disseminate through various means the impact of their operations on the distribution of income primarily between the bank and the depositors and entrepreneurs, and then on different income groups of the country. A fully equipped research academy within each Islamic bank would assist this function.
Balance Between the Ideals and Practice

Islamic banks, step by step, have to be converted into PLS banks by increasing their percentage share of investment financing.

There seems to be a gap between the ideals and actual practice of Islamic banks in Bangladesh. In their reports, booklets, bulletins, and posters, these banks express their commitment to a just society free from exploitation. While the failure to achieve this goal is attributed mainly to the pervasive influence of conventional banking system itself, a lack of vigilance of the promoters of Islamic banking in realizing the objective is no less to blame. There should be a thorough review of policies that have been pursued by these banks over about two decades, and points of departure have to be identified to redesign their course of action.
Promotion of Distributional Efficiency

The task is more challenging for Islamic banks, as they have to promote their distributional efficiency from all dimensions together with profitability. Islamic banks, step by step, have to be converted into PLS banks by increasing their percentage share of investment financing. The Islamic banks, to do that, can be selective in choosing clients for financing under PLS modes. They should establish a direct functional relationship between the income of the depositors and between the income of the bank and that of the entrepreneurs.
Promotion of Allocative Efficiency

Islamic banks can improve their allocative efficiency by satisfying social welfare conditions in the following manner: a) They should allocate a reasonable portion of their investible funds to social priority sectors such as agriculture (including poultry, fishery, etc.), small and cottage industries, and exportoriented industries.
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b) Once the percentage shares of investible funds are allocated among the sectors of investment financing, the profitability of projects should be the criterion for allocating investment funds. The criterion would be satisfied if more and more projects were financed under PLS modes.
Bangladesh Bankthe central bank of the countryshould have more responsibilities for the promotion of Islamic banking considering its central roles.
Modern Banking Practices

Islamic banks, with a view to facing the growing competition either from fellow Islamic banks or the conventional banks that have launched Islamic banking practices, will have to adapt their functioning in line with modern business practices through improvement of the range of transactions in the banking sector. Thus, it is necessary for them to provide comprehensive banking and investment services to clients and simultaneously to take advantage of modern communication technology.
Responsibility of Central Bank

Bangladesh Bankthe central bank of the countryshould have more responsibilities for the promotion of Islamic banking considering its central roles. It can develop some Islamic monetary and saving instruments and create a separate window for transactions with the conventional banks. It can develop and update its Internal and Islamic Economics Division for analyzing, supervising, monitoring, and guiding purposes, thereby facilitating Islamic banks development in Bangladesh. Government support is also needed to introduce and thereby pass the Islamic Banking Act proposed by Bangladesh Bank. In general, the success of Islamic banking depends heavily on its ability to find a viable alternative to interest financing. The system must recognize and acknowledge that its success in abolishing interest has been only partial, and that it still has a long way to go in its search for a satisfactory alternative. Improved managerial capabilities and training of personnel in project appraisal, monitoring, evaluation, and performance auditing are important prerequisites. So also is putting into practice accounting standards that provide timely and reliable information for profit sharing, rent sharing, or cost-plus financing transactions. Until these are done, it is an uphill task for Islamic banks to persuade clients who are not already persuaded to believe that they, the banks, have a sufficient and reliable information base from which to conduct and expand their business. It is important to remember that the Islamic banking movement in Bangladesh has been in operation for only 22 years, so it is unfair to

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compare its results with those of the conventional banks, which have been established for many decades. Islamic banking is still an ongoing phenomenon. The challenge for Islamic banking is whether and how to go on surviving, then to succeed and so become an established, permanent phenomenon.
It is suggested that Bangladesh Bank should participate directly as a cofinancier on a profit-sharing basis on projects financed by an Islamic bank.

CONCLUSIONS AND POLICY SUGGESTIONS Islamic banks in Bangladesh came into existence with certain objectives, in line with the philosophy of Islamic banking, that imply a direct and specific responsibility on their part to play an effective role in the socioeconomic development of the country. It is apparent that Islamic banks have concentrated on short-term commercial activities to maintain their place in the market. However, achieving and maintaining high profit is also essential for the success of the system. Although the existing Shariah principles of banking and finance are considered sufficient to facilitate all modern banking products and services, they should also include laws, practices, procedures, and instruments that help in the maintenance and special consideration of distributive justice and equity. Areas like the banker-customer relationship, legal underpinnings for the banks products and services, legal considerations varying the types of customers, duties and responsibilities as a paying and collecting banker, legal actions against the customer, aspects of financing, and the like should be reviewed and tailored under Islamic Shariah. Since the two monetary policy instruments used by Bangladesh Bank (namely, open market operations and discount rates) are not applicable to the Islamic banking system (unlike its conventional counterpart), alternative financial instruments permissible in Shariah are recommended to be used by the Islamic banks. It is suggested that Bangladesh Bank should participate directly as a cofinancier on a profit-sharing basis on projects financed by an Islamic bank. The spread of Islamic banking in the country would improve the interregional flows of funds, reduce the disparities in the cost of borrowing, and mobilize investment resources in the rural areas to improve the living standards of the small and marginal farmers. Issues of poverty and unemployment are major ones. Being one of the poorest countries in the world and with limited job opportunities, a large number of university graduates in Bangladesh are unemployed.
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Islamic banks could play an active role through their welfare-oriented activities to create job opportunities for the graduates. Bbai murabahah, or markup-based financing, has gained a singular momentum in Islamic banking operations in Bangladesh. In order to contribute more for the economic development of the country and to encourage their customers to have investment accounts in the banks as well, Islamic banks in Bangladesh should put more of an emphasis on the long-term financing based on mudarabah and musharakah, which are considered as the chief alternative to riba. It is thus proposed that Islamic banks in Bangladesh try to incorporate the principles of the PLS mechanism in their current investment decision and increase the PLS ratio in total investment through implementing special clientele and project-development programs on an urgent basis. Islamic banks depend to a great extent on religious commitments of depositors to maintain their market share rather than competitive and widespread services. Since the majority of depositors in Bangladesh are from low-income groups, Islamic banks should seek to attract more customers through extending a wide range of credit facilities and realizing high returns on investment deposit so as to avoid endangering their market share. In other words, Islamic banks should build their bank-customer relationship on economic rather than religious considerations. Stringent credit policy followed by the Bangladesh Bank needs to be made more flexible so that the banks can direct more finance to certain economic sectors or activities in line with the objectives of the development plan of the country. There can be no doubt that the development goals adopted by Islamic banks in Bangladesh coincide with the needs of the national economy and help accelerate its growth. Islamic banks can extend finance to small investors, producers, craftsmen, fishermen, and small industrialists, particularly those in rural areas. Because of the character of the liability side of Islamic banks, they are capable of financing investment projects of a longterm nature. To reach desired levels of efficiency, Islamic banks in Bangladesh should find more standardized financial instruments and innovations in accordance with the Shariah principles, which will enable them to deal with other interest-based conventional banks. Likewise, Islamic banks should have their own interbank money markets and develop a secondary financial market for Islamic financial products if they wish
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Regulation and Performance of Islamic Banking in Bangladesh

to achieve a true comparison with their conventional counterparts. They must also develop more transparency in financial reporting, auditing, and accounting. In order to achieve their goals, Islamic banks in Bangladesh are expected to increase the rate of savings by attracting into the banking system new savers who refuse to deposit their funds with interestbased conventional banks. They are also expected to pay particular attention to the fundamental attitudes of small savers who have been neglected by their conventional counterparts. Furthermore, it is intended that Islamic banks design an informative program on savings that stresses the development of financial habits and understanding the benefits that occur from savings. Finally, Islamic banks still do not have the legal support of the central bank of the country, which exposes them to great risks. Therefore, it is suggested that Islamic banks in Bangladesh should have their own banking act that can provide legal support to the banks and their customers..

NOTES
1. With the promulgation of the Bangladesh Bank (Nationalisation) Order 1972, all branches of the then-commercial banks of the country were classified under six nationalized commercial banks (NCBs)Sonali Bank, Janata Bank, Agrani Bank, Pubali Bank, Rupali Bank, and Uttara Bank. Since then. the Pubali, Rupali, and Uttara Banks have been put in the private sector and have been functioning as private banks from November 5, 1996. 2. Bangladesh Bank Web site (www.bangladesh-bank.org) 3. Bangladesh Bank (1999). 4. Islami Bank Bangladesh Limited (2003, p. 53). 5. Bangladesh Bank Web site (www.bangladesh-bank.org) 6. All scheduled banks in Bangladesh have to maintain their Statutory Cash Reserve and Liquidity Reserve with Bangladesh Bank in terms of Sections 25 and 33, respectively, of the Bank Companies Act 1991 (Act No. 14 of 1991). 7. Ministry of Law, Justice, and Parliamentary Affairs (1991) 8. National Board of Revenue (1984), Section 29, Clauses III and IV. 9. The acronym CAMEL stands for capital, assets, management, earnings, and liquidity. It is a measure of the relative soundness of a bank and is calculated on a 15 scale, with 1 being a strong performance. 10. Bangladesh Bank (1997). 11. International Association of Islamic Banks (IAIB) (2001).

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