Final
-
Upload
sheikh-abu-musa -
Category
Documents
-
view
310 -
download
0
Transcript of Final
1
1 Introduction
11 Background
Bangladesh is the third largest Muslim country in the world with around 135 million
populations of which 90 percent are Muslim The people of this country are deeply
committed to Islamic way of life as enshrined in the Holy Quran and the Sunnah
Naturally it remains a deep cry in their hearts to fashion and design their economic lives
in accordance with the percepts of Islam The establishment of Islami Bank Bangladesh
Limited on March 13 1983 as the first of its kind in Southeast Asia was the true
reflection of this inner urge of its people It was both a hope and a challenge to the Islam
loving people of the country in general and the pioneers of the Islamic banking
movement to make it a success In the beginning there was some doubt in the minds of
many people about the viability as well as the sustainability of the Islamic banking
system But the history of two decades of Islamic banking operation in Bangladesh not
only removed this doubt from the minds of the people but also showed how a new
banking concept based on Islamic values could so rapidly establish itself as the most
modern dynamic and popular bank of the country Within this short span of time the
workforce of Islamic banks in Bangladesh in general and Islami Bank Bangladesh
Limited in particular by their strong commitment and tireless effort have been able to
prove the superiority of Islamic banking over conventional banking in every department
of banking operations and services The success of Islamic banks not only gave them
enough floors in the field of banking but also encouraged at least one conventional bank
to convert fully all its operations on Islamic principles (Hassan M K 1999)
The hope and aspiration of the people to run banking system on the basis of Islamic
principle came into reality after the OIC recommendation at its Foreign Ministers
meeting in 1978 at Senegal to develop a separate banking system of their own After 5
years of that declaration in 1983 Bangladesh established its first Islamic bank At
present out of 49 banks in Bangladesh 7 full fledged Islamic Banks and 19 Islamic
Banking branches of 9 conventional banks are working in the private sector on the basis
of Islamic Shariah Islamic banks in Bangladesh since their inception have been gaining
popularity in spite of some problems in their operation (Hassan M K 1999)
2
An important development in Islamic banking in the last few years has been the entry of
some conventional banks in the market and their use of Islamic modes of financing
through their Islamic branches windows or units It necessitates and encourages the
mobilized ion of Islamic banking which includes some of the giants in the banking and
finance industry Bangladesh was not indifferent to this turning move Presently 9
conventional banks have opened 20 Islamic banking branches alongside their interest
based branches These conventional banks should focus on the safeguards that ensure the
Islamic nature of these branches such as separation and compliance with Shariah
Separation of Islamic banking branches includes separation of capital accounts staff
employed and office However the most important thing is compliance with Shariah
There should be strong Shariah supervisory boards in order to prepare the model
agreement to approve the structure of every new operation and lay down the basic
guidelines for each and every mode of financing (Ahmad A U F amp Hassan M K
2007)
The major part of the operational financial resources of Islamic banks is derived from
different types of deposits mobilized on the principles of Al-Wadia (safe custodianship)
and Al-Mudaraba (trust financing) Utilization of fund under the framework of Islamic
banking has opened a multifarious way for making loan (the term ldquoloanrdquo in conventional
banking is called Investment in the Islamic banking system) conforming to Islamic
Shariah Since Islamic banks can not lend on interest they have devised different types
of interest-free financing devices (Alam M N 2000)
Total deposits of the Islamic banks and Islamic banking branches of the conventional
banks stood at Taka 5326 billion at end December 2010 This was 297 percent of the
deposits of all private commercial banks and 175 percent of the deposits of the total
banking system at the end of December 2010 Total investment of the Islamic banks and
the Islamic banking branches of the conventional banks stood at Taka 4929 billion at end
of December 2010 This was 332 percent of the investment of all private banks and 202
percent of the investment of the total banking system of the country (Ahmed E
Rahman Z amp Ahmed R I 2006)
3
12 Problems
The Islamic banking in Bangladesh is facing numerous problems of challenges
Firstly they have not yet been successful in devising an interest-free mechanism to place
their funds on a short-term basis They face the same problem in financing consumer
loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which bring
them a fixed assured return As a result there is a lot of genuine criticism that these banks
have not abolished interest but they have in fact only changed the nomenclature of their
transactions
13 Objectives of the study Objectives of the research consists of both broad and specific
objectives
131 Broad objectives
To explore the challenges and prospects of Islamic Banking in Bangladesh
132 Specific objectives The specific objectives of this study are as follows
To compare the performance and concept of conventional and Islamic banking
in Bangladesh
To identify the possible reasons for variations in the performance of various
categories of banks especially Islamic banks in Bangladesh
To find out the clientsrsquo psychological behavior and religious view to Islamic
banking in Bangladesh
To find out the threats and weaknesses of Islamic Banking in Bangladesh
To find out the opportunities of Islamic Banking in Bangladesh
To suggest possible lines of actions to improve the performance of Islamic
banks in Bangladesh
4
14 Hypotheses
Hypothesis 1
Ho The trend of Islamic banking concept in Bangladesh is rapidly increasing
Ha The trend of Islamic banking concept in Bangladesh is not rapidly increasing
Through our observation and study it is clearly seen that Islamic banking concept is
rapidly increasing
So null hypothesis is accepted and alternative hypothesis is rejected that is the trend of
Islamic banking concept is rapidly increasing
Hypothesis 2
H0 There are differences between traditional banking and islamic banking
Ha There are no differences between traditional banking and islamic banking
Traditional banking deals with the interest but Islamic banking deals with profit
Traditional banks do not have shariah board but Islamic banks have shariah board
Besides traditional banks have fixed interest rate and depositors or investors do not bear
any risk On the contrary the depositors of Islamic banks bear profit or loss Hence
Islamic banks do not provide any fixed rate of return or profit Thus there are difference
between traditional banking and Islamic banking So null hypothesis is accepted and
alternative hypothesis is rejected
Hypothesis 3
H0 Psychological behavior ie religious outlook of customers have strong influence on
the Islamic Banking in Bangladesh
Ha Psychological behavior and religious outlook of customers have not strong influence
on the Islamic Banking in Bangladesh
In our study it is observed that 80 of the respondents said that religious psychological
view is the main criteria for choosing Islamic banks The Psychology is interest is
absolutely forbidden in Islam and on an average the respondents fairly agree that Islamic
banks provide interest free service in Bangladesh
Hence there is a strong impact of psychological outlook on choosing Islamic banking
5
15 Rationale of the Study
The following group might be benefited from our study
Islamic Bank in Bangladesh
Central Bank of Bangladesh
Islamic Researchers in Bangladesh
Others conventional Bank those are practicing Islamic Banking Section
Existing and potential customers
16 Scope and Limitations of the Study
161 Scope of the Study
We studied only the full fledged Islamic banks in Bangladesh and we surveyed on
the potential and existing customers of Islamic banks in Dhaka city due to our time
and budget constraint as well for our convenience
162 Limitations of the Study
The main limitation of our study is time and money
Time Constraint We are regular student of MBA In most of the case we had to
go to the study area after our scheduled class but that time most of the Banks were
busy for closing So they did not interest to response
Scarcity of Fund we did not study our research intensively and rigorously due to
lack of financing Hence some issues have missed deliberately
Others limitations
Difficulty of access to head office of banks
We have been confronted rough behavior by the officials of some banks
Unwillingness of the respondent to response the survey
6
20 Methodology
Our study is based on both primary and secondary data
21 Primary Data Collection
We have collected primary data through questionnaire and census from managers
different of Islamic banks and customers We have conducted census on seven full
fledged of Islamic banks and surveyed on fifty potential and existing customers of
Islamic banks
22 Secondary Data Collection We collected secondary data from the following
sources
Books
Journal
Annual Report of Different Islamic Bank
Bangladesh Bureau of Statistics
Bangladesh Institute of Development Studies
Article
Internet
23 Sample size determination
We have two sample sizes for the study one is for managers and anotherrsquos is for
customers
For the managers the sample is identical to population that is census Population
size is seven for the managers
In regard of customers we adopted the technique of convenience sampling as we
have no idea of population So we use the following procedure for the sample size
of the customers
Sample size n = z2 p qd02
= 1652 05050102
= 680625
= 69
Here Level of Significance=10p=05q=1-05=05d0=Relative Precision=plusmn10
7
We made no capital expenditure for our survey and we use our personal capital
equipments
24 Sample Size The cost of each sample survey is approximately Tk30 We set a
budget for our survey is Tk1500 only So according to the budget we can survey
1500=0+30n
n=50
Here budget allows us a sample size of 50 respondents Thatrsquos why we adjust by the
relative precession according to the budgeted sample
50=1652 0505d02
d0=plusmn1166 ( approximately)
Hence we are willing to accept a precision of plusmn1166 of sample statistic to estimate
population parameter with 90 level of confidence for the survey
25 Pre-testing We conducted a pre- testing or Pilot survey and revised and edited our
questionnaires according to the real field exposure Hence there are some deviations
from the Schema and the questionnaires which were designed early
26 Data analysis We have used the SPSS and Excel to analyze the data We have done
frequency distribution through SPSS and Index ratio through excel program
8
30 Literature Review
31 Development of Islamic banking in the World
The second half of the twentieth century witnessed a major shift of thinking in devising
banking policy and framework on the basis of Islamic Shariah This new thought was
institutionalized at the end of the third quarter of the century and emerged as a new
system of banking called Islamic banking The establishment of the Islamic
Development Bank (IDB) in 1975 gave momentum to the Islamic Banking movement
Since the establishment of IDB a number of Islamic Banking and financial institutions
have been established all over the world irrespective of Muslim and non-Muslim
countries Over the past few decades the Islamic financial industry has rapidly
expanded worldwide Currently about 260 Islamic financial institutions (IFIs) have total
combined assets exceeding $250 billion in more than 57 countries The Islamic
financial market is estimated to grow at annual rates averaging 15 in a year Their
rapid growth has gained considerable attention in international financial circles where
various market participants have recognized promising potentials (Hassan M K 1999)
The Islamic finance market has become extremely sophisticated as well as increasingly
competitive Today virtually all large western financial institutions are involved in
Islamic finance whether through Islamic subsidiaries ldquoIslamic windowsrdquo or the
marketing of Islamic products In recent years a range of new Islamic products have
appeared such as Islamic bonds (or sukuk) and Islamic derivatives While some of
those products are widely accepted others are still controversial (Hassan M K 1999)
32 Genesis of Islamic Banking in Bangladesh
Bangladesh is the third largest Muslim country in the world with around 135 million
populations of which 90 percent are Muslim The hope and aspiration of the people to
run banking system on the basis of Islamic principle came into reality after the OIC
recommendation at its Foreign Ministers meeting in 1978 at Senegal to develop a
separate banking system of their own After 5 years of that declaration in 1983
Bangladesh established its first Islamic bank At present out of 49 banks in
Bangladesh 7 full fledged Islamic Banks and 19 Islamic Banking branches of 9
conventional banks are working in the private sector on the basis of Islamic Shariah
9
Islamic banks in Bangladesh since their inception have been gaining popularity in spite
of some problems in their operation (Sarkar M A A 2004)
33 Islamic Banking Branches in Conventional Banks
An important development in Islamic banking in the last few years has been the entry
of some conventional banks in the market and their use of Islamic modes of financing
through their Islamic branches windows or units It necessitates and encourages the
mobilized ion of Islamic banking which includes some of the giants in the banking
and finance industry Bangladesh was not indifferent to this turning move Presently 9
conventional banks have opened 19 Islamic banking branches alongside their interest
based branches These conventional banks should focus on the safeguards that ensure
the Islamic nature of these branches such as separation and compliance with Shariah
Separation of Islamic banking branches includes separation of capital accounts staff
employed and office However the most important thing is compliance with Shariah
There should be strong Shariah supervisory boards in order to prepare the model
agreement to approve the structure of every new operation and lay down the basic
guidelines for each and every mode of financing (Siddiqi M 2002)
34 Problems Specific to Islamic Banking in Bangladesh
341 Absence of Islamic Money Market
In the absence of Islamic money market in Bangladesh the Islamic banks cannot
invest their surplus fund ie temporary excess liquidity to earn any income rather
than keeping it idle Because all the Government Treasury Bills approved securities
and Bangladesh Bank Bills in Bangladesh are interest bearing Naturally the Islamic
banks cannot invest the permissible part of their Security Liquidity Reserve and liquid
surplus in those securities As a result they deposit their whole reserve in cash with
Bangladesh Bank Similarly the liquid surplus also remains uninvested On the
contrary the conventional banks of the country do not suffer from this sort of
limitations As such the profitability of the Islamic banks in Bangladesh is adversely
affected
10
342 Absence of Suitable Long-term Assets
The absence of suitable long term assets available to Islamic banks is mirrored by lack
of short term tradable financial instruments At present there is no equivalent of an
inter-bank market in Bangladesh where banks could place say over night funds or
where they could borrow to satisfy temporary liquidity needs Trading of financial
instruments is also difficult to arrange when rates of return are not known until
maturity Furthermore it is not clear whether Islamic banks in Bangladesh can utilize
more exotic instruments such as derivatives that are becoming increasingly popular
with conventional banks Obviously these factors place Islamic banking in
Bangladesh at a distinct disadvantage compared to its conventional banking
counterpart
343 Shortage of Supportive and Link Institutions
Any system however well integrated it may be cannot thrive exclusively on its built-
in elements It has to depend on a number of link institutions and so is the case with
Islamic banking For identifying suitable projects Islamic banking can profitably draw
the services of economists lawyers insurance companies management consultants
auditors and so on They also need research and training forums in order to prompting
entrepreneurship amongst their clients Such support services properly oriented
towards Islamic banking are yet to be developed in Bangladesh
344 Organizing Relationship with Foreign Banks
Another important issue facing Islamic banks in Bangladesh is how to organize their
relationships with foreign banks and more generally how to conduct international
operations This is of course an issue closely related to the creation of financial
instruments which would be simultaneously consistent with Islamic principles and
acceptable to interest-based banks including foreign banks
345 Long-term Financing
Islamic Banks stick very closely to the pricing policies of the government They can
not benefit from hidden costs and inputs which elevate the level of prices by certain
entrepreneurs without any justification On the other hand Islamic banks as financial
institutions are even more directly affected by the failure of the projects they finance
This is because the built in security for getting back their funds together with their
11
profits is in the success of the project Islamically it is not lawful to obtain security
from the partner against dishonesty or negligence both of which are very difficult if
not impossible to prove (Ahmad K 2000)
35 The Future of Islamic Banking in Bangladesh
351 Need for Re-organization of the whole financial System
Review of the problems of Islamic banking in general and Islamic banks of
Bangladesh in particular poses a challenging feature for the promotion and survival
of Islamic banks in Bangladesh The policy implication is not that Islamic banks
should never be floated within the conventional banking framework Rather it is the
conventional banking system whose operational mechanism needs to be re-examined
and converted into PLS system consider- ing beneficial impact of the latter on the
economy However as long as Islamic banks are to operate within the conventional
banking framework the recommendations under the following heads may be taken
note of
352 New banking philosophy for the Islamic Banks
There seems to be a gap between the ideals and actual practice of Islamic banks in
Bangladesh In their reports booklets bulletins and posters there banks express their
commitment to striving for establishing a just society free from exploitation Study
shows that a little progress has been achieved so far in that direction Though this
failure is attributed mainly to the pervasive influence of conventional banking system
itself lack of vigilance of the promot- ers of Islamic banking in realizing the
objective is no less to blame There should be a through review of policies that have
been pursued by these banks for about a decade and points of departure have to be
identified to redesign their of action
353 Future Policy and Strategy
The first action that deserves immediate attention is the promotion of the image of
Islamic banks as PLS banks Strategies have to be carefully devised so that the image
of Islamic character and solvency as a bank is simultaneously promoted To this end
Pilot schemes in some very selected areas should be started to test innovative ideas
with profit-loss-sharing modes of financing as major component Islamic banks
should clearly demonstrate by their actions that their banking practices are guided by
12
profitability criterion thereby establishing that only Islamic banking practices ensures
efficient allocation of resources and provide true market signals through PLS modes
Islamic banks should continuously monitor and disseminate through various means
the impact of their operations on the distribution of income primarily between the
bank and the other two parties the depositors and the entrepreneurs and then on
different income groups of the society These presuppose establishment of a fully
equipped research academy in each Islamic bank
354 Stepping for Distributional Efficiency
The task is more challenging for Islamic banks as they have toe promote their
distributional efficiency from all dimensions together with profitability Islamic
banks step by step have to be converted into profit-loss-sharing banks by increasing
their percentage share of investment financing though PLS modes The Islamic banks
to do that can be selective in choosing clients for financing under PLS modes They
should establish direct functional relationship between the income of the depositors
and between the income the income of the bank and that of the entrepreneurs The
relationship improves with share of bank financing under PLS modes increases
355 Promotion of Allocative Efficiency
The Islamic banks can improve their allocative efficiency be satisfying social welfare
conditions in the following manner First they should allocate a reasonable portion of
their investible funds in social priority sectors such as agriculture (including poultry
and fishery) small and cottage industries and export-led industries like garment
shrimp cultivation Secondly when the percentage shares of allocation of investible
funds are determined among the sectors of investment financing profitability of
projects should be the criterion for allocating investment funds The criterion would
be best satisfied if more and more projects were financed under PLS modes
356 Modern banking Policies and practices
Islamic banks with a view to facing the growing competition either fellow-Islamic
banks or the conventional banks which have launched Islamic banking practices will
have to adapts their functioning in line with modern business practices though
improvement and expansion of the range of dealing in the banking sector Thus it is
necessary for them to provide comprehensive banking and investment services to
13
clients and simultaneously to take advantage of modern technological breakthroughs
in areas such as electronic communication computerization etc
357 Government and Central bank Responsibilities
Government should think actively for the promotion of Islamic banking in
Bangladesh considering its pro-develop- ment role It should amend existing financial
laws acts and regulations to create favorable environment conducive to smooth
operation of Islamic banks The bank Reforms Committee may be entrusted to draft
an Islamic Banking Act Government should also allow establishment of Islamic
insurance and other subsidiary companies in order to facilitate their operation
Bangladesh Bank should develop some Islamic Monetary and Saving instruments and
create separate window for transactions with the Islamic banks and a full-fledged
Islamic banking Department for analyzing supervising monitoring and guiding
purpose thereby facilitating Islamic banks for their smooth develop- ment in
Bangladesh
358 Inter-Islamic Bank Co-operation and Perspective Plan
All Islamic banks should come forward to help each others and adopt a perspective
plan say for 20 years for Islamization of the banking system of Bangladesh To
actualize this mission they should set-up immediately and Apex Research Adademy
and a Training Institute designed with modern tools Books and other accessories
(Sarkar M A A 1999)
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
2
An important development in Islamic banking in the last few years has been the entry of
some conventional banks in the market and their use of Islamic modes of financing
through their Islamic branches windows or units It necessitates and encourages the
mobilized ion of Islamic banking which includes some of the giants in the banking and
finance industry Bangladesh was not indifferent to this turning move Presently 9
conventional banks have opened 20 Islamic banking branches alongside their interest
based branches These conventional banks should focus on the safeguards that ensure the
Islamic nature of these branches such as separation and compliance with Shariah
Separation of Islamic banking branches includes separation of capital accounts staff
employed and office However the most important thing is compliance with Shariah
There should be strong Shariah supervisory boards in order to prepare the model
agreement to approve the structure of every new operation and lay down the basic
guidelines for each and every mode of financing (Ahmad A U F amp Hassan M K
2007)
The major part of the operational financial resources of Islamic banks is derived from
different types of deposits mobilized on the principles of Al-Wadia (safe custodianship)
and Al-Mudaraba (trust financing) Utilization of fund under the framework of Islamic
banking has opened a multifarious way for making loan (the term ldquoloanrdquo in conventional
banking is called Investment in the Islamic banking system) conforming to Islamic
Shariah Since Islamic banks can not lend on interest they have devised different types
of interest-free financing devices (Alam M N 2000)
Total deposits of the Islamic banks and Islamic banking branches of the conventional
banks stood at Taka 5326 billion at end December 2010 This was 297 percent of the
deposits of all private commercial banks and 175 percent of the deposits of the total
banking system at the end of December 2010 Total investment of the Islamic banks and
the Islamic banking branches of the conventional banks stood at Taka 4929 billion at end
of December 2010 This was 332 percent of the investment of all private banks and 202
percent of the investment of the total banking system of the country (Ahmed E
Rahman Z amp Ahmed R I 2006)
3
12 Problems
The Islamic banking in Bangladesh is facing numerous problems of challenges
Firstly they have not yet been successful in devising an interest-free mechanism to place
their funds on a short-term basis They face the same problem in financing consumer
loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which bring
them a fixed assured return As a result there is a lot of genuine criticism that these banks
have not abolished interest but they have in fact only changed the nomenclature of their
transactions
13 Objectives of the study Objectives of the research consists of both broad and specific
objectives
131 Broad objectives
To explore the challenges and prospects of Islamic Banking in Bangladesh
132 Specific objectives The specific objectives of this study are as follows
To compare the performance and concept of conventional and Islamic banking
in Bangladesh
To identify the possible reasons for variations in the performance of various
categories of banks especially Islamic banks in Bangladesh
To find out the clientsrsquo psychological behavior and religious view to Islamic
banking in Bangladesh
To find out the threats and weaknesses of Islamic Banking in Bangladesh
To find out the opportunities of Islamic Banking in Bangladesh
To suggest possible lines of actions to improve the performance of Islamic
banks in Bangladesh
4
14 Hypotheses
Hypothesis 1
Ho The trend of Islamic banking concept in Bangladesh is rapidly increasing
Ha The trend of Islamic banking concept in Bangladesh is not rapidly increasing
Through our observation and study it is clearly seen that Islamic banking concept is
rapidly increasing
So null hypothesis is accepted and alternative hypothesis is rejected that is the trend of
Islamic banking concept is rapidly increasing
Hypothesis 2
H0 There are differences between traditional banking and islamic banking
Ha There are no differences between traditional banking and islamic banking
Traditional banking deals with the interest but Islamic banking deals with profit
Traditional banks do not have shariah board but Islamic banks have shariah board
Besides traditional banks have fixed interest rate and depositors or investors do not bear
any risk On the contrary the depositors of Islamic banks bear profit or loss Hence
Islamic banks do not provide any fixed rate of return or profit Thus there are difference
between traditional banking and Islamic banking So null hypothesis is accepted and
alternative hypothesis is rejected
Hypothesis 3
H0 Psychological behavior ie religious outlook of customers have strong influence on
the Islamic Banking in Bangladesh
Ha Psychological behavior and religious outlook of customers have not strong influence
on the Islamic Banking in Bangladesh
In our study it is observed that 80 of the respondents said that religious psychological
view is the main criteria for choosing Islamic banks The Psychology is interest is
absolutely forbidden in Islam and on an average the respondents fairly agree that Islamic
banks provide interest free service in Bangladesh
Hence there is a strong impact of psychological outlook on choosing Islamic banking
5
15 Rationale of the Study
The following group might be benefited from our study
Islamic Bank in Bangladesh
Central Bank of Bangladesh
Islamic Researchers in Bangladesh
Others conventional Bank those are practicing Islamic Banking Section
Existing and potential customers
16 Scope and Limitations of the Study
161 Scope of the Study
We studied only the full fledged Islamic banks in Bangladesh and we surveyed on
the potential and existing customers of Islamic banks in Dhaka city due to our time
and budget constraint as well for our convenience
162 Limitations of the Study
The main limitation of our study is time and money
Time Constraint We are regular student of MBA In most of the case we had to
go to the study area after our scheduled class but that time most of the Banks were
busy for closing So they did not interest to response
Scarcity of Fund we did not study our research intensively and rigorously due to
lack of financing Hence some issues have missed deliberately
Others limitations
Difficulty of access to head office of banks
We have been confronted rough behavior by the officials of some banks
Unwillingness of the respondent to response the survey
6
20 Methodology
Our study is based on both primary and secondary data
21 Primary Data Collection
We have collected primary data through questionnaire and census from managers
different of Islamic banks and customers We have conducted census on seven full
fledged of Islamic banks and surveyed on fifty potential and existing customers of
Islamic banks
22 Secondary Data Collection We collected secondary data from the following
sources
Books
Journal
Annual Report of Different Islamic Bank
Bangladesh Bureau of Statistics
Bangladesh Institute of Development Studies
Article
Internet
23 Sample size determination
We have two sample sizes for the study one is for managers and anotherrsquos is for
customers
For the managers the sample is identical to population that is census Population
size is seven for the managers
In regard of customers we adopted the technique of convenience sampling as we
have no idea of population So we use the following procedure for the sample size
of the customers
Sample size n = z2 p qd02
= 1652 05050102
= 680625
= 69
Here Level of Significance=10p=05q=1-05=05d0=Relative Precision=plusmn10
7
We made no capital expenditure for our survey and we use our personal capital
equipments
24 Sample Size The cost of each sample survey is approximately Tk30 We set a
budget for our survey is Tk1500 only So according to the budget we can survey
1500=0+30n
n=50
Here budget allows us a sample size of 50 respondents Thatrsquos why we adjust by the
relative precession according to the budgeted sample
50=1652 0505d02
d0=plusmn1166 ( approximately)
Hence we are willing to accept a precision of plusmn1166 of sample statistic to estimate
population parameter with 90 level of confidence for the survey
25 Pre-testing We conducted a pre- testing or Pilot survey and revised and edited our
questionnaires according to the real field exposure Hence there are some deviations
from the Schema and the questionnaires which were designed early
26 Data analysis We have used the SPSS and Excel to analyze the data We have done
frequency distribution through SPSS and Index ratio through excel program
8
30 Literature Review
31 Development of Islamic banking in the World
The second half of the twentieth century witnessed a major shift of thinking in devising
banking policy and framework on the basis of Islamic Shariah This new thought was
institutionalized at the end of the third quarter of the century and emerged as a new
system of banking called Islamic banking The establishment of the Islamic
Development Bank (IDB) in 1975 gave momentum to the Islamic Banking movement
Since the establishment of IDB a number of Islamic Banking and financial institutions
have been established all over the world irrespective of Muslim and non-Muslim
countries Over the past few decades the Islamic financial industry has rapidly
expanded worldwide Currently about 260 Islamic financial institutions (IFIs) have total
combined assets exceeding $250 billion in more than 57 countries The Islamic
financial market is estimated to grow at annual rates averaging 15 in a year Their
rapid growth has gained considerable attention in international financial circles where
various market participants have recognized promising potentials (Hassan M K 1999)
The Islamic finance market has become extremely sophisticated as well as increasingly
competitive Today virtually all large western financial institutions are involved in
Islamic finance whether through Islamic subsidiaries ldquoIslamic windowsrdquo or the
marketing of Islamic products In recent years a range of new Islamic products have
appeared such as Islamic bonds (or sukuk) and Islamic derivatives While some of
those products are widely accepted others are still controversial (Hassan M K 1999)
32 Genesis of Islamic Banking in Bangladesh
Bangladesh is the third largest Muslim country in the world with around 135 million
populations of which 90 percent are Muslim The hope and aspiration of the people to
run banking system on the basis of Islamic principle came into reality after the OIC
recommendation at its Foreign Ministers meeting in 1978 at Senegal to develop a
separate banking system of their own After 5 years of that declaration in 1983
Bangladesh established its first Islamic bank At present out of 49 banks in
Bangladesh 7 full fledged Islamic Banks and 19 Islamic Banking branches of 9
conventional banks are working in the private sector on the basis of Islamic Shariah
9
Islamic banks in Bangladesh since their inception have been gaining popularity in spite
of some problems in their operation (Sarkar M A A 2004)
33 Islamic Banking Branches in Conventional Banks
An important development in Islamic banking in the last few years has been the entry
of some conventional banks in the market and their use of Islamic modes of financing
through their Islamic branches windows or units It necessitates and encourages the
mobilized ion of Islamic banking which includes some of the giants in the banking
and finance industry Bangladesh was not indifferent to this turning move Presently 9
conventional banks have opened 19 Islamic banking branches alongside their interest
based branches These conventional banks should focus on the safeguards that ensure
the Islamic nature of these branches such as separation and compliance with Shariah
Separation of Islamic banking branches includes separation of capital accounts staff
employed and office However the most important thing is compliance with Shariah
There should be strong Shariah supervisory boards in order to prepare the model
agreement to approve the structure of every new operation and lay down the basic
guidelines for each and every mode of financing (Siddiqi M 2002)
34 Problems Specific to Islamic Banking in Bangladesh
341 Absence of Islamic Money Market
In the absence of Islamic money market in Bangladesh the Islamic banks cannot
invest their surplus fund ie temporary excess liquidity to earn any income rather
than keeping it idle Because all the Government Treasury Bills approved securities
and Bangladesh Bank Bills in Bangladesh are interest bearing Naturally the Islamic
banks cannot invest the permissible part of their Security Liquidity Reserve and liquid
surplus in those securities As a result they deposit their whole reserve in cash with
Bangladesh Bank Similarly the liquid surplus also remains uninvested On the
contrary the conventional banks of the country do not suffer from this sort of
limitations As such the profitability of the Islamic banks in Bangladesh is adversely
affected
10
342 Absence of Suitable Long-term Assets
The absence of suitable long term assets available to Islamic banks is mirrored by lack
of short term tradable financial instruments At present there is no equivalent of an
inter-bank market in Bangladesh where banks could place say over night funds or
where they could borrow to satisfy temporary liquidity needs Trading of financial
instruments is also difficult to arrange when rates of return are not known until
maturity Furthermore it is not clear whether Islamic banks in Bangladesh can utilize
more exotic instruments such as derivatives that are becoming increasingly popular
with conventional banks Obviously these factors place Islamic banking in
Bangladesh at a distinct disadvantage compared to its conventional banking
counterpart
343 Shortage of Supportive and Link Institutions
Any system however well integrated it may be cannot thrive exclusively on its built-
in elements It has to depend on a number of link institutions and so is the case with
Islamic banking For identifying suitable projects Islamic banking can profitably draw
the services of economists lawyers insurance companies management consultants
auditors and so on They also need research and training forums in order to prompting
entrepreneurship amongst their clients Such support services properly oriented
towards Islamic banking are yet to be developed in Bangladesh
344 Organizing Relationship with Foreign Banks
Another important issue facing Islamic banks in Bangladesh is how to organize their
relationships with foreign banks and more generally how to conduct international
operations This is of course an issue closely related to the creation of financial
instruments which would be simultaneously consistent with Islamic principles and
acceptable to interest-based banks including foreign banks
345 Long-term Financing
Islamic Banks stick very closely to the pricing policies of the government They can
not benefit from hidden costs and inputs which elevate the level of prices by certain
entrepreneurs without any justification On the other hand Islamic banks as financial
institutions are even more directly affected by the failure of the projects they finance
This is because the built in security for getting back their funds together with their
11
profits is in the success of the project Islamically it is not lawful to obtain security
from the partner against dishonesty or negligence both of which are very difficult if
not impossible to prove (Ahmad K 2000)
35 The Future of Islamic Banking in Bangladesh
351 Need for Re-organization of the whole financial System
Review of the problems of Islamic banking in general and Islamic banks of
Bangladesh in particular poses a challenging feature for the promotion and survival
of Islamic banks in Bangladesh The policy implication is not that Islamic banks
should never be floated within the conventional banking framework Rather it is the
conventional banking system whose operational mechanism needs to be re-examined
and converted into PLS system consider- ing beneficial impact of the latter on the
economy However as long as Islamic banks are to operate within the conventional
banking framework the recommendations under the following heads may be taken
note of
352 New banking philosophy for the Islamic Banks
There seems to be a gap between the ideals and actual practice of Islamic banks in
Bangladesh In their reports booklets bulletins and posters there banks express their
commitment to striving for establishing a just society free from exploitation Study
shows that a little progress has been achieved so far in that direction Though this
failure is attributed mainly to the pervasive influence of conventional banking system
itself lack of vigilance of the promot- ers of Islamic banking in realizing the
objective is no less to blame There should be a through review of policies that have
been pursued by these banks for about a decade and points of departure have to be
identified to redesign their of action
353 Future Policy and Strategy
The first action that deserves immediate attention is the promotion of the image of
Islamic banks as PLS banks Strategies have to be carefully devised so that the image
of Islamic character and solvency as a bank is simultaneously promoted To this end
Pilot schemes in some very selected areas should be started to test innovative ideas
with profit-loss-sharing modes of financing as major component Islamic banks
should clearly demonstrate by their actions that their banking practices are guided by
12
profitability criterion thereby establishing that only Islamic banking practices ensures
efficient allocation of resources and provide true market signals through PLS modes
Islamic banks should continuously monitor and disseminate through various means
the impact of their operations on the distribution of income primarily between the
bank and the other two parties the depositors and the entrepreneurs and then on
different income groups of the society These presuppose establishment of a fully
equipped research academy in each Islamic bank
354 Stepping for Distributional Efficiency
The task is more challenging for Islamic banks as they have toe promote their
distributional efficiency from all dimensions together with profitability Islamic
banks step by step have to be converted into profit-loss-sharing banks by increasing
their percentage share of investment financing though PLS modes The Islamic banks
to do that can be selective in choosing clients for financing under PLS modes They
should establish direct functional relationship between the income of the depositors
and between the income the income of the bank and that of the entrepreneurs The
relationship improves with share of bank financing under PLS modes increases
355 Promotion of Allocative Efficiency
The Islamic banks can improve their allocative efficiency be satisfying social welfare
conditions in the following manner First they should allocate a reasonable portion of
their investible funds in social priority sectors such as agriculture (including poultry
and fishery) small and cottage industries and export-led industries like garment
shrimp cultivation Secondly when the percentage shares of allocation of investible
funds are determined among the sectors of investment financing profitability of
projects should be the criterion for allocating investment funds The criterion would
be best satisfied if more and more projects were financed under PLS modes
356 Modern banking Policies and practices
Islamic banks with a view to facing the growing competition either fellow-Islamic
banks or the conventional banks which have launched Islamic banking practices will
have to adapts their functioning in line with modern business practices though
improvement and expansion of the range of dealing in the banking sector Thus it is
necessary for them to provide comprehensive banking and investment services to
13
clients and simultaneously to take advantage of modern technological breakthroughs
in areas such as electronic communication computerization etc
357 Government and Central bank Responsibilities
Government should think actively for the promotion of Islamic banking in
Bangladesh considering its pro-develop- ment role It should amend existing financial
laws acts and regulations to create favorable environment conducive to smooth
operation of Islamic banks The bank Reforms Committee may be entrusted to draft
an Islamic Banking Act Government should also allow establishment of Islamic
insurance and other subsidiary companies in order to facilitate their operation
Bangladesh Bank should develop some Islamic Monetary and Saving instruments and
create separate window for transactions with the Islamic banks and a full-fledged
Islamic banking Department for analyzing supervising monitoring and guiding
purpose thereby facilitating Islamic banks for their smooth develop- ment in
Bangladesh
358 Inter-Islamic Bank Co-operation and Perspective Plan
All Islamic banks should come forward to help each others and adopt a perspective
plan say for 20 years for Islamization of the banking system of Bangladesh To
actualize this mission they should set-up immediately and Apex Research Adademy
and a Training Institute designed with modern tools Books and other accessories
(Sarkar M A A 1999)
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
3
12 Problems
The Islamic banking in Bangladesh is facing numerous problems of challenges
Firstly they have not yet been successful in devising an interest-free mechanism to place
their funds on a short-term basis They face the same problem in financing consumer
loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which bring
them a fixed assured return As a result there is a lot of genuine criticism that these banks
have not abolished interest but they have in fact only changed the nomenclature of their
transactions
13 Objectives of the study Objectives of the research consists of both broad and specific
objectives
131 Broad objectives
To explore the challenges and prospects of Islamic Banking in Bangladesh
132 Specific objectives The specific objectives of this study are as follows
To compare the performance and concept of conventional and Islamic banking
in Bangladesh
To identify the possible reasons for variations in the performance of various
categories of banks especially Islamic banks in Bangladesh
To find out the clientsrsquo psychological behavior and religious view to Islamic
banking in Bangladesh
To find out the threats and weaknesses of Islamic Banking in Bangladesh
To find out the opportunities of Islamic Banking in Bangladesh
To suggest possible lines of actions to improve the performance of Islamic
banks in Bangladesh
4
14 Hypotheses
Hypothesis 1
Ho The trend of Islamic banking concept in Bangladesh is rapidly increasing
Ha The trend of Islamic banking concept in Bangladesh is not rapidly increasing
Through our observation and study it is clearly seen that Islamic banking concept is
rapidly increasing
So null hypothesis is accepted and alternative hypothesis is rejected that is the trend of
Islamic banking concept is rapidly increasing
Hypothesis 2
H0 There are differences between traditional banking and islamic banking
Ha There are no differences between traditional banking and islamic banking
Traditional banking deals with the interest but Islamic banking deals with profit
Traditional banks do not have shariah board but Islamic banks have shariah board
Besides traditional banks have fixed interest rate and depositors or investors do not bear
any risk On the contrary the depositors of Islamic banks bear profit or loss Hence
Islamic banks do not provide any fixed rate of return or profit Thus there are difference
between traditional banking and Islamic banking So null hypothesis is accepted and
alternative hypothesis is rejected
Hypothesis 3
H0 Psychological behavior ie religious outlook of customers have strong influence on
the Islamic Banking in Bangladesh
Ha Psychological behavior and religious outlook of customers have not strong influence
on the Islamic Banking in Bangladesh
In our study it is observed that 80 of the respondents said that religious psychological
view is the main criteria for choosing Islamic banks The Psychology is interest is
absolutely forbidden in Islam and on an average the respondents fairly agree that Islamic
banks provide interest free service in Bangladesh
Hence there is a strong impact of psychological outlook on choosing Islamic banking
5
15 Rationale of the Study
The following group might be benefited from our study
Islamic Bank in Bangladesh
Central Bank of Bangladesh
Islamic Researchers in Bangladesh
Others conventional Bank those are practicing Islamic Banking Section
Existing and potential customers
16 Scope and Limitations of the Study
161 Scope of the Study
We studied only the full fledged Islamic banks in Bangladesh and we surveyed on
the potential and existing customers of Islamic banks in Dhaka city due to our time
and budget constraint as well for our convenience
162 Limitations of the Study
The main limitation of our study is time and money
Time Constraint We are regular student of MBA In most of the case we had to
go to the study area after our scheduled class but that time most of the Banks were
busy for closing So they did not interest to response
Scarcity of Fund we did not study our research intensively and rigorously due to
lack of financing Hence some issues have missed deliberately
Others limitations
Difficulty of access to head office of banks
We have been confronted rough behavior by the officials of some banks
Unwillingness of the respondent to response the survey
6
20 Methodology
Our study is based on both primary and secondary data
21 Primary Data Collection
We have collected primary data through questionnaire and census from managers
different of Islamic banks and customers We have conducted census on seven full
fledged of Islamic banks and surveyed on fifty potential and existing customers of
Islamic banks
22 Secondary Data Collection We collected secondary data from the following
sources
Books
Journal
Annual Report of Different Islamic Bank
Bangladesh Bureau of Statistics
Bangladesh Institute of Development Studies
Article
Internet
23 Sample size determination
We have two sample sizes for the study one is for managers and anotherrsquos is for
customers
For the managers the sample is identical to population that is census Population
size is seven for the managers
In regard of customers we adopted the technique of convenience sampling as we
have no idea of population So we use the following procedure for the sample size
of the customers
Sample size n = z2 p qd02
= 1652 05050102
= 680625
= 69
Here Level of Significance=10p=05q=1-05=05d0=Relative Precision=plusmn10
7
We made no capital expenditure for our survey and we use our personal capital
equipments
24 Sample Size The cost of each sample survey is approximately Tk30 We set a
budget for our survey is Tk1500 only So according to the budget we can survey
1500=0+30n
n=50
Here budget allows us a sample size of 50 respondents Thatrsquos why we adjust by the
relative precession according to the budgeted sample
50=1652 0505d02
d0=plusmn1166 ( approximately)
Hence we are willing to accept a precision of plusmn1166 of sample statistic to estimate
population parameter with 90 level of confidence for the survey
25 Pre-testing We conducted a pre- testing or Pilot survey and revised and edited our
questionnaires according to the real field exposure Hence there are some deviations
from the Schema and the questionnaires which were designed early
26 Data analysis We have used the SPSS and Excel to analyze the data We have done
frequency distribution through SPSS and Index ratio through excel program
8
30 Literature Review
31 Development of Islamic banking in the World
The second half of the twentieth century witnessed a major shift of thinking in devising
banking policy and framework on the basis of Islamic Shariah This new thought was
institutionalized at the end of the third quarter of the century and emerged as a new
system of banking called Islamic banking The establishment of the Islamic
Development Bank (IDB) in 1975 gave momentum to the Islamic Banking movement
Since the establishment of IDB a number of Islamic Banking and financial institutions
have been established all over the world irrespective of Muslim and non-Muslim
countries Over the past few decades the Islamic financial industry has rapidly
expanded worldwide Currently about 260 Islamic financial institutions (IFIs) have total
combined assets exceeding $250 billion in more than 57 countries The Islamic
financial market is estimated to grow at annual rates averaging 15 in a year Their
rapid growth has gained considerable attention in international financial circles where
various market participants have recognized promising potentials (Hassan M K 1999)
The Islamic finance market has become extremely sophisticated as well as increasingly
competitive Today virtually all large western financial institutions are involved in
Islamic finance whether through Islamic subsidiaries ldquoIslamic windowsrdquo or the
marketing of Islamic products In recent years a range of new Islamic products have
appeared such as Islamic bonds (or sukuk) and Islamic derivatives While some of
those products are widely accepted others are still controversial (Hassan M K 1999)
32 Genesis of Islamic Banking in Bangladesh
Bangladesh is the third largest Muslim country in the world with around 135 million
populations of which 90 percent are Muslim The hope and aspiration of the people to
run banking system on the basis of Islamic principle came into reality after the OIC
recommendation at its Foreign Ministers meeting in 1978 at Senegal to develop a
separate banking system of their own After 5 years of that declaration in 1983
Bangladesh established its first Islamic bank At present out of 49 banks in
Bangladesh 7 full fledged Islamic Banks and 19 Islamic Banking branches of 9
conventional banks are working in the private sector on the basis of Islamic Shariah
9
Islamic banks in Bangladesh since their inception have been gaining popularity in spite
of some problems in their operation (Sarkar M A A 2004)
33 Islamic Banking Branches in Conventional Banks
An important development in Islamic banking in the last few years has been the entry
of some conventional banks in the market and their use of Islamic modes of financing
through their Islamic branches windows or units It necessitates and encourages the
mobilized ion of Islamic banking which includes some of the giants in the banking
and finance industry Bangladesh was not indifferent to this turning move Presently 9
conventional banks have opened 19 Islamic banking branches alongside their interest
based branches These conventional banks should focus on the safeguards that ensure
the Islamic nature of these branches such as separation and compliance with Shariah
Separation of Islamic banking branches includes separation of capital accounts staff
employed and office However the most important thing is compliance with Shariah
There should be strong Shariah supervisory boards in order to prepare the model
agreement to approve the structure of every new operation and lay down the basic
guidelines for each and every mode of financing (Siddiqi M 2002)
34 Problems Specific to Islamic Banking in Bangladesh
341 Absence of Islamic Money Market
In the absence of Islamic money market in Bangladesh the Islamic banks cannot
invest their surplus fund ie temporary excess liquidity to earn any income rather
than keeping it idle Because all the Government Treasury Bills approved securities
and Bangladesh Bank Bills in Bangladesh are interest bearing Naturally the Islamic
banks cannot invest the permissible part of their Security Liquidity Reserve and liquid
surplus in those securities As a result they deposit their whole reserve in cash with
Bangladesh Bank Similarly the liquid surplus also remains uninvested On the
contrary the conventional banks of the country do not suffer from this sort of
limitations As such the profitability of the Islamic banks in Bangladesh is adversely
affected
10
342 Absence of Suitable Long-term Assets
The absence of suitable long term assets available to Islamic banks is mirrored by lack
of short term tradable financial instruments At present there is no equivalent of an
inter-bank market in Bangladesh where banks could place say over night funds or
where they could borrow to satisfy temporary liquidity needs Trading of financial
instruments is also difficult to arrange when rates of return are not known until
maturity Furthermore it is not clear whether Islamic banks in Bangladesh can utilize
more exotic instruments such as derivatives that are becoming increasingly popular
with conventional banks Obviously these factors place Islamic banking in
Bangladesh at a distinct disadvantage compared to its conventional banking
counterpart
343 Shortage of Supportive and Link Institutions
Any system however well integrated it may be cannot thrive exclusively on its built-
in elements It has to depend on a number of link institutions and so is the case with
Islamic banking For identifying suitable projects Islamic banking can profitably draw
the services of economists lawyers insurance companies management consultants
auditors and so on They also need research and training forums in order to prompting
entrepreneurship amongst their clients Such support services properly oriented
towards Islamic banking are yet to be developed in Bangladesh
344 Organizing Relationship with Foreign Banks
Another important issue facing Islamic banks in Bangladesh is how to organize their
relationships with foreign banks and more generally how to conduct international
operations This is of course an issue closely related to the creation of financial
instruments which would be simultaneously consistent with Islamic principles and
acceptable to interest-based banks including foreign banks
345 Long-term Financing
Islamic Banks stick very closely to the pricing policies of the government They can
not benefit from hidden costs and inputs which elevate the level of prices by certain
entrepreneurs without any justification On the other hand Islamic banks as financial
institutions are even more directly affected by the failure of the projects they finance
This is because the built in security for getting back their funds together with their
11
profits is in the success of the project Islamically it is not lawful to obtain security
from the partner against dishonesty or negligence both of which are very difficult if
not impossible to prove (Ahmad K 2000)
35 The Future of Islamic Banking in Bangladesh
351 Need for Re-organization of the whole financial System
Review of the problems of Islamic banking in general and Islamic banks of
Bangladesh in particular poses a challenging feature for the promotion and survival
of Islamic banks in Bangladesh The policy implication is not that Islamic banks
should never be floated within the conventional banking framework Rather it is the
conventional banking system whose operational mechanism needs to be re-examined
and converted into PLS system consider- ing beneficial impact of the latter on the
economy However as long as Islamic banks are to operate within the conventional
banking framework the recommendations under the following heads may be taken
note of
352 New banking philosophy for the Islamic Banks
There seems to be a gap between the ideals and actual practice of Islamic banks in
Bangladesh In their reports booklets bulletins and posters there banks express their
commitment to striving for establishing a just society free from exploitation Study
shows that a little progress has been achieved so far in that direction Though this
failure is attributed mainly to the pervasive influence of conventional banking system
itself lack of vigilance of the promot- ers of Islamic banking in realizing the
objective is no less to blame There should be a through review of policies that have
been pursued by these banks for about a decade and points of departure have to be
identified to redesign their of action
353 Future Policy and Strategy
The first action that deserves immediate attention is the promotion of the image of
Islamic banks as PLS banks Strategies have to be carefully devised so that the image
of Islamic character and solvency as a bank is simultaneously promoted To this end
Pilot schemes in some very selected areas should be started to test innovative ideas
with profit-loss-sharing modes of financing as major component Islamic banks
should clearly demonstrate by their actions that their banking practices are guided by
12
profitability criterion thereby establishing that only Islamic banking practices ensures
efficient allocation of resources and provide true market signals through PLS modes
Islamic banks should continuously monitor and disseminate through various means
the impact of their operations on the distribution of income primarily between the
bank and the other two parties the depositors and the entrepreneurs and then on
different income groups of the society These presuppose establishment of a fully
equipped research academy in each Islamic bank
354 Stepping for Distributional Efficiency
The task is more challenging for Islamic banks as they have toe promote their
distributional efficiency from all dimensions together with profitability Islamic
banks step by step have to be converted into profit-loss-sharing banks by increasing
their percentage share of investment financing though PLS modes The Islamic banks
to do that can be selective in choosing clients for financing under PLS modes They
should establish direct functional relationship between the income of the depositors
and between the income the income of the bank and that of the entrepreneurs The
relationship improves with share of bank financing under PLS modes increases
355 Promotion of Allocative Efficiency
The Islamic banks can improve their allocative efficiency be satisfying social welfare
conditions in the following manner First they should allocate a reasonable portion of
their investible funds in social priority sectors such as agriculture (including poultry
and fishery) small and cottage industries and export-led industries like garment
shrimp cultivation Secondly when the percentage shares of allocation of investible
funds are determined among the sectors of investment financing profitability of
projects should be the criterion for allocating investment funds The criterion would
be best satisfied if more and more projects were financed under PLS modes
356 Modern banking Policies and practices
Islamic banks with a view to facing the growing competition either fellow-Islamic
banks or the conventional banks which have launched Islamic banking practices will
have to adapts their functioning in line with modern business practices though
improvement and expansion of the range of dealing in the banking sector Thus it is
necessary for them to provide comprehensive banking and investment services to
13
clients and simultaneously to take advantage of modern technological breakthroughs
in areas such as electronic communication computerization etc
357 Government and Central bank Responsibilities
Government should think actively for the promotion of Islamic banking in
Bangladesh considering its pro-develop- ment role It should amend existing financial
laws acts and regulations to create favorable environment conducive to smooth
operation of Islamic banks The bank Reforms Committee may be entrusted to draft
an Islamic Banking Act Government should also allow establishment of Islamic
insurance and other subsidiary companies in order to facilitate their operation
Bangladesh Bank should develop some Islamic Monetary and Saving instruments and
create separate window for transactions with the Islamic banks and a full-fledged
Islamic banking Department for analyzing supervising monitoring and guiding
purpose thereby facilitating Islamic banks for their smooth develop- ment in
Bangladesh
358 Inter-Islamic Bank Co-operation and Perspective Plan
All Islamic banks should come forward to help each others and adopt a perspective
plan say for 20 years for Islamization of the banking system of Bangladesh To
actualize this mission they should set-up immediately and Apex Research Adademy
and a Training Institute designed with modern tools Books and other accessories
(Sarkar M A A 1999)
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
4
14 Hypotheses
Hypothesis 1
Ho The trend of Islamic banking concept in Bangladesh is rapidly increasing
Ha The trend of Islamic banking concept in Bangladesh is not rapidly increasing
Through our observation and study it is clearly seen that Islamic banking concept is
rapidly increasing
So null hypothesis is accepted and alternative hypothesis is rejected that is the trend of
Islamic banking concept is rapidly increasing
Hypothesis 2
H0 There are differences between traditional banking and islamic banking
Ha There are no differences between traditional banking and islamic banking
Traditional banking deals with the interest but Islamic banking deals with profit
Traditional banks do not have shariah board but Islamic banks have shariah board
Besides traditional banks have fixed interest rate and depositors or investors do not bear
any risk On the contrary the depositors of Islamic banks bear profit or loss Hence
Islamic banks do not provide any fixed rate of return or profit Thus there are difference
between traditional banking and Islamic banking So null hypothesis is accepted and
alternative hypothesis is rejected
Hypothesis 3
H0 Psychological behavior ie religious outlook of customers have strong influence on
the Islamic Banking in Bangladesh
Ha Psychological behavior and religious outlook of customers have not strong influence
on the Islamic Banking in Bangladesh
In our study it is observed that 80 of the respondents said that religious psychological
view is the main criteria for choosing Islamic banks The Psychology is interest is
absolutely forbidden in Islam and on an average the respondents fairly agree that Islamic
banks provide interest free service in Bangladesh
Hence there is a strong impact of psychological outlook on choosing Islamic banking
5
15 Rationale of the Study
The following group might be benefited from our study
Islamic Bank in Bangladesh
Central Bank of Bangladesh
Islamic Researchers in Bangladesh
Others conventional Bank those are practicing Islamic Banking Section
Existing and potential customers
16 Scope and Limitations of the Study
161 Scope of the Study
We studied only the full fledged Islamic banks in Bangladesh and we surveyed on
the potential and existing customers of Islamic banks in Dhaka city due to our time
and budget constraint as well for our convenience
162 Limitations of the Study
The main limitation of our study is time and money
Time Constraint We are regular student of MBA In most of the case we had to
go to the study area after our scheduled class but that time most of the Banks were
busy for closing So they did not interest to response
Scarcity of Fund we did not study our research intensively and rigorously due to
lack of financing Hence some issues have missed deliberately
Others limitations
Difficulty of access to head office of banks
We have been confronted rough behavior by the officials of some banks
Unwillingness of the respondent to response the survey
6
20 Methodology
Our study is based on both primary and secondary data
21 Primary Data Collection
We have collected primary data through questionnaire and census from managers
different of Islamic banks and customers We have conducted census on seven full
fledged of Islamic banks and surveyed on fifty potential and existing customers of
Islamic banks
22 Secondary Data Collection We collected secondary data from the following
sources
Books
Journal
Annual Report of Different Islamic Bank
Bangladesh Bureau of Statistics
Bangladesh Institute of Development Studies
Article
Internet
23 Sample size determination
We have two sample sizes for the study one is for managers and anotherrsquos is for
customers
For the managers the sample is identical to population that is census Population
size is seven for the managers
In regard of customers we adopted the technique of convenience sampling as we
have no idea of population So we use the following procedure for the sample size
of the customers
Sample size n = z2 p qd02
= 1652 05050102
= 680625
= 69
Here Level of Significance=10p=05q=1-05=05d0=Relative Precision=plusmn10
7
We made no capital expenditure for our survey and we use our personal capital
equipments
24 Sample Size The cost of each sample survey is approximately Tk30 We set a
budget for our survey is Tk1500 only So according to the budget we can survey
1500=0+30n
n=50
Here budget allows us a sample size of 50 respondents Thatrsquos why we adjust by the
relative precession according to the budgeted sample
50=1652 0505d02
d0=plusmn1166 ( approximately)
Hence we are willing to accept a precision of plusmn1166 of sample statistic to estimate
population parameter with 90 level of confidence for the survey
25 Pre-testing We conducted a pre- testing or Pilot survey and revised and edited our
questionnaires according to the real field exposure Hence there are some deviations
from the Schema and the questionnaires which were designed early
26 Data analysis We have used the SPSS and Excel to analyze the data We have done
frequency distribution through SPSS and Index ratio through excel program
8
30 Literature Review
31 Development of Islamic banking in the World
The second half of the twentieth century witnessed a major shift of thinking in devising
banking policy and framework on the basis of Islamic Shariah This new thought was
institutionalized at the end of the third quarter of the century and emerged as a new
system of banking called Islamic banking The establishment of the Islamic
Development Bank (IDB) in 1975 gave momentum to the Islamic Banking movement
Since the establishment of IDB a number of Islamic Banking and financial institutions
have been established all over the world irrespective of Muslim and non-Muslim
countries Over the past few decades the Islamic financial industry has rapidly
expanded worldwide Currently about 260 Islamic financial institutions (IFIs) have total
combined assets exceeding $250 billion in more than 57 countries The Islamic
financial market is estimated to grow at annual rates averaging 15 in a year Their
rapid growth has gained considerable attention in international financial circles where
various market participants have recognized promising potentials (Hassan M K 1999)
The Islamic finance market has become extremely sophisticated as well as increasingly
competitive Today virtually all large western financial institutions are involved in
Islamic finance whether through Islamic subsidiaries ldquoIslamic windowsrdquo or the
marketing of Islamic products In recent years a range of new Islamic products have
appeared such as Islamic bonds (or sukuk) and Islamic derivatives While some of
those products are widely accepted others are still controversial (Hassan M K 1999)
32 Genesis of Islamic Banking in Bangladesh
Bangladesh is the third largest Muslim country in the world with around 135 million
populations of which 90 percent are Muslim The hope and aspiration of the people to
run banking system on the basis of Islamic principle came into reality after the OIC
recommendation at its Foreign Ministers meeting in 1978 at Senegal to develop a
separate banking system of their own After 5 years of that declaration in 1983
Bangladesh established its first Islamic bank At present out of 49 banks in
Bangladesh 7 full fledged Islamic Banks and 19 Islamic Banking branches of 9
conventional banks are working in the private sector on the basis of Islamic Shariah
9
Islamic banks in Bangladesh since their inception have been gaining popularity in spite
of some problems in their operation (Sarkar M A A 2004)
33 Islamic Banking Branches in Conventional Banks
An important development in Islamic banking in the last few years has been the entry
of some conventional banks in the market and their use of Islamic modes of financing
through their Islamic branches windows or units It necessitates and encourages the
mobilized ion of Islamic banking which includes some of the giants in the banking
and finance industry Bangladesh was not indifferent to this turning move Presently 9
conventional banks have opened 19 Islamic banking branches alongside their interest
based branches These conventional banks should focus on the safeguards that ensure
the Islamic nature of these branches such as separation and compliance with Shariah
Separation of Islamic banking branches includes separation of capital accounts staff
employed and office However the most important thing is compliance with Shariah
There should be strong Shariah supervisory boards in order to prepare the model
agreement to approve the structure of every new operation and lay down the basic
guidelines for each and every mode of financing (Siddiqi M 2002)
34 Problems Specific to Islamic Banking in Bangladesh
341 Absence of Islamic Money Market
In the absence of Islamic money market in Bangladesh the Islamic banks cannot
invest their surplus fund ie temporary excess liquidity to earn any income rather
than keeping it idle Because all the Government Treasury Bills approved securities
and Bangladesh Bank Bills in Bangladesh are interest bearing Naturally the Islamic
banks cannot invest the permissible part of their Security Liquidity Reserve and liquid
surplus in those securities As a result they deposit their whole reserve in cash with
Bangladesh Bank Similarly the liquid surplus also remains uninvested On the
contrary the conventional banks of the country do not suffer from this sort of
limitations As such the profitability of the Islamic banks in Bangladesh is adversely
affected
10
342 Absence of Suitable Long-term Assets
The absence of suitable long term assets available to Islamic banks is mirrored by lack
of short term tradable financial instruments At present there is no equivalent of an
inter-bank market in Bangladesh where banks could place say over night funds or
where they could borrow to satisfy temporary liquidity needs Trading of financial
instruments is also difficult to arrange when rates of return are not known until
maturity Furthermore it is not clear whether Islamic banks in Bangladesh can utilize
more exotic instruments such as derivatives that are becoming increasingly popular
with conventional banks Obviously these factors place Islamic banking in
Bangladesh at a distinct disadvantage compared to its conventional banking
counterpart
343 Shortage of Supportive and Link Institutions
Any system however well integrated it may be cannot thrive exclusively on its built-
in elements It has to depend on a number of link institutions and so is the case with
Islamic banking For identifying suitable projects Islamic banking can profitably draw
the services of economists lawyers insurance companies management consultants
auditors and so on They also need research and training forums in order to prompting
entrepreneurship amongst their clients Such support services properly oriented
towards Islamic banking are yet to be developed in Bangladesh
344 Organizing Relationship with Foreign Banks
Another important issue facing Islamic banks in Bangladesh is how to organize their
relationships with foreign banks and more generally how to conduct international
operations This is of course an issue closely related to the creation of financial
instruments which would be simultaneously consistent with Islamic principles and
acceptable to interest-based banks including foreign banks
345 Long-term Financing
Islamic Banks stick very closely to the pricing policies of the government They can
not benefit from hidden costs and inputs which elevate the level of prices by certain
entrepreneurs without any justification On the other hand Islamic banks as financial
institutions are even more directly affected by the failure of the projects they finance
This is because the built in security for getting back their funds together with their
11
profits is in the success of the project Islamically it is not lawful to obtain security
from the partner against dishonesty or negligence both of which are very difficult if
not impossible to prove (Ahmad K 2000)
35 The Future of Islamic Banking in Bangladesh
351 Need for Re-organization of the whole financial System
Review of the problems of Islamic banking in general and Islamic banks of
Bangladesh in particular poses a challenging feature for the promotion and survival
of Islamic banks in Bangladesh The policy implication is not that Islamic banks
should never be floated within the conventional banking framework Rather it is the
conventional banking system whose operational mechanism needs to be re-examined
and converted into PLS system consider- ing beneficial impact of the latter on the
economy However as long as Islamic banks are to operate within the conventional
banking framework the recommendations under the following heads may be taken
note of
352 New banking philosophy for the Islamic Banks
There seems to be a gap between the ideals and actual practice of Islamic banks in
Bangladesh In their reports booklets bulletins and posters there banks express their
commitment to striving for establishing a just society free from exploitation Study
shows that a little progress has been achieved so far in that direction Though this
failure is attributed mainly to the pervasive influence of conventional banking system
itself lack of vigilance of the promot- ers of Islamic banking in realizing the
objective is no less to blame There should be a through review of policies that have
been pursued by these banks for about a decade and points of departure have to be
identified to redesign their of action
353 Future Policy and Strategy
The first action that deserves immediate attention is the promotion of the image of
Islamic banks as PLS banks Strategies have to be carefully devised so that the image
of Islamic character and solvency as a bank is simultaneously promoted To this end
Pilot schemes in some very selected areas should be started to test innovative ideas
with profit-loss-sharing modes of financing as major component Islamic banks
should clearly demonstrate by their actions that their banking practices are guided by
12
profitability criterion thereby establishing that only Islamic banking practices ensures
efficient allocation of resources and provide true market signals through PLS modes
Islamic banks should continuously monitor and disseminate through various means
the impact of their operations on the distribution of income primarily between the
bank and the other two parties the depositors and the entrepreneurs and then on
different income groups of the society These presuppose establishment of a fully
equipped research academy in each Islamic bank
354 Stepping for Distributional Efficiency
The task is more challenging for Islamic banks as they have toe promote their
distributional efficiency from all dimensions together with profitability Islamic
banks step by step have to be converted into profit-loss-sharing banks by increasing
their percentage share of investment financing though PLS modes The Islamic banks
to do that can be selective in choosing clients for financing under PLS modes They
should establish direct functional relationship between the income of the depositors
and between the income the income of the bank and that of the entrepreneurs The
relationship improves with share of bank financing under PLS modes increases
355 Promotion of Allocative Efficiency
The Islamic banks can improve their allocative efficiency be satisfying social welfare
conditions in the following manner First they should allocate a reasonable portion of
their investible funds in social priority sectors such as agriculture (including poultry
and fishery) small and cottage industries and export-led industries like garment
shrimp cultivation Secondly when the percentage shares of allocation of investible
funds are determined among the sectors of investment financing profitability of
projects should be the criterion for allocating investment funds The criterion would
be best satisfied if more and more projects were financed under PLS modes
356 Modern banking Policies and practices
Islamic banks with a view to facing the growing competition either fellow-Islamic
banks or the conventional banks which have launched Islamic banking practices will
have to adapts their functioning in line with modern business practices though
improvement and expansion of the range of dealing in the banking sector Thus it is
necessary for them to provide comprehensive banking and investment services to
13
clients and simultaneously to take advantage of modern technological breakthroughs
in areas such as electronic communication computerization etc
357 Government and Central bank Responsibilities
Government should think actively for the promotion of Islamic banking in
Bangladesh considering its pro-develop- ment role It should amend existing financial
laws acts and regulations to create favorable environment conducive to smooth
operation of Islamic banks The bank Reforms Committee may be entrusted to draft
an Islamic Banking Act Government should also allow establishment of Islamic
insurance and other subsidiary companies in order to facilitate their operation
Bangladesh Bank should develop some Islamic Monetary and Saving instruments and
create separate window for transactions with the Islamic banks and a full-fledged
Islamic banking Department for analyzing supervising monitoring and guiding
purpose thereby facilitating Islamic banks for their smooth develop- ment in
Bangladesh
358 Inter-Islamic Bank Co-operation and Perspective Plan
All Islamic banks should come forward to help each others and adopt a perspective
plan say for 20 years for Islamization of the banking system of Bangladesh To
actualize this mission they should set-up immediately and Apex Research Adademy
and a Training Institute designed with modern tools Books and other accessories
(Sarkar M A A 1999)
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
5
15 Rationale of the Study
The following group might be benefited from our study
Islamic Bank in Bangladesh
Central Bank of Bangladesh
Islamic Researchers in Bangladesh
Others conventional Bank those are practicing Islamic Banking Section
Existing and potential customers
16 Scope and Limitations of the Study
161 Scope of the Study
We studied only the full fledged Islamic banks in Bangladesh and we surveyed on
the potential and existing customers of Islamic banks in Dhaka city due to our time
and budget constraint as well for our convenience
162 Limitations of the Study
The main limitation of our study is time and money
Time Constraint We are regular student of MBA In most of the case we had to
go to the study area after our scheduled class but that time most of the Banks were
busy for closing So they did not interest to response
Scarcity of Fund we did not study our research intensively and rigorously due to
lack of financing Hence some issues have missed deliberately
Others limitations
Difficulty of access to head office of banks
We have been confronted rough behavior by the officials of some banks
Unwillingness of the respondent to response the survey
6
20 Methodology
Our study is based on both primary and secondary data
21 Primary Data Collection
We have collected primary data through questionnaire and census from managers
different of Islamic banks and customers We have conducted census on seven full
fledged of Islamic banks and surveyed on fifty potential and existing customers of
Islamic banks
22 Secondary Data Collection We collected secondary data from the following
sources
Books
Journal
Annual Report of Different Islamic Bank
Bangladesh Bureau of Statistics
Bangladesh Institute of Development Studies
Article
Internet
23 Sample size determination
We have two sample sizes for the study one is for managers and anotherrsquos is for
customers
For the managers the sample is identical to population that is census Population
size is seven for the managers
In regard of customers we adopted the technique of convenience sampling as we
have no idea of population So we use the following procedure for the sample size
of the customers
Sample size n = z2 p qd02
= 1652 05050102
= 680625
= 69
Here Level of Significance=10p=05q=1-05=05d0=Relative Precision=plusmn10
7
We made no capital expenditure for our survey and we use our personal capital
equipments
24 Sample Size The cost of each sample survey is approximately Tk30 We set a
budget for our survey is Tk1500 only So according to the budget we can survey
1500=0+30n
n=50
Here budget allows us a sample size of 50 respondents Thatrsquos why we adjust by the
relative precession according to the budgeted sample
50=1652 0505d02
d0=plusmn1166 ( approximately)
Hence we are willing to accept a precision of plusmn1166 of sample statistic to estimate
population parameter with 90 level of confidence for the survey
25 Pre-testing We conducted a pre- testing or Pilot survey and revised and edited our
questionnaires according to the real field exposure Hence there are some deviations
from the Schema and the questionnaires which were designed early
26 Data analysis We have used the SPSS and Excel to analyze the data We have done
frequency distribution through SPSS and Index ratio through excel program
8
30 Literature Review
31 Development of Islamic banking in the World
The second half of the twentieth century witnessed a major shift of thinking in devising
banking policy and framework on the basis of Islamic Shariah This new thought was
institutionalized at the end of the third quarter of the century and emerged as a new
system of banking called Islamic banking The establishment of the Islamic
Development Bank (IDB) in 1975 gave momentum to the Islamic Banking movement
Since the establishment of IDB a number of Islamic Banking and financial institutions
have been established all over the world irrespective of Muslim and non-Muslim
countries Over the past few decades the Islamic financial industry has rapidly
expanded worldwide Currently about 260 Islamic financial institutions (IFIs) have total
combined assets exceeding $250 billion in more than 57 countries The Islamic
financial market is estimated to grow at annual rates averaging 15 in a year Their
rapid growth has gained considerable attention in international financial circles where
various market participants have recognized promising potentials (Hassan M K 1999)
The Islamic finance market has become extremely sophisticated as well as increasingly
competitive Today virtually all large western financial institutions are involved in
Islamic finance whether through Islamic subsidiaries ldquoIslamic windowsrdquo or the
marketing of Islamic products In recent years a range of new Islamic products have
appeared such as Islamic bonds (or sukuk) and Islamic derivatives While some of
those products are widely accepted others are still controversial (Hassan M K 1999)
32 Genesis of Islamic Banking in Bangladesh
Bangladesh is the third largest Muslim country in the world with around 135 million
populations of which 90 percent are Muslim The hope and aspiration of the people to
run banking system on the basis of Islamic principle came into reality after the OIC
recommendation at its Foreign Ministers meeting in 1978 at Senegal to develop a
separate banking system of their own After 5 years of that declaration in 1983
Bangladesh established its first Islamic bank At present out of 49 banks in
Bangladesh 7 full fledged Islamic Banks and 19 Islamic Banking branches of 9
conventional banks are working in the private sector on the basis of Islamic Shariah
9
Islamic banks in Bangladesh since their inception have been gaining popularity in spite
of some problems in their operation (Sarkar M A A 2004)
33 Islamic Banking Branches in Conventional Banks
An important development in Islamic banking in the last few years has been the entry
of some conventional banks in the market and their use of Islamic modes of financing
through their Islamic branches windows or units It necessitates and encourages the
mobilized ion of Islamic banking which includes some of the giants in the banking
and finance industry Bangladesh was not indifferent to this turning move Presently 9
conventional banks have opened 19 Islamic banking branches alongside their interest
based branches These conventional banks should focus on the safeguards that ensure
the Islamic nature of these branches such as separation and compliance with Shariah
Separation of Islamic banking branches includes separation of capital accounts staff
employed and office However the most important thing is compliance with Shariah
There should be strong Shariah supervisory boards in order to prepare the model
agreement to approve the structure of every new operation and lay down the basic
guidelines for each and every mode of financing (Siddiqi M 2002)
34 Problems Specific to Islamic Banking in Bangladesh
341 Absence of Islamic Money Market
In the absence of Islamic money market in Bangladesh the Islamic banks cannot
invest their surplus fund ie temporary excess liquidity to earn any income rather
than keeping it idle Because all the Government Treasury Bills approved securities
and Bangladesh Bank Bills in Bangladesh are interest bearing Naturally the Islamic
banks cannot invest the permissible part of their Security Liquidity Reserve and liquid
surplus in those securities As a result they deposit their whole reserve in cash with
Bangladesh Bank Similarly the liquid surplus also remains uninvested On the
contrary the conventional banks of the country do not suffer from this sort of
limitations As such the profitability of the Islamic banks in Bangladesh is adversely
affected
10
342 Absence of Suitable Long-term Assets
The absence of suitable long term assets available to Islamic banks is mirrored by lack
of short term tradable financial instruments At present there is no equivalent of an
inter-bank market in Bangladesh where banks could place say over night funds or
where they could borrow to satisfy temporary liquidity needs Trading of financial
instruments is also difficult to arrange when rates of return are not known until
maturity Furthermore it is not clear whether Islamic banks in Bangladesh can utilize
more exotic instruments such as derivatives that are becoming increasingly popular
with conventional banks Obviously these factors place Islamic banking in
Bangladesh at a distinct disadvantage compared to its conventional banking
counterpart
343 Shortage of Supportive and Link Institutions
Any system however well integrated it may be cannot thrive exclusively on its built-
in elements It has to depend on a number of link institutions and so is the case with
Islamic banking For identifying suitable projects Islamic banking can profitably draw
the services of economists lawyers insurance companies management consultants
auditors and so on They also need research and training forums in order to prompting
entrepreneurship amongst their clients Such support services properly oriented
towards Islamic banking are yet to be developed in Bangladesh
344 Organizing Relationship with Foreign Banks
Another important issue facing Islamic banks in Bangladesh is how to organize their
relationships with foreign banks and more generally how to conduct international
operations This is of course an issue closely related to the creation of financial
instruments which would be simultaneously consistent with Islamic principles and
acceptable to interest-based banks including foreign banks
345 Long-term Financing
Islamic Banks stick very closely to the pricing policies of the government They can
not benefit from hidden costs and inputs which elevate the level of prices by certain
entrepreneurs without any justification On the other hand Islamic banks as financial
institutions are even more directly affected by the failure of the projects they finance
This is because the built in security for getting back their funds together with their
11
profits is in the success of the project Islamically it is not lawful to obtain security
from the partner against dishonesty or negligence both of which are very difficult if
not impossible to prove (Ahmad K 2000)
35 The Future of Islamic Banking in Bangladesh
351 Need for Re-organization of the whole financial System
Review of the problems of Islamic banking in general and Islamic banks of
Bangladesh in particular poses a challenging feature for the promotion and survival
of Islamic banks in Bangladesh The policy implication is not that Islamic banks
should never be floated within the conventional banking framework Rather it is the
conventional banking system whose operational mechanism needs to be re-examined
and converted into PLS system consider- ing beneficial impact of the latter on the
economy However as long as Islamic banks are to operate within the conventional
banking framework the recommendations under the following heads may be taken
note of
352 New banking philosophy for the Islamic Banks
There seems to be a gap between the ideals and actual practice of Islamic banks in
Bangladesh In their reports booklets bulletins and posters there banks express their
commitment to striving for establishing a just society free from exploitation Study
shows that a little progress has been achieved so far in that direction Though this
failure is attributed mainly to the pervasive influence of conventional banking system
itself lack of vigilance of the promot- ers of Islamic banking in realizing the
objective is no less to blame There should be a through review of policies that have
been pursued by these banks for about a decade and points of departure have to be
identified to redesign their of action
353 Future Policy and Strategy
The first action that deserves immediate attention is the promotion of the image of
Islamic banks as PLS banks Strategies have to be carefully devised so that the image
of Islamic character and solvency as a bank is simultaneously promoted To this end
Pilot schemes in some very selected areas should be started to test innovative ideas
with profit-loss-sharing modes of financing as major component Islamic banks
should clearly demonstrate by their actions that their banking practices are guided by
12
profitability criterion thereby establishing that only Islamic banking practices ensures
efficient allocation of resources and provide true market signals through PLS modes
Islamic banks should continuously monitor and disseminate through various means
the impact of their operations on the distribution of income primarily between the
bank and the other two parties the depositors and the entrepreneurs and then on
different income groups of the society These presuppose establishment of a fully
equipped research academy in each Islamic bank
354 Stepping for Distributional Efficiency
The task is more challenging for Islamic banks as they have toe promote their
distributional efficiency from all dimensions together with profitability Islamic
banks step by step have to be converted into profit-loss-sharing banks by increasing
their percentage share of investment financing though PLS modes The Islamic banks
to do that can be selective in choosing clients for financing under PLS modes They
should establish direct functional relationship between the income of the depositors
and between the income the income of the bank and that of the entrepreneurs The
relationship improves with share of bank financing under PLS modes increases
355 Promotion of Allocative Efficiency
The Islamic banks can improve their allocative efficiency be satisfying social welfare
conditions in the following manner First they should allocate a reasonable portion of
their investible funds in social priority sectors such as agriculture (including poultry
and fishery) small and cottage industries and export-led industries like garment
shrimp cultivation Secondly when the percentage shares of allocation of investible
funds are determined among the sectors of investment financing profitability of
projects should be the criterion for allocating investment funds The criterion would
be best satisfied if more and more projects were financed under PLS modes
356 Modern banking Policies and practices
Islamic banks with a view to facing the growing competition either fellow-Islamic
banks or the conventional banks which have launched Islamic banking practices will
have to adapts their functioning in line with modern business practices though
improvement and expansion of the range of dealing in the banking sector Thus it is
necessary for them to provide comprehensive banking and investment services to
13
clients and simultaneously to take advantage of modern technological breakthroughs
in areas such as electronic communication computerization etc
357 Government and Central bank Responsibilities
Government should think actively for the promotion of Islamic banking in
Bangladesh considering its pro-develop- ment role It should amend existing financial
laws acts and regulations to create favorable environment conducive to smooth
operation of Islamic banks The bank Reforms Committee may be entrusted to draft
an Islamic Banking Act Government should also allow establishment of Islamic
insurance and other subsidiary companies in order to facilitate their operation
Bangladesh Bank should develop some Islamic Monetary and Saving instruments and
create separate window for transactions with the Islamic banks and a full-fledged
Islamic banking Department for analyzing supervising monitoring and guiding
purpose thereby facilitating Islamic banks for their smooth develop- ment in
Bangladesh
358 Inter-Islamic Bank Co-operation and Perspective Plan
All Islamic banks should come forward to help each others and adopt a perspective
plan say for 20 years for Islamization of the banking system of Bangladesh To
actualize this mission they should set-up immediately and Apex Research Adademy
and a Training Institute designed with modern tools Books and other accessories
(Sarkar M A A 1999)
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
6
20 Methodology
Our study is based on both primary and secondary data
21 Primary Data Collection
We have collected primary data through questionnaire and census from managers
different of Islamic banks and customers We have conducted census on seven full
fledged of Islamic banks and surveyed on fifty potential and existing customers of
Islamic banks
22 Secondary Data Collection We collected secondary data from the following
sources
Books
Journal
Annual Report of Different Islamic Bank
Bangladesh Bureau of Statistics
Bangladesh Institute of Development Studies
Article
Internet
23 Sample size determination
We have two sample sizes for the study one is for managers and anotherrsquos is for
customers
For the managers the sample is identical to population that is census Population
size is seven for the managers
In regard of customers we adopted the technique of convenience sampling as we
have no idea of population So we use the following procedure for the sample size
of the customers
Sample size n = z2 p qd02
= 1652 05050102
= 680625
= 69
Here Level of Significance=10p=05q=1-05=05d0=Relative Precision=plusmn10
7
We made no capital expenditure for our survey and we use our personal capital
equipments
24 Sample Size The cost of each sample survey is approximately Tk30 We set a
budget for our survey is Tk1500 only So according to the budget we can survey
1500=0+30n
n=50
Here budget allows us a sample size of 50 respondents Thatrsquos why we adjust by the
relative precession according to the budgeted sample
50=1652 0505d02
d0=plusmn1166 ( approximately)
Hence we are willing to accept a precision of plusmn1166 of sample statistic to estimate
population parameter with 90 level of confidence for the survey
25 Pre-testing We conducted a pre- testing or Pilot survey and revised and edited our
questionnaires according to the real field exposure Hence there are some deviations
from the Schema and the questionnaires which were designed early
26 Data analysis We have used the SPSS and Excel to analyze the data We have done
frequency distribution through SPSS and Index ratio through excel program
8
30 Literature Review
31 Development of Islamic banking in the World
The second half of the twentieth century witnessed a major shift of thinking in devising
banking policy and framework on the basis of Islamic Shariah This new thought was
institutionalized at the end of the third quarter of the century and emerged as a new
system of banking called Islamic banking The establishment of the Islamic
Development Bank (IDB) in 1975 gave momentum to the Islamic Banking movement
Since the establishment of IDB a number of Islamic Banking and financial institutions
have been established all over the world irrespective of Muslim and non-Muslim
countries Over the past few decades the Islamic financial industry has rapidly
expanded worldwide Currently about 260 Islamic financial institutions (IFIs) have total
combined assets exceeding $250 billion in more than 57 countries The Islamic
financial market is estimated to grow at annual rates averaging 15 in a year Their
rapid growth has gained considerable attention in international financial circles where
various market participants have recognized promising potentials (Hassan M K 1999)
The Islamic finance market has become extremely sophisticated as well as increasingly
competitive Today virtually all large western financial institutions are involved in
Islamic finance whether through Islamic subsidiaries ldquoIslamic windowsrdquo or the
marketing of Islamic products In recent years a range of new Islamic products have
appeared such as Islamic bonds (or sukuk) and Islamic derivatives While some of
those products are widely accepted others are still controversial (Hassan M K 1999)
32 Genesis of Islamic Banking in Bangladesh
Bangladesh is the third largest Muslim country in the world with around 135 million
populations of which 90 percent are Muslim The hope and aspiration of the people to
run banking system on the basis of Islamic principle came into reality after the OIC
recommendation at its Foreign Ministers meeting in 1978 at Senegal to develop a
separate banking system of their own After 5 years of that declaration in 1983
Bangladesh established its first Islamic bank At present out of 49 banks in
Bangladesh 7 full fledged Islamic Banks and 19 Islamic Banking branches of 9
conventional banks are working in the private sector on the basis of Islamic Shariah
9
Islamic banks in Bangladesh since their inception have been gaining popularity in spite
of some problems in their operation (Sarkar M A A 2004)
33 Islamic Banking Branches in Conventional Banks
An important development in Islamic banking in the last few years has been the entry
of some conventional banks in the market and their use of Islamic modes of financing
through their Islamic branches windows or units It necessitates and encourages the
mobilized ion of Islamic banking which includes some of the giants in the banking
and finance industry Bangladesh was not indifferent to this turning move Presently 9
conventional banks have opened 19 Islamic banking branches alongside their interest
based branches These conventional banks should focus on the safeguards that ensure
the Islamic nature of these branches such as separation and compliance with Shariah
Separation of Islamic banking branches includes separation of capital accounts staff
employed and office However the most important thing is compliance with Shariah
There should be strong Shariah supervisory boards in order to prepare the model
agreement to approve the structure of every new operation and lay down the basic
guidelines for each and every mode of financing (Siddiqi M 2002)
34 Problems Specific to Islamic Banking in Bangladesh
341 Absence of Islamic Money Market
In the absence of Islamic money market in Bangladesh the Islamic banks cannot
invest their surplus fund ie temporary excess liquidity to earn any income rather
than keeping it idle Because all the Government Treasury Bills approved securities
and Bangladesh Bank Bills in Bangladesh are interest bearing Naturally the Islamic
banks cannot invest the permissible part of their Security Liquidity Reserve and liquid
surplus in those securities As a result they deposit their whole reserve in cash with
Bangladesh Bank Similarly the liquid surplus also remains uninvested On the
contrary the conventional banks of the country do not suffer from this sort of
limitations As such the profitability of the Islamic banks in Bangladesh is adversely
affected
10
342 Absence of Suitable Long-term Assets
The absence of suitable long term assets available to Islamic banks is mirrored by lack
of short term tradable financial instruments At present there is no equivalent of an
inter-bank market in Bangladesh where banks could place say over night funds or
where they could borrow to satisfy temporary liquidity needs Trading of financial
instruments is also difficult to arrange when rates of return are not known until
maturity Furthermore it is not clear whether Islamic banks in Bangladesh can utilize
more exotic instruments such as derivatives that are becoming increasingly popular
with conventional banks Obviously these factors place Islamic banking in
Bangladesh at a distinct disadvantage compared to its conventional banking
counterpart
343 Shortage of Supportive and Link Institutions
Any system however well integrated it may be cannot thrive exclusively on its built-
in elements It has to depend on a number of link institutions and so is the case with
Islamic banking For identifying suitable projects Islamic banking can profitably draw
the services of economists lawyers insurance companies management consultants
auditors and so on They also need research and training forums in order to prompting
entrepreneurship amongst their clients Such support services properly oriented
towards Islamic banking are yet to be developed in Bangladesh
344 Organizing Relationship with Foreign Banks
Another important issue facing Islamic banks in Bangladesh is how to organize their
relationships with foreign banks and more generally how to conduct international
operations This is of course an issue closely related to the creation of financial
instruments which would be simultaneously consistent with Islamic principles and
acceptable to interest-based banks including foreign banks
345 Long-term Financing
Islamic Banks stick very closely to the pricing policies of the government They can
not benefit from hidden costs and inputs which elevate the level of prices by certain
entrepreneurs without any justification On the other hand Islamic banks as financial
institutions are even more directly affected by the failure of the projects they finance
This is because the built in security for getting back their funds together with their
11
profits is in the success of the project Islamically it is not lawful to obtain security
from the partner against dishonesty or negligence both of which are very difficult if
not impossible to prove (Ahmad K 2000)
35 The Future of Islamic Banking in Bangladesh
351 Need for Re-organization of the whole financial System
Review of the problems of Islamic banking in general and Islamic banks of
Bangladesh in particular poses a challenging feature for the promotion and survival
of Islamic banks in Bangladesh The policy implication is not that Islamic banks
should never be floated within the conventional banking framework Rather it is the
conventional banking system whose operational mechanism needs to be re-examined
and converted into PLS system consider- ing beneficial impact of the latter on the
economy However as long as Islamic banks are to operate within the conventional
banking framework the recommendations under the following heads may be taken
note of
352 New banking philosophy for the Islamic Banks
There seems to be a gap between the ideals and actual practice of Islamic banks in
Bangladesh In their reports booklets bulletins and posters there banks express their
commitment to striving for establishing a just society free from exploitation Study
shows that a little progress has been achieved so far in that direction Though this
failure is attributed mainly to the pervasive influence of conventional banking system
itself lack of vigilance of the promot- ers of Islamic banking in realizing the
objective is no less to blame There should be a through review of policies that have
been pursued by these banks for about a decade and points of departure have to be
identified to redesign their of action
353 Future Policy and Strategy
The first action that deserves immediate attention is the promotion of the image of
Islamic banks as PLS banks Strategies have to be carefully devised so that the image
of Islamic character and solvency as a bank is simultaneously promoted To this end
Pilot schemes in some very selected areas should be started to test innovative ideas
with profit-loss-sharing modes of financing as major component Islamic banks
should clearly demonstrate by their actions that their banking practices are guided by
12
profitability criterion thereby establishing that only Islamic banking practices ensures
efficient allocation of resources and provide true market signals through PLS modes
Islamic banks should continuously monitor and disseminate through various means
the impact of their operations on the distribution of income primarily between the
bank and the other two parties the depositors and the entrepreneurs and then on
different income groups of the society These presuppose establishment of a fully
equipped research academy in each Islamic bank
354 Stepping for Distributional Efficiency
The task is more challenging for Islamic banks as they have toe promote their
distributional efficiency from all dimensions together with profitability Islamic
banks step by step have to be converted into profit-loss-sharing banks by increasing
their percentage share of investment financing though PLS modes The Islamic banks
to do that can be selective in choosing clients for financing under PLS modes They
should establish direct functional relationship between the income of the depositors
and between the income the income of the bank and that of the entrepreneurs The
relationship improves with share of bank financing under PLS modes increases
355 Promotion of Allocative Efficiency
The Islamic banks can improve their allocative efficiency be satisfying social welfare
conditions in the following manner First they should allocate a reasonable portion of
their investible funds in social priority sectors such as agriculture (including poultry
and fishery) small and cottage industries and export-led industries like garment
shrimp cultivation Secondly when the percentage shares of allocation of investible
funds are determined among the sectors of investment financing profitability of
projects should be the criterion for allocating investment funds The criterion would
be best satisfied if more and more projects were financed under PLS modes
356 Modern banking Policies and practices
Islamic banks with a view to facing the growing competition either fellow-Islamic
banks or the conventional banks which have launched Islamic banking practices will
have to adapts their functioning in line with modern business practices though
improvement and expansion of the range of dealing in the banking sector Thus it is
necessary for them to provide comprehensive banking and investment services to
13
clients and simultaneously to take advantage of modern technological breakthroughs
in areas such as electronic communication computerization etc
357 Government and Central bank Responsibilities
Government should think actively for the promotion of Islamic banking in
Bangladesh considering its pro-develop- ment role It should amend existing financial
laws acts and regulations to create favorable environment conducive to smooth
operation of Islamic banks The bank Reforms Committee may be entrusted to draft
an Islamic Banking Act Government should also allow establishment of Islamic
insurance and other subsidiary companies in order to facilitate their operation
Bangladesh Bank should develop some Islamic Monetary and Saving instruments and
create separate window for transactions with the Islamic banks and a full-fledged
Islamic banking Department for analyzing supervising monitoring and guiding
purpose thereby facilitating Islamic banks for their smooth develop- ment in
Bangladesh
358 Inter-Islamic Bank Co-operation and Perspective Plan
All Islamic banks should come forward to help each others and adopt a perspective
plan say for 20 years for Islamization of the banking system of Bangladesh To
actualize this mission they should set-up immediately and Apex Research Adademy
and a Training Institute designed with modern tools Books and other accessories
(Sarkar M A A 1999)
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
7
We made no capital expenditure for our survey and we use our personal capital
equipments
24 Sample Size The cost of each sample survey is approximately Tk30 We set a
budget for our survey is Tk1500 only So according to the budget we can survey
1500=0+30n
n=50
Here budget allows us a sample size of 50 respondents Thatrsquos why we adjust by the
relative precession according to the budgeted sample
50=1652 0505d02
d0=plusmn1166 ( approximately)
Hence we are willing to accept a precision of plusmn1166 of sample statistic to estimate
population parameter with 90 level of confidence for the survey
25 Pre-testing We conducted a pre- testing or Pilot survey and revised and edited our
questionnaires according to the real field exposure Hence there are some deviations
from the Schema and the questionnaires which were designed early
26 Data analysis We have used the SPSS and Excel to analyze the data We have done
frequency distribution through SPSS and Index ratio through excel program
8
30 Literature Review
31 Development of Islamic banking in the World
The second half of the twentieth century witnessed a major shift of thinking in devising
banking policy and framework on the basis of Islamic Shariah This new thought was
institutionalized at the end of the third quarter of the century and emerged as a new
system of banking called Islamic banking The establishment of the Islamic
Development Bank (IDB) in 1975 gave momentum to the Islamic Banking movement
Since the establishment of IDB a number of Islamic Banking and financial institutions
have been established all over the world irrespective of Muslim and non-Muslim
countries Over the past few decades the Islamic financial industry has rapidly
expanded worldwide Currently about 260 Islamic financial institutions (IFIs) have total
combined assets exceeding $250 billion in more than 57 countries The Islamic
financial market is estimated to grow at annual rates averaging 15 in a year Their
rapid growth has gained considerable attention in international financial circles where
various market participants have recognized promising potentials (Hassan M K 1999)
The Islamic finance market has become extremely sophisticated as well as increasingly
competitive Today virtually all large western financial institutions are involved in
Islamic finance whether through Islamic subsidiaries ldquoIslamic windowsrdquo or the
marketing of Islamic products In recent years a range of new Islamic products have
appeared such as Islamic bonds (or sukuk) and Islamic derivatives While some of
those products are widely accepted others are still controversial (Hassan M K 1999)
32 Genesis of Islamic Banking in Bangladesh
Bangladesh is the third largest Muslim country in the world with around 135 million
populations of which 90 percent are Muslim The hope and aspiration of the people to
run banking system on the basis of Islamic principle came into reality after the OIC
recommendation at its Foreign Ministers meeting in 1978 at Senegal to develop a
separate banking system of their own After 5 years of that declaration in 1983
Bangladesh established its first Islamic bank At present out of 49 banks in
Bangladesh 7 full fledged Islamic Banks and 19 Islamic Banking branches of 9
conventional banks are working in the private sector on the basis of Islamic Shariah
9
Islamic banks in Bangladesh since their inception have been gaining popularity in spite
of some problems in their operation (Sarkar M A A 2004)
33 Islamic Banking Branches in Conventional Banks
An important development in Islamic banking in the last few years has been the entry
of some conventional banks in the market and their use of Islamic modes of financing
through their Islamic branches windows or units It necessitates and encourages the
mobilized ion of Islamic banking which includes some of the giants in the banking
and finance industry Bangladesh was not indifferent to this turning move Presently 9
conventional banks have opened 19 Islamic banking branches alongside their interest
based branches These conventional banks should focus on the safeguards that ensure
the Islamic nature of these branches such as separation and compliance with Shariah
Separation of Islamic banking branches includes separation of capital accounts staff
employed and office However the most important thing is compliance with Shariah
There should be strong Shariah supervisory boards in order to prepare the model
agreement to approve the structure of every new operation and lay down the basic
guidelines for each and every mode of financing (Siddiqi M 2002)
34 Problems Specific to Islamic Banking in Bangladesh
341 Absence of Islamic Money Market
In the absence of Islamic money market in Bangladesh the Islamic banks cannot
invest their surplus fund ie temporary excess liquidity to earn any income rather
than keeping it idle Because all the Government Treasury Bills approved securities
and Bangladesh Bank Bills in Bangladesh are interest bearing Naturally the Islamic
banks cannot invest the permissible part of their Security Liquidity Reserve and liquid
surplus in those securities As a result they deposit their whole reserve in cash with
Bangladesh Bank Similarly the liquid surplus also remains uninvested On the
contrary the conventional banks of the country do not suffer from this sort of
limitations As such the profitability of the Islamic banks in Bangladesh is adversely
affected
10
342 Absence of Suitable Long-term Assets
The absence of suitable long term assets available to Islamic banks is mirrored by lack
of short term tradable financial instruments At present there is no equivalent of an
inter-bank market in Bangladesh where banks could place say over night funds or
where they could borrow to satisfy temporary liquidity needs Trading of financial
instruments is also difficult to arrange when rates of return are not known until
maturity Furthermore it is not clear whether Islamic banks in Bangladesh can utilize
more exotic instruments such as derivatives that are becoming increasingly popular
with conventional banks Obviously these factors place Islamic banking in
Bangladesh at a distinct disadvantage compared to its conventional banking
counterpart
343 Shortage of Supportive and Link Institutions
Any system however well integrated it may be cannot thrive exclusively on its built-
in elements It has to depend on a number of link institutions and so is the case with
Islamic banking For identifying suitable projects Islamic banking can profitably draw
the services of economists lawyers insurance companies management consultants
auditors and so on They also need research and training forums in order to prompting
entrepreneurship amongst their clients Such support services properly oriented
towards Islamic banking are yet to be developed in Bangladesh
344 Organizing Relationship with Foreign Banks
Another important issue facing Islamic banks in Bangladesh is how to organize their
relationships with foreign banks and more generally how to conduct international
operations This is of course an issue closely related to the creation of financial
instruments which would be simultaneously consistent with Islamic principles and
acceptable to interest-based banks including foreign banks
345 Long-term Financing
Islamic Banks stick very closely to the pricing policies of the government They can
not benefit from hidden costs and inputs which elevate the level of prices by certain
entrepreneurs without any justification On the other hand Islamic banks as financial
institutions are even more directly affected by the failure of the projects they finance
This is because the built in security for getting back their funds together with their
11
profits is in the success of the project Islamically it is not lawful to obtain security
from the partner against dishonesty or negligence both of which are very difficult if
not impossible to prove (Ahmad K 2000)
35 The Future of Islamic Banking in Bangladesh
351 Need for Re-organization of the whole financial System
Review of the problems of Islamic banking in general and Islamic banks of
Bangladesh in particular poses a challenging feature for the promotion and survival
of Islamic banks in Bangladesh The policy implication is not that Islamic banks
should never be floated within the conventional banking framework Rather it is the
conventional banking system whose operational mechanism needs to be re-examined
and converted into PLS system consider- ing beneficial impact of the latter on the
economy However as long as Islamic banks are to operate within the conventional
banking framework the recommendations under the following heads may be taken
note of
352 New banking philosophy for the Islamic Banks
There seems to be a gap between the ideals and actual practice of Islamic banks in
Bangladesh In their reports booklets bulletins and posters there banks express their
commitment to striving for establishing a just society free from exploitation Study
shows that a little progress has been achieved so far in that direction Though this
failure is attributed mainly to the pervasive influence of conventional banking system
itself lack of vigilance of the promot- ers of Islamic banking in realizing the
objective is no less to blame There should be a through review of policies that have
been pursued by these banks for about a decade and points of departure have to be
identified to redesign their of action
353 Future Policy and Strategy
The first action that deserves immediate attention is the promotion of the image of
Islamic banks as PLS banks Strategies have to be carefully devised so that the image
of Islamic character and solvency as a bank is simultaneously promoted To this end
Pilot schemes in some very selected areas should be started to test innovative ideas
with profit-loss-sharing modes of financing as major component Islamic banks
should clearly demonstrate by their actions that their banking practices are guided by
12
profitability criterion thereby establishing that only Islamic banking practices ensures
efficient allocation of resources and provide true market signals through PLS modes
Islamic banks should continuously monitor and disseminate through various means
the impact of their operations on the distribution of income primarily between the
bank and the other two parties the depositors and the entrepreneurs and then on
different income groups of the society These presuppose establishment of a fully
equipped research academy in each Islamic bank
354 Stepping for Distributional Efficiency
The task is more challenging for Islamic banks as they have toe promote their
distributional efficiency from all dimensions together with profitability Islamic
banks step by step have to be converted into profit-loss-sharing banks by increasing
their percentage share of investment financing though PLS modes The Islamic banks
to do that can be selective in choosing clients for financing under PLS modes They
should establish direct functional relationship between the income of the depositors
and between the income the income of the bank and that of the entrepreneurs The
relationship improves with share of bank financing under PLS modes increases
355 Promotion of Allocative Efficiency
The Islamic banks can improve their allocative efficiency be satisfying social welfare
conditions in the following manner First they should allocate a reasonable portion of
their investible funds in social priority sectors such as agriculture (including poultry
and fishery) small and cottage industries and export-led industries like garment
shrimp cultivation Secondly when the percentage shares of allocation of investible
funds are determined among the sectors of investment financing profitability of
projects should be the criterion for allocating investment funds The criterion would
be best satisfied if more and more projects were financed under PLS modes
356 Modern banking Policies and practices
Islamic banks with a view to facing the growing competition either fellow-Islamic
banks or the conventional banks which have launched Islamic banking practices will
have to adapts their functioning in line with modern business practices though
improvement and expansion of the range of dealing in the banking sector Thus it is
necessary for them to provide comprehensive banking and investment services to
13
clients and simultaneously to take advantage of modern technological breakthroughs
in areas such as electronic communication computerization etc
357 Government and Central bank Responsibilities
Government should think actively for the promotion of Islamic banking in
Bangladesh considering its pro-develop- ment role It should amend existing financial
laws acts and regulations to create favorable environment conducive to smooth
operation of Islamic banks The bank Reforms Committee may be entrusted to draft
an Islamic Banking Act Government should also allow establishment of Islamic
insurance and other subsidiary companies in order to facilitate their operation
Bangladesh Bank should develop some Islamic Monetary and Saving instruments and
create separate window for transactions with the Islamic banks and a full-fledged
Islamic banking Department for analyzing supervising monitoring and guiding
purpose thereby facilitating Islamic banks for their smooth develop- ment in
Bangladesh
358 Inter-Islamic Bank Co-operation and Perspective Plan
All Islamic banks should come forward to help each others and adopt a perspective
plan say for 20 years for Islamization of the banking system of Bangladesh To
actualize this mission they should set-up immediately and Apex Research Adademy
and a Training Institute designed with modern tools Books and other accessories
(Sarkar M A A 1999)
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
8
30 Literature Review
31 Development of Islamic banking in the World
The second half of the twentieth century witnessed a major shift of thinking in devising
banking policy and framework on the basis of Islamic Shariah This new thought was
institutionalized at the end of the third quarter of the century and emerged as a new
system of banking called Islamic banking The establishment of the Islamic
Development Bank (IDB) in 1975 gave momentum to the Islamic Banking movement
Since the establishment of IDB a number of Islamic Banking and financial institutions
have been established all over the world irrespective of Muslim and non-Muslim
countries Over the past few decades the Islamic financial industry has rapidly
expanded worldwide Currently about 260 Islamic financial institutions (IFIs) have total
combined assets exceeding $250 billion in more than 57 countries The Islamic
financial market is estimated to grow at annual rates averaging 15 in a year Their
rapid growth has gained considerable attention in international financial circles where
various market participants have recognized promising potentials (Hassan M K 1999)
The Islamic finance market has become extremely sophisticated as well as increasingly
competitive Today virtually all large western financial institutions are involved in
Islamic finance whether through Islamic subsidiaries ldquoIslamic windowsrdquo or the
marketing of Islamic products In recent years a range of new Islamic products have
appeared such as Islamic bonds (or sukuk) and Islamic derivatives While some of
those products are widely accepted others are still controversial (Hassan M K 1999)
32 Genesis of Islamic Banking in Bangladesh
Bangladesh is the third largest Muslim country in the world with around 135 million
populations of which 90 percent are Muslim The hope and aspiration of the people to
run banking system on the basis of Islamic principle came into reality after the OIC
recommendation at its Foreign Ministers meeting in 1978 at Senegal to develop a
separate banking system of their own After 5 years of that declaration in 1983
Bangladesh established its first Islamic bank At present out of 49 banks in
Bangladesh 7 full fledged Islamic Banks and 19 Islamic Banking branches of 9
conventional banks are working in the private sector on the basis of Islamic Shariah
9
Islamic banks in Bangladesh since their inception have been gaining popularity in spite
of some problems in their operation (Sarkar M A A 2004)
33 Islamic Banking Branches in Conventional Banks
An important development in Islamic banking in the last few years has been the entry
of some conventional banks in the market and their use of Islamic modes of financing
through their Islamic branches windows or units It necessitates and encourages the
mobilized ion of Islamic banking which includes some of the giants in the banking
and finance industry Bangladesh was not indifferent to this turning move Presently 9
conventional banks have opened 19 Islamic banking branches alongside their interest
based branches These conventional banks should focus on the safeguards that ensure
the Islamic nature of these branches such as separation and compliance with Shariah
Separation of Islamic banking branches includes separation of capital accounts staff
employed and office However the most important thing is compliance with Shariah
There should be strong Shariah supervisory boards in order to prepare the model
agreement to approve the structure of every new operation and lay down the basic
guidelines for each and every mode of financing (Siddiqi M 2002)
34 Problems Specific to Islamic Banking in Bangladesh
341 Absence of Islamic Money Market
In the absence of Islamic money market in Bangladesh the Islamic banks cannot
invest their surplus fund ie temporary excess liquidity to earn any income rather
than keeping it idle Because all the Government Treasury Bills approved securities
and Bangladesh Bank Bills in Bangladesh are interest bearing Naturally the Islamic
banks cannot invest the permissible part of their Security Liquidity Reserve and liquid
surplus in those securities As a result they deposit their whole reserve in cash with
Bangladesh Bank Similarly the liquid surplus also remains uninvested On the
contrary the conventional banks of the country do not suffer from this sort of
limitations As such the profitability of the Islamic banks in Bangladesh is adversely
affected
10
342 Absence of Suitable Long-term Assets
The absence of suitable long term assets available to Islamic banks is mirrored by lack
of short term tradable financial instruments At present there is no equivalent of an
inter-bank market in Bangladesh where banks could place say over night funds or
where they could borrow to satisfy temporary liquidity needs Trading of financial
instruments is also difficult to arrange when rates of return are not known until
maturity Furthermore it is not clear whether Islamic banks in Bangladesh can utilize
more exotic instruments such as derivatives that are becoming increasingly popular
with conventional banks Obviously these factors place Islamic banking in
Bangladesh at a distinct disadvantage compared to its conventional banking
counterpart
343 Shortage of Supportive and Link Institutions
Any system however well integrated it may be cannot thrive exclusively on its built-
in elements It has to depend on a number of link institutions and so is the case with
Islamic banking For identifying suitable projects Islamic banking can profitably draw
the services of economists lawyers insurance companies management consultants
auditors and so on They also need research and training forums in order to prompting
entrepreneurship amongst their clients Such support services properly oriented
towards Islamic banking are yet to be developed in Bangladesh
344 Organizing Relationship with Foreign Banks
Another important issue facing Islamic banks in Bangladesh is how to organize their
relationships with foreign banks and more generally how to conduct international
operations This is of course an issue closely related to the creation of financial
instruments which would be simultaneously consistent with Islamic principles and
acceptable to interest-based banks including foreign banks
345 Long-term Financing
Islamic Banks stick very closely to the pricing policies of the government They can
not benefit from hidden costs and inputs which elevate the level of prices by certain
entrepreneurs without any justification On the other hand Islamic banks as financial
institutions are even more directly affected by the failure of the projects they finance
This is because the built in security for getting back their funds together with their
11
profits is in the success of the project Islamically it is not lawful to obtain security
from the partner against dishonesty or negligence both of which are very difficult if
not impossible to prove (Ahmad K 2000)
35 The Future of Islamic Banking in Bangladesh
351 Need for Re-organization of the whole financial System
Review of the problems of Islamic banking in general and Islamic banks of
Bangladesh in particular poses a challenging feature for the promotion and survival
of Islamic banks in Bangladesh The policy implication is not that Islamic banks
should never be floated within the conventional banking framework Rather it is the
conventional banking system whose operational mechanism needs to be re-examined
and converted into PLS system consider- ing beneficial impact of the latter on the
economy However as long as Islamic banks are to operate within the conventional
banking framework the recommendations under the following heads may be taken
note of
352 New banking philosophy for the Islamic Banks
There seems to be a gap between the ideals and actual practice of Islamic banks in
Bangladesh In their reports booklets bulletins and posters there banks express their
commitment to striving for establishing a just society free from exploitation Study
shows that a little progress has been achieved so far in that direction Though this
failure is attributed mainly to the pervasive influence of conventional banking system
itself lack of vigilance of the promot- ers of Islamic banking in realizing the
objective is no less to blame There should be a through review of policies that have
been pursued by these banks for about a decade and points of departure have to be
identified to redesign their of action
353 Future Policy and Strategy
The first action that deserves immediate attention is the promotion of the image of
Islamic banks as PLS banks Strategies have to be carefully devised so that the image
of Islamic character and solvency as a bank is simultaneously promoted To this end
Pilot schemes in some very selected areas should be started to test innovative ideas
with profit-loss-sharing modes of financing as major component Islamic banks
should clearly demonstrate by their actions that their banking practices are guided by
12
profitability criterion thereby establishing that only Islamic banking practices ensures
efficient allocation of resources and provide true market signals through PLS modes
Islamic banks should continuously monitor and disseminate through various means
the impact of their operations on the distribution of income primarily between the
bank and the other two parties the depositors and the entrepreneurs and then on
different income groups of the society These presuppose establishment of a fully
equipped research academy in each Islamic bank
354 Stepping for Distributional Efficiency
The task is more challenging for Islamic banks as they have toe promote their
distributional efficiency from all dimensions together with profitability Islamic
banks step by step have to be converted into profit-loss-sharing banks by increasing
their percentage share of investment financing though PLS modes The Islamic banks
to do that can be selective in choosing clients for financing under PLS modes They
should establish direct functional relationship between the income of the depositors
and between the income the income of the bank and that of the entrepreneurs The
relationship improves with share of bank financing under PLS modes increases
355 Promotion of Allocative Efficiency
The Islamic banks can improve their allocative efficiency be satisfying social welfare
conditions in the following manner First they should allocate a reasonable portion of
their investible funds in social priority sectors such as agriculture (including poultry
and fishery) small and cottage industries and export-led industries like garment
shrimp cultivation Secondly when the percentage shares of allocation of investible
funds are determined among the sectors of investment financing profitability of
projects should be the criterion for allocating investment funds The criterion would
be best satisfied if more and more projects were financed under PLS modes
356 Modern banking Policies and practices
Islamic banks with a view to facing the growing competition either fellow-Islamic
banks or the conventional banks which have launched Islamic banking practices will
have to adapts their functioning in line with modern business practices though
improvement and expansion of the range of dealing in the banking sector Thus it is
necessary for them to provide comprehensive banking and investment services to
13
clients and simultaneously to take advantage of modern technological breakthroughs
in areas such as electronic communication computerization etc
357 Government and Central bank Responsibilities
Government should think actively for the promotion of Islamic banking in
Bangladesh considering its pro-develop- ment role It should amend existing financial
laws acts and regulations to create favorable environment conducive to smooth
operation of Islamic banks The bank Reforms Committee may be entrusted to draft
an Islamic Banking Act Government should also allow establishment of Islamic
insurance and other subsidiary companies in order to facilitate their operation
Bangladesh Bank should develop some Islamic Monetary and Saving instruments and
create separate window for transactions with the Islamic banks and a full-fledged
Islamic banking Department for analyzing supervising monitoring and guiding
purpose thereby facilitating Islamic banks for their smooth develop- ment in
Bangladesh
358 Inter-Islamic Bank Co-operation and Perspective Plan
All Islamic banks should come forward to help each others and adopt a perspective
plan say for 20 years for Islamization of the banking system of Bangladesh To
actualize this mission they should set-up immediately and Apex Research Adademy
and a Training Institute designed with modern tools Books and other accessories
(Sarkar M A A 1999)
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
9
Islamic banks in Bangladesh since their inception have been gaining popularity in spite
of some problems in their operation (Sarkar M A A 2004)
33 Islamic Banking Branches in Conventional Banks
An important development in Islamic banking in the last few years has been the entry
of some conventional banks in the market and their use of Islamic modes of financing
through their Islamic branches windows or units It necessitates and encourages the
mobilized ion of Islamic banking which includes some of the giants in the banking
and finance industry Bangladesh was not indifferent to this turning move Presently 9
conventional banks have opened 19 Islamic banking branches alongside their interest
based branches These conventional banks should focus on the safeguards that ensure
the Islamic nature of these branches such as separation and compliance with Shariah
Separation of Islamic banking branches includes separation of capital accounts staff
employed and office However the most important thing is compliance with Shariah
There should be strong Shariah supervisory boards in order to prepare the model
agreement to approve the structure of every new operation and lay down the basic
guidelines for each and every mode of financing (Siddiqi M 2002)
34 Problems Specific to Islamic Banking in Bangladesh
341 Absence of Islamic Money Market
In the absence of Islamic money market in Bangladesh the Islamic banks cannot
invest their surplus fund ie temporary excess liquidity to earn any income rather
than keeping it idle Because all the Government Treasury Bills approved securities
and Bangladesh Bank Bills in Bangladesh are interest bearing Naturally the Islamic
banks cannot invest the permissible part of their Security Liquidity Reserve and liquid
surplus in those securities As a result they deposit their whole reserve in cash with
Bangladesh Bank Similarly the liquid surplus also remains uninvested On the
contrary the conventional banks of the country do not suffer from this sort of
limitations As such the profitability of the Islamic banks in Bangladesh is adversely
affected
10
342 Absence of Suitable Long-term Assets
The absence of suitable long term assets available to Islamic banks is mirrored by lack
of short term tradable financial instruments At present there is no equivalent of an
inter-bank market in Bangladesh where banks could place say over night funds or
where they could borrow to satisfy temporary liquidity needs Trading of financial
instruments is also difficult to arrange when rates of return are not known until
maturity Furthermore it is not clear whether Islamic banks in Bangladesh can utilize
more exotic instruments such as derivatives that are becoming increasingly popular
with conventional banks Obviously these factors place Islamic banking in
Bangladesh at a distinct disadvantage compared to its conventional banking
counterpart
343 Shortage of Supportive and Link Institutions
Any system however well integrated it may be cannot thrive exclusively on its built-
in elements It has to depend on a number of link institutions and so is the case with
Islamic banking For identifying suitable projects Islamic banking can profitably draw
the services of economists lawyers insurance companies management consultants
auditors and so on They also need research and training forums in order to prompting
entrepreneurship amongst their clients Such support services properly oriented
towards Islamic banking are yet to be developed in Bangladesh
344 Organizing Relationship with Foreign Banks
Another important issue facing Islamic banks in Bangladesh is how to organize their
relationships with foreign banks and more generally how to conduct international
operations This is of course an issue closely related to the creation of financial
instruments which would be simultaneously consistent with Islamic principles and
acceptable to interest-based banks including foreign banks
345 Long-term Financing
Islamic Banks stick very closely to the pricing policies of the government They can
not benefit from hidden costs and inputs which elevate the level of prices by certain
entrepreneurs without any justification On the other hand Islamic banks as financial
institutions are even more directly affected by the failure of the projects they finance
This is because the built in security for getting back their funds together with their
11
profits is in the success of the project Islamically it is not lawful to obtain security
from the partner against dishonesty or negligence both of which are very difficult if
not impossible to prove (Ahmad K 2000)
35 The Future of Islamic Banking in Bangladesh
351 Need for Re-organization of the whole financial System
Review of the problems of Islamic banking in general and Islamic banks of
Bangladesh in particular poses a challenging feature for the promotion and survival
of Islamic banks in Bangladesh The policy implication is not that Islamic banks
should never be floated within the conventional banking framework Rather it is the
conventional banking system whose operational mechanism needs to be re-examined
and converted into PLS system consider- ing beneficial impact of the latter on the
economy However as long as Islamic banks are to operate within the conventional
banking framework the recommendations under the following heads may be taken
note of
352 New banking philosophy for the Islamic Banks
There seems to be a gap between the ideals and actual practice of Islamic banks in
Bangladesh In their reports booklets bulletins and posters there banks express their
commitment to striving for establishing a just society free from exploitation Study
shows that a little progress has been achieved so far in that direction Though this
failure is attributed mainly to the pervasive influence of conventional banking system
itself lack of vigilance of the promot- ers of Islamic banking in realizing the
objective is no less to blame There should be a through review of policies that have
been pursued by these banks for about a decade and points of departure have to be
identified to redesign their of action
353 Future Policy and Strategy
The first action that deserves immediate attention is the promotion of the image of
Islamic banks as PLS banks Strategies have to be carefully devised so that the image
of Islamic character and solvency as a bank is simultaneously promoted To this end
Pilot schemes in some very selected areas should be started to test innovative ideas
with profit-loss-sharing modes of financing as major component Islamic banks
should clearly demonstrate by their actions that their banking practices are guided by
12
profitability criterion thereby establishing that only Islamic banking practices ensures
efficient allocation of resources and provide true market signals through PLS modes
Islamic banks should continuously monitor and disseminate through various means
the impact of their operations on the distribution of income primarily between the
bank and the other two parties the depositors and the entrepreneurs and then on
different income groups of the society These presuppose establishment of a fully
equipped research academy in each Islamic bank
354 Stepping for Distributional Efficiency
The task is more challenging for Islamic banks as they have toe promote their
distributional efficiency from all dimensions together with profitability Islamic
banks step by step have to be converted into profit-loss-sharing banks by increasing
their percentage share of investment financing though PLS modes The Islamic banks
to do that can be selective in choosing clients for financing under PLS modes They
should establish direct functional relationship between the income of the depositors
and between the income the income of the bank and that of the entrepreneurs The
relationship improves with share of bank financing under PLS modes increases
355 Promotion of Allocative Efficiency
The Islamic banks can improve their allocative efficiency be satisfying social welfare
conditions in the following manner First they should allocate a reasonable portion of
their investible funds in social priority sectors such as agriculture (including poultry
and fishery) small and cottage industries and export-led industries like garment
shrimp cultivation Secondly when the percentage shares of allocation of investible
funds are determined among the sectors of investment financing profitability of
projects should be the criterion for allocating investment funds The criterion would
be best satisfied if more and more projects were financed under PLS modes
356 Modern banking Policies and practices
Islamic banks with a view to facing the growing competition either fellow-Islamic
banks or the conventional banks which have launched Islamic banking practices will
have to adapts their functioning in line with modern business practices though
improvement and expansion of the range of dealing in the banking sector Thus it is
necessary for them to provide comprehensive banking and investment services to
13
clients and simultaneously to take advantage of modern technological breakthroughs
in areas such as electronic communication computerization etc
357 Government and Central bank Responsibilities
Government should think actively for the promotion of Islamic banking in
Bangladesh considering its pro-develop- ment role It should amend existing financial
laws acts and regulations to create favorable environment conducive to smooth
operation of Islamic banks The bank Reforms Committee may be entrusted to draft
an Islamic Banking Act Government should also allow establishment of Islamic
insurance and other subsidiary companies in order to facilitate their operation
Bangladesh Bank should develop some Islamic Monetary and Saving instruments and
create separate window for transactions with the Islamic banks and a full-fledged
Islamic banking Department for analyzing supervising monitoring and guiding
purpose thereby facilitating Islamic banks for their smooth develop- ment in
Bangladesh
358 Inter-Islamic Bank Co-operation and Perspective Plan
All Islamic banks should come forward to help each others and adopt a perspective
plan say for 20 years for Islamization of the banking system of Bangladesh To
actualize this mission they should set-up immediately and Apex Research Adademy
and a Training Institute designed with modern tools Books and other accessories
(Sarkar M A A 1999)
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
10
342 Absence of Suitable Long-term Assets
The absence of suitable long term assets available to Islamic banks is mirrored by lack
of short term tradable financial instruments At present there is no equivalent of an
inter-bank market in Bangladesh where banks could place say over night funds or
where they could borrow to satisfy temporary liquidity needs Trading of financial
instruments is also difficult to arrange when rates of return are not known until
maturity Furthermore it is not clear whether Islamic banks in Bangladesh can utilize
more exotic instruments such as derivatives that are becoming increasingly popular
with conventional banks Obviously these factors place Islamic banking in
Bangladesh at a distinct disadvantage compared to its conventional banking
counterpart
343 Shortage of Supportive and Link Institutions
Any system however well integrated it may be cannot thrive exclusively on its built-
in elements It has to depend on a number of link institutions and so is the case with
Islamic banking For identifying suitable projects Islamic banking can profitably draw
the services of economists lawyers insurance companies management consultants
auditors and so on They also need research and training forums in order to prompting
entrepreneurship amongst their clients Such support services properly oriented
towards Islamic banking are yet to be developed in Bangladesh
344 Organizing Relationship with Foreign Banks
Another important issue facing Islamic banks in Bangladesh is how to organize their
relationships with foreign banks and more generally how to conduct international
operations This is of course an issue closely related to the creation of financial
instruments which would be simultaneously consistent with Islamic principles and
acceptable to interest-based banks including foreign banks
345 Long-term Financing
Islamic Banks stick very closely to the pricing policies of the government They can
not benefit from hidden costs and inputs which elevate the level of prices by certain
entrepreneurs without any justification On the other hand Islamic banks as financial
institutions are even more directly affected by the failure of the projects they finance
This is because the built in security for getting back their funds together with their
11
profits is in the success of the project Islamically it is not lawful to obtain security
from the partner against dishonesty or negligence both of which are very difficult if
not impossible to prove (Ahmad K 2000)
35 The Future of Islamic Banking in Bangladesh
351 Need for Re-organization of the whole financial System
Review of the problems of Islamic banking in general and Islamic banks of
Bangladesh in particular poses a challenging feature for the promotion and survival
of Islamic banks in Bangladesh The policy implication is not that Islamic banks
should never be floated within the conventional banking framework Rather it is the
conventional banking system whose operational mechanism needs to be re-examined
and converted into PLS system consider- ing beneficial impact of the latter on the
economy However as long as Islamic banks are to operate within the conventional
banking framework the recommendations under the following heads may be taken
note of
352 New banking philosophy for the Islamic Banks
There seems to be a gap between the ideals and actual practice of Islamic banks in
Bangladesh In their reports booklets bulletins and posters there banks express their
commitment to striving for establishing a just society free from exploitation Study
shows that a little progress has been achieved so far in that direction Though this
failure is attributed mainly to the pervasive influence of conventional banking system
itself lack of vigilance of the promot- ers of Islamic banking in realizing the
objective is no less to blame There should be a through review of policies that have
been pursued by these banks for about a decade and points of departure have to be
identified to redesign their of action
353 Future Policy and Strategy
The first action that deserves immediate attention is the promotion of the image of
Islamic banks as PLS banks Strategies have to be carefully devised so that the image
of Islamic character and solvency as a bank is simultaneously promoted To this end
Pilot schemes in some very selected areas should be started to test innovative ideas
with profit-loss-sharing modes of financing as major component Islamic banks
should clearly demonstrate by their actions that their banking practices are guided by
12
profitability criterion thereby establishing that only Islamic banking practices ensures
efficient allocation of resources and provide true market signals through PLS modes
Islamic banks should continuously monitor and disseminate through various means
the impact of their operations on the distribution of income primarily between the
bank and the other two parties the depositors and the entrepreneurs and then on
different income groups of the society These presuppose establishment of a fully
equipped research academy in each Islamic bank
354 Stepping for Distributional Efficiency
The task is more challenging for Islamic banks as they have toe promote their
distributional efficiency from all dimensions together with profitability Islamic
banks step by step have to be converted into profit-loss-sharing banks by increasing
their percentage share of investment financing though PLS modes The Islamic banks
to do that can be selective in choosing clients for financing under PLS modes They
should establish direct functional relationship between the income of the depositors
and between the income the income of the bank and that of the entrepreneurs The
relationship improves with share of bank financing under PLS modes increases
355 Promotion of Allocative Efficiency
The Islamic banks can improve their allocative efficiency be satisfying social welfare
conditions in the following manner First they should allocate a reasonable portion of
their investible funds in social priority sectors such as agriculture (including poultry
and fishery) small and cottage industries and export-led industries like garment
shrimp cultivation Secondly when the percentage shares of allocation of investible
funds are determined among the sectors of investment financing profitability of
projects should be the criterion for allocating investment funds The criterion would
be best satisfied if more and more projects were financed under PLS modes
356 Modern banking Policies and practices
Islamic banks with a view to facing the growing competition either fellow-Islamic
banks or the conventional banks which have launched Islamic banking practices will
have to adapts their functioning in line with modern business practices though
improvement and expansion of the range of dealing in the banking sector Thus it is
necessary for them to provide comprehensive banking and investment services to
13
clients and simultaneously to take advantage of modern technological breakthroughs
in areas such as electronic communication computerization etc
357 Government and Central bank Responsibilities
Government should think actively for the promotion of Islamic banking in
Bangladesh considering its pro-develop- ment role It should amend existing financial
laws acts and regulations to create favorable environment conducive to smooth
operation of Islamic banks The bank Reforms Committee may be entrusted to draft
an Islamic Banking Act Government should also allow establishment of Islamic
insurance and other subsidiary companies in order to facilitate their operation
Bangladesh Bank should develop some Islamic Monetary and Saving instruments and
create separate window for transactions with the Islamic banks and a full-fledged
Islamic banking Department for analyzing supervising monitoring and guiding
purpose thereby facilitating Islamic banks for their smooth develop- ment in
Bangladesh
358 Inter-Islamic Bank Co-operation and Perspective Plan
All Islamic banks should come forward to help each others and adopt a perspective
plan say for 20 years for Islamization of the banking system of Bangladesh To
actualize this mission they should set-up immediately and Apex Research Adademy
and a Training Institute designed with modern tools Books and other accessories
(Sarkar M A A 1999)
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
11
profits is in the success of the project Islamically it is not lawful to obtain security
from the partner against dishonesty or negligence both of which are very difficult if
not impossible to prove (Ahmad K 2000)
35 The Future of Islamic Banking in Bangladesh
351 Need for Re-organization of the whole financial System
Review of the problems of Islamic banking in general and Islamic banks of
Bangladesh in particular poses a challenging feature for the promotion and survival
of Islamic banks in Bangladesh The policy implication is not that Islamic banks
should never be floated within the conventional banking framework Rather it is the
conventional banking system whose operational mechanism needs to be re-examined
and converted into PLS system consider- ing beneficial impact of the latter on the
economy However as long as Islamic banks are to operate within the conventional
banking framework the recommendations under the following heads may be taken
note of
352 New banking philosophy for the Islamic Banks
There seems to be a gap between the ideals and actual practice of Islamic banks in
Bangladesh In their reports booklets bulletins and posters there banks express their
commitment to striving for establishing a just society free from exploitation Study
shows that a little progress has been achieved so far in that direction Though this
failure is attributed mainly to the pervasive influence of conventional banking system
itself lack of vigilance of the promot- ers of Islamic banking in realizing the
objective is no less to blame There should be a through review of policies that have
been pursued by these banks for about a decade and points of departure have to be
identified to redesign their of action
353 Future Policy and Strategy
The first action that deserves immediate attention is the promotion of the image of
Islamic banks as PLS banks Strategies have to be carefully devised so that the image
of Islamic character and solvency as a bank is simultaneously promoted To this end
Pilot schemes in some very selected areas should be started to test innovative ideas
with profit-loss-sharing modes of financing as major component Islamic banks
should clearly demonstrate by their actions that their banking practices are guided by
12
profitability criterion thereby establishing that only Islamic banking practices ensures
efficient allocation of resources and provide true market signals through PLS modes
Islamic banks should continuously monitor and disseminate through various means
the impact of their operations on the distribution of income primarily between the
bank and the other two parties the depositors and the entrepreneurs and then on
different income groups of the society These presuppose establishment of a fully
equipped research academy in each Islamic bank
354 Stepping for Distributional Efficiency
The task is more challenging for Islamic banks as they have toe promote their
distributional efficiency from all dimensions together with profitability Islamic
banks step by step have to be converted into profit-loss-sharing banks by increasing
their percentage share of investment financing though PLS modes The Islamic banks
to do that can be selective in choosing clients for financing under PLS modes They
should establish direct functional relationship between the income of the depositors
and between the income the income of the bank and that of the entrepreneurs The
relationship improves with share of bank financing under PLS modes increases
355 Promotion of Allocative Efficiency
The Islamic banks can improve their allocative efficiency be satisfying social welfare
conditions in the following manner First they should allocate a reasonable portion of
their investible funds in social priority sectors such as agriculture (including poultry
and fishery) small and cottage industries and export-led industries like garment
shrimp cultivation Secondly when the percentage shares of allocation of investible
funds are determined among the sectors of investment financing profitability of
projects should be the criterion for allocating investment funds The criterion would
be best satisfied if more and more projects were financed under PLS modes
356 Modern banking Policies and practices
Islamic banks with a view to facing the growing competition either fellow-Islamic
banks or the conventional banks which have launched Islamic banking practices will
have to adapts their functioning in line with modern business practices though
improvement and expansion of the range of dealing in the banking sector Thus it is
necessary for them to provide comprehensive banking and investment services to
13
clients and simultaneously to take advantage of modern technological breakthroughs
in areas such as electronic communication computerization etc
357 Government and Central bank Responsibilities
Government should think actively for the promotion of Islamic banking in
Bangladesh considering its pro-develop- ment role It should amend existing financial
laws acts and regulations to create favorable environment conducive to smooth
operation of Islamic banks The bank Reforms Committee may be entrusted to draft
an Islamic Banking Act Government should also allow establishment of Islamic
insurance and other subsidiary companies in order to facilitate their operation
Bangladesh Bank should develop some Islamic Monetary and Saving instruments and
create separate window for transactions with the Islamic banks and a full-fledged
Islamic banking Department for analyzing supervising monitoring and guiding
purpose thereby facilitating Islamic banks for their smooth develop- ment in
Bangladesh
358 Inter-Islamic Bank Co-operation and Perspective Plan
All Islamic banks should come forward to help each others and adopt a perspective
plan say for 20 years for Islamization of the banking system of Bangladesh To
actualize this mission they should set-up immediately and Apex Research Adademy
and a Training Institute designed with modern tools Books and other accessories
(Sarkar M A A 1999)
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
12
profitability criterion thereby establishing that only Islamic banking practices ensures
efficient allocation of resources and provide true market signals through PLS modes
Islamic banks should continuously monitor and disseminate through various means
the impact of their operations on the distribution of income primarily between the
bank and the other two parties the depositors and the entrepreneurs and then on
different income groups of the society These presuppose establishment of a fully
equipped research academy in each Islamic bank
354 Stepping for Distributional Efficiency
The task is more challenging for Islamic banks as they have toe promote their
distributional efficiency from all dimensions together with profitability Islamic
banks step by step have to be converted into profit-loss-sharing banks by increasing
their percentage share of investment financing though PLS modes The Islamic banks
to do that can be selective in choosing clients for financing under PLS modes They
should establish direct functional relationship between the income of the depositors
and between the income the income of the bank and that of the entrepreneurs The
relationship improves with share of bank financing under PLS modes increases
355 Promotion of Allocative Efficiency
The Islamic banks can improve their allocative efficiency be satisfying social welfare
conditions in the following manner First they should allocate a reasonable portion of
their investible funds in social priority sectors such as agriculture (including poultry
and fishery) small and cottage industries and export-led industries like garment
shrimp cultivation Secondly when the percentage shares of allocation of investible
funds are determined among the sectors of investment financing profitability of
projects should be the criterion for allocating investment funds The criterion would
be best satisfied if more and more projects were financed under PLS modes
356 Modern banking Policies and practices
Islamic banks with a view to facing the growing competition either fellow-Islamic
banks or the conventional banks which have launched Islamic banking practices will
have to adapts their functioning in line with modern business practices though
improvement and expansion of the range of dealing in the banking sector Thus it is
necessary for them to provide comprehensive banking and investment services to
13
clients and simultaneously to take advantage of modern technological breakthroughs
in areas such as electronic communication computerization etc
357 Government and Central bank Responsibilities
Government should think actively for the promotion of Islamic banking in
Bangladesh considering its pro-develop- ment role It should amend existing financial
laws acts and regulations to create favorable environment conducive to smooth
operation of Islamic banks The bank Reforms Committee may be entrusted to draft
an Islamic Banking Act Government should also allow establishment of Islamic
insurance and other subsidiary companies in order to facilitate their operation
Bangladesh Bank should develop some Islamic Monetary and Saving instruments and
create separate window for transactions with the Islamic banks and a full-fledged
Islamic banking Department for analyzing supervising monitoring and guiding
purpose thereby facilitating Islamic banks for their smooth develop- ment in
Bangladesh
358 Inter-Islamic Bank Co-operation and Perspective Plan
All Islamic banks should come forward to help each others and adopt a perspective
plan say for 20 years for Islamization of the banking system of Bangladesh To
actualize this mission they should set-up immediately and Apex Research Adademy
and a Training Institute designed with modern tools Books and other accessories
(Sarkar M A A 1999)
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
13
clients and simultaneously to take advantage of modern technological breakthroughs
in areas such as electronic communication computerization etc
357 Government and Central bank Responsibilities
Government should think actively for the promotion of Islamic banking in
Bangladesh considering its pro-develop- ment role It should amend existing financial
laws acts and regulations to create favorable environment conducive to smooth
operation of Islamic banks The bank Reforms Committee may be entrusted to draft
an Islamic Banking Act Government should also allow establishment of Islamic
insurance and other subsidiary companies in order to facilitate their operation
Bangladesh Bank should develop some Islamic Monetary and Saving instruments and
create separate window for transactions with the Islamic banks and a full-fledged
Islamic banking Department for analyzing supervising monitoring and guiding
purpose thereby facilitating Islamic banks for their smooth develop- ment in
Bangladesh
358 Inter-Islamic Bank Co-operation and Perspective Plan
All Islamic banks should come forward to help each others and adopt a perspective
plan say for 20 years for Islamization of the banking system of Bangladesh To
actualize this mission they should set-up immediately and Apex Research Adademy
and a Training Institute designed with modern tools Books and other accessories
(Sarkar M A A 1999)
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
14
40 Analysis and Findings
41 Data analysis for Managers We conducted a census survey on the all fully
fledged Islamic banks in Bangladesh based on 30(thirty) questions which are attached
in the appended parts Here the respondents are the managers of the Islamic banks
They provided the following data
411 Basic Corporate Profile In this part we brought some of information like no of
branches ATM booth products listing of stock exchange under one umbrella named
as basic Corporate Profile
Table 1 Comparative Basic Profile of Islamic Banks in Bangladesh
Name of Banks
Established No of
branches ATM booth Products
Listed in
Stock
exchange
Islami Bank Bangladesh
Limited
March131983
251 200 12 Yes
Shahajalal Islami Bank
Limited
May102001
63 12 26 Yes
First Security Islami Bank
Limited
October 51999
67 No 14 Yes
Social Islami Bank Limited
1995
74 20 10 Yes
EXIM Bank Limitd August 31999 59 50 22 Yes
ICB Islamic Bank Limited
May 201983
34 34 8 Yes
Al Arafa Islami Bank
Limited
September
271995 79
Under
Construction 6 Yes
Here it is seen Islami Bank Bangladesh is the first Islamic bank and the Shahjalal
Islamic bank is the last one in regard of establishment IBBL has got the highest
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
15
number of branches 714 Islami banks have ATM booth service100 Islamic
banks are enlisted in the stock exchange(s)
Table 2 ATM Booth System in Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 1 143 143 857
Underpro
cess1 143 143 1000
Total 7 1000 1000
412 Financial performance and rating of Islamic banks Amount of authorized
Capital and paid up capital Deposit ndashLoan Ratio Loan recovery rate credit rating
as well as CAMELS ratings of different Islamic banks in Bangladesh are tabulated
in this section
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
16
Table 3 Financial performance and Rating of Different Islamic Banks in Bangladesh
Name of the
Bank
Authorized
Capital B
DT
(million)
Paid up
Capital
BDT
(million)
Deposit
Loan
Ratio
Rate of
Loan
Recovery
Credit
rating
CAMELS
rating
Islami Bank
Bangladesh
Limited 10000 741312 100 90 Above 90 AA+ 1
Shahajalal
Islami Bank
Limited 10000 450 100 91 Above 90 A++ 2
First Security
Islami Bank
Limited 3520 3036 10088 70-90 A- 3
Social Islami
Bank Limited 4197 298781 10089 70-90 A+ 3
EXIM Bank
Limitd 20000 9224 10089 70-90
AA- 3
ICB Islamic
Bank Limited 10000 664702 100102 Below 70
-
4
Al Arafa
Islami Bank
Limited 5000 467728 1009343 70-90 A 4
Overall
industry
scenario 62717 3443523 10092 70-90
- -
From the table it is seen the total authorized and paid up Capital of the Islamic
banking sector are BDT 62717 million 3443523 respectively Average Deposit-
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
17
loan ratio is 10020 where as recovery rate is 70-90 29 Islamic banks have the
recovery rate is above 90 and 57 of banks have loan recovery rate is 70-90
4121 Credit Rating A credit rating evaluates the credit worthiness of an issuer of
specific types of debt specifically debt issued by a business enterprise such as a
corporation or a government It is an evaluation made by a credit rating agency of the
debt issuerrsquos likelihood of default Credit ratings are determined by credit ratings
agencies The credit rating represents the credit rating agencys evaluation of
qualitative and quantitative information for a company or government including non-
public information obtained by the credit rating agencies analysts Credit ratings are
not based on mathematical formulas Instead credit rating agencies use their
judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government
The credit rating of a corporation is a financial indicator to potential investors of debt
securities such as bonds Credit rating is usually of a financial instrument such as a
bond rather than the whole corporation These are assigned by credit rating agencies
such as Standard amp Poors Moodys or Fitch Ratings and have letter designations
such as A B C The Standard amp Poors rating scale is as follows from excellent to
poor AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
B- CCC+ CCC CCC- CC C D Anything lower than a BBB- rating is considered a
speculative or junk bond[3] The Moodys rating system is similar in concept but the
naming is a little different It is as follows from excellent to poor Aaa Aa1 Aa2
Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Ca C (Ahmed E Rahman Z amp Ahmed R I 2006)
From our study it is seen that Credit rating of the Islamic banking sector in
Bangladesh is good
4122 CAMELS Rating Performance of the banking sector has been evaluated
through CAMELS rating which involves analysis and evaluation of the six crucial
dimensions of banking operations The six indicators used in the rating system are (i)
Capital adequacy (ii) Asset quality (iii) Management soundness (including
implementation status of Core Risk -Management Guidelines) (iv) Earnings (v)
Liquidity and (vi) Sensitivity to market risk It is an international bank-rating system
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
18
where bank supervisory authorities (Usually central bank) rate institutions according
to these six factors
Bank supervisory authorities assign each bank a score on a scale of one (best) to five
(worst) for each factor If a bank has an average score less than two it is considered to
be a high-quality institution while banks with scores greater than three are considered
to be less-than-satisfactory establishments The system helps the supervisory authority
identify banks that are in need of attention
In our country Bangladesh bank assigns the CAMELS ratings and any bank rated 4 or
5 ie Marginal or Unsatisfactory under composite CAMELS rating is generally
identified as a Problem Bank Activities of the problem banks are closely monitored
by the Central Bank BB issues directives from time to time to the problem banks to
bring them in financially sound condition Actually the existing CAMELS rating
does not truly identify the performance of Islamic banks due to the difference between
the Islamic bank and conventional banks Hence their should be different CAMELS
rating for Islamic bank (Alam M N 2000)
413 Financial strength About 86 Islamic banks are financially sound and the rest
14 are average The findings of our survey are the below
Table 4 Financial Strength of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Strong 6 857 857 857
Avera
ge1 143 143 1000
Total 7 1000 1000
414 Sector wise loan Islamic banks in Bangladesh provide loan to the sector of
industry agriculture SME commerce and so on But in our study shows about 43
of banks give more loans to industry sector to promote the industrialization
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
19
Table 5 Sector Wise Loan Provided by Islamic Bank
Frequen
cy
Percen
t
Valid
Percent
Cumulativ
e Percent
Valid Industr
y3 429 429 429
Comme
rce2 286 286 714
Others 2 286 286 1000
Total 7 1000 1000
Sector wise Loan Provided by Islamic Bank
286
286
429
Others
Commerce
Industry
Figure 1 Sector wise loan provided by Islamic Bank
415 Market share of Islamic bank Though the market share should be expressed
in the percentage lack of proper quantitative data we recourse qualitative data ie
high medium and low
Table 6 Market Share of Islamic Bank in the Overall Industry
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 1 143 143 143
Mediu
m5 714 714 857
Low 1 143 143 1000
Total 7 1000 1000
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
20
It is seen that 143 of banks have high market share and 714 have medium
market share and the rest are low market share
Market Share of Islamic Bank in the
Overall Industry
143
714
143
Low
Medium
High
Figure 2 Market Share of Islamic Bank in the overall Industry
416 Market growth It is the parameter of how growing the market of Islamic
banks About 43 banks are growing rapidly and the 57 of banks grow on neither
rapidly or slowly
Table 7 Market Growth of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High
Low
3
0
42
9
0
429
0
429
429
Mediu
m 4 571 571 1000
Total 7 1000 1000
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
21
Market Growth of Islamic Bank
571
429
Medium
High
Figure 3 Market Growth Islamic Bank in Bangladesh
417 Compliances of the Products of Isamic Bank with Islamic Shariah The
products and services of islami bank must comply with the Islamic shariah Hence we
set a question in the questionnaire about the compatibility of products with Islamic
shariah The responses are below
Table 8 Compliances of the Products of Isamic Bank with Islamic Shariah
Frequency Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Modera
te2 286 286 1000
Total 7 1000 1000
418 Offshore Branch of Islamic Bank Offshore banking Unit is the branch of a
bank which is located outside of the home country typically in a low tax jurisdiction
that provides financial and legal advantageOBU aims to supply the demand of
increase revenue They take advantage of what in modern times it is called financial
sector which goes beyond criminality illegality and financial abuse or fraud Today
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
22
offshore banking centers aim at facilitating taxation for investors use of modern and
sophisticated banking dynamic investment and mutual funds
However 40 banks have offshore banking Unit to expand the market outside of the
country especially for the expatriate people
Table 9 Offshore Branch of Islamic Bank
Offshore Branch of Islamic Bank
571
429
No
Yes
Figure 4 Offshore Branch of Islamic Bank
419 Bank charge Our study reveals 57 of banks have medium bank charge and
43 have the low bank charge which is a good indicator of customersrsquo motivation
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 3 429 429 429
No 4 571 571 1000
Total 7 1000 1000
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
23
Table10 Average Bank Charge of Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Mediu
m4 571 571 571
Low 3 429 429 1000
Total 7 1000 1000
4110 Dividend Policy Most of the banks (about 86) offer dividend regularly The
dividend payment scenario of Islamic banks in Bangladesh is given the following
table
Table11 Dividend Payment per year
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 6 857 857 857
No 1 143 143 1000
Total 7 1000 1000
4111 Profitability of Islamic banks industry The profitability of Islamic banking
industry is quite satisfactory29 of banks earns higher profit than industry average
and 57 of banks earn industry average profit It is a good prospect of the Islamic
banking industry
Table12 Net Profit of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Above
average2 286 286 286
Industry
average4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
24
4112 CSR activities Every bank of Islamic banking industry is committed to the
communities and the stakeholders Hence Islamic banking industry performs
Corporate Social Responsibilities in the field of education sports sanitation health
care social welfare and social and religious awareness programs IBBL was the
number one sponsor in the ICC world Cup 2011 held in Bangladesh as a part of
CSR29 of Islamic banks are rendering high level of CSR activities
Table13 CSR Activities of Different Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Mediu
m5 714 714 1000
Total 7 1000 1000
4113 Facilitating role of Central Bank Bangladesh bank plays a significant role in
operating Islamic banks The managers were asked the facilitating role of central
bank The responses are follows
Table 14 Facilitating role of central Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Favorable 3 429 429 429
Favorable
but need
to change
3 429 429 857
Unfavora
ble1 143 143 1000
Total 7 1000 1000
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
25
About 43 managers of Islamic banks think that Govt or central bankrsquos role is
favorable and the same number managers think the role is favorable but need to
change or initiate more facilitating role The 14 thinks the role of govt or central
bank is not favorable for Islamic banking in Bangladesh
4114 Awards received by Islamic banks 71 of Islamic banks in the industry got
local or international award for the recognition of the financial performance and
management quality Like as ICAB award Bankers of the year best bank of Asia and
so on
Table15A wards
received by Islamic
bank
4115 Islamic banks as Remittances channels
A large number of Bangladeshi people are working and residing foreign countries
Every year they send a substantial amount of foreign currencies (remittances) through
banking channels Hence we wanted to know from the managers about the remittance
flow through the Islamic banks in Bangladesh and the responses are follows
Table16 Remittance flow through Islamic Bank
Frequency Percent
Valid Percent
Cumulative Percent
Valid High 1 143 143 143Medium
6 857 857 1000
Total 7 1000 1000
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Yes 5 714 714 714
No 2 286 286 1000
Total 7 1000 1000
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
26
Only 14 banks are used as high amount of remittance flow and 86 of banks
channel medium amount of remittance flow
4116 Compliances with Regulatory Body of Islamic Bank 71 of Islamic banks
are highly complied with the rules and regulations of central bank as well as govt
Table17 Compliance status of Islamic bank with regulatory bodies
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 5 714 714 714
Avera
ge2 286 286 1000
Total 7 1000 1000
4117 Islamic Banks as International Trade Channel International trade like as
export and import and issuing LC confirming LC and advising to the local
exporters factoring forfeiting as well as foreign exchange are dealt in banks as the
part of international banking and finances In our study we find 29 of banks are
highly contributing as international trade channel and 14 are contributing less than
industry average
Table 18 Contribution of Islamic Bank in International Trade Channel
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid High 2 286 286 286
Average 4 571 571 857
Below
average1 143 143 1000
Total 7 1000 1000
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
27
4118 Liquidity status Liquidity ratio is the measure to pay off the current
obligations and liquidity is the amount of cash and the financial asset which can easily
convertible to cash In the banking sector it is an indicator to meet the demand of the
depositors against the cheque or cash collections It is seen many of banks face
liquidity problem to meet the demand of customers especially in the eid time due to
more deposit-loan ratio Consequently call money rate will increase up to 250
which is a bad sign for the economy and the share holders and depositors as well
Table19 Liquidity Problem Faced by Islamic Bank
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Someti
mes6 857 857 857
Regular 1 143 143 1000
Total 7 1000 1000
It is seen 86 of banks face liquidity problem sometimes and 14 face liquidity
problem regularly
4119 Degree of automation Digitization and automation is the demand of
globalization and the attractiveness for competitions In Bangladesh this electronic
and digital revolution is also initiated but still pursuing to reach the zenith of
automation
Reasonably in our survey the managers were asked about the level of automation in
their respective banks and the responses are in the table
Table 20 Degree of Automation in Islamic Bank
Frequenc
y PercentValid
PercentCumulative
PercentValid High 4 571 571 571
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
28
Medium
3 429 429 1000
Total 7 1000 1000
In the table it is seen that 57 of Islamic banks are highly automated and about 43
banks are in mid level of automation
4120 SWOT analysis of Overall Islamic banking in Bangladesh Based on our
study the SWOT analysis of Islamic banking industry in Bangladesh is as follows
41201 Strengths
Moral and ideological views of the employees
Devoted working group
Continuous good credit rating of a good number of Islamic banks
Most of the customers rely on Islamic banks as these are shariah based
Integrity and efficiency of the management team
41202 Weakness
Absence of Islamic Banking Act in Bangladesh
Shortage of Islamic Banking product in present money market
Lacking of knowledge among the people about Islamic banking
Slow adaptation of modern banking concept
Insufficient number of ATM booth
Absence of intra islamic banking transaction market
41203 Opportunities
Large pool of customers
People are becoming more aware about Islamic banking
Introduction of new deposit investment and service products
Vast untapped market
Scope of establishing branch network home and abroad
Leadership in islamisation of banking in the country
41204 Threats
Critics regarding Islamic banking
Deviation in compliance with the Islamic shariah
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
29
Arrival of competitors in the market
Inadequate knowledge of Islamic banking
42 Data analysis for Customers For our study we selected both existing and
potential customers of Islamic banks Based on our questionnaire survey the data
analysis is following
421 Demographic features of customers The demographic features of the
respondents of our study are as follows
Table 21 Demographic features of customers
Demographic
features
Categories Percentage ()
Gender Male
Female
78
22
Education level Below high school
High School
Under graduate
Graduate
Post graduate
4
14
16
46
20
Age(Year) lt30 (young aged)
30-40(middle aged)
gt40(old aged)
64
20
16
Occupation Public Sector
Private Sector
Business
Student
Others
20
24
38
6
12
Monthly Income
in Tk
Low (Less then 10000)
Moderate(10000-40000)
Moderately high(41000-100000)
High (Above 100000)
18
40
22
20
Monthly Savings lt Tk5000
Tk(5000-20000)
gtTk50000
50
40
10
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
30
422 Service communication and others This part consists of the following data
and information
4221 Number of Bank Account Holders
Bank account in any Islamic Bank
320
680
No
Yes
Figure 5 Bank account in any Islamic Bank
4222 Level of customerrsquos satisfaction
To compare the quality of service by Islamic bank were asked to comment on their
level of satisfaction The responses were as follows
Table 22 Overall level of satisfaction of existing customers in Islamic Bank
Quality of services Rank values Frequency of
responses
Percentage
()
Very satisfactory
Satisfactory
Indifferent
Unsatisfactory
+ 20
+ 10
00
- 10
12
17
6
3
30
425
15
75
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
31
Very unsatisfactory - 20 2 5
Total 40 100
The corresponding index for these is given below
I = (2 x 12 + 1 x 17 + 0 x 6 ndash 1 x 3 ndash 2 x 2)40 = 085
The survey result showed that most of the existing customers are in satisfactory level
and the overall index of the existing customers is 085 which is close to the ranked
value of satisfactory (+10) So the overall the existing customers are satisfied with
the services of Islamic bank
Level of Satisfaction of existing Cusomers
Very unsatisfactory
unsatisfactory
Indifferent
satisfactory
Very satisfactory
Per
cen
t
50
40
30
20
10
0
Figure 6 Level of satisfaction of existing customers
4223 Is Interest Haram(forbidden)in islam
In our questionnaire we asked a question about the legitimacy of interest in islam Our
question was ldquoDo you know that it is haram (forbidden) to receive and charge interest
in islamrdquo
According to the question the respondents have provided the following data
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
32
Is Haram to receive and charge interest in islam
60
940
No
Yes
Figure 7 Is Haram to receive and charge interest in Islam
4224 Knowledge about Islamic banking and finance we wanted to know the
level of Islamic banking and finance of the respondents The question in the
questionnaire in this regard was ldquoHow much do you know about Islamic banking and
financerdquo
Knowledge about Islamic Banking
Different level
Not yetLess informedInformedHighly informed
Pe
rce
nt
60
50
40
30
20
10
0
Figure 8 Knowledge about Islamic Banking
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
33
Table23 Knowledge about Islamic banking and finance
Frequenc
y Percent
Valid
Percent
Cumulative
Percent
Valid Highly
informed8 160 160 160
Informed 14 280 280 440
Less
informed27 540 540 980
Not yet 1 20 20 1000
Total 50 1000 1000
4225 Opinions about Islamic banks in Bangladesh provide interest free
services In our study there was a statement to the respondents ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo and we asked the opinion about the
statement from the customers
Table 24 Responses by the customers to the Proposition that ldquoIslamic Banks in
Bangladesh provide interest free servicerdquo
Opinions Rank values Frequency of
responses
Percentages
()
Strongly Agree
Agree
Indifferent
Disagree
Strongly Disagree
+ 20
+ 10
00
- 10
- 20
10
21
8
9
2
20
42
16
18
4
Total 50 100
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
34
The corresponding index for the stated proposition
I (proposal) = (2 x 10+ 1 x 21 + 0 x 8 ndash 1 x 9 ndash 2 x 2)50 = 056
This index number illustrates a fair level of agreement with the proposition ldquoIslamic
Banks in Bangladesh provide interest free servicerdquo
4226 Mode of communication of Islamic banks Here we wanted to know the
sources of information about interest free banking in Bangladesh among the existing
and potential customers In this regard the question was ldquoHow do you come to know
that bank offers interest free banking in Bangladeshrdquo
Mode of Communication of Islamic Banks
500
20
300
180
Friends Family
Internet
Media (Newspaper TV
Bank employees
Figure 9 Mode of Communication of Islamic Banks
From our survey 50 of the respondents came to know the idea of interest free
banking in Bangladesh whereas 30 from mass and electronics media
4227 Opinion about the cost of Islamic banking in comparison to non Islamic
banks
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
35
Are Islamic or Interest free Services Costlier
than non Islamic Bank Services
500 360
140
Not sure No
Yes
Fig 10 Are Islamic or Interest free Services Costlier than non Islamic Bank
Services
4228 Knowledge about Capital Budgeting in Islamic Banks From our study we
have seen that majority of the respondent indifferent about the knowledge of Islamic
Banking
Knowledge about Deposits and Savings
are Invested by the Bank
360
340
300
Not sure
No
Yes
Fig 11 Knowledge about Deposits and Savings are Invested by the Bank
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
36
4229 Psychological reason for choosing Islamic banking We intended to know
the main reason for choosing the Islamic banks for the existing and potential
customers In this purpose the question was designed such a way ldquoWhat is (will) the
main reason for choosing Islamic bankingrdquo
Main Reason for Chosing Islamic Bank
Reason
Convenient location
Quality service
Cheap products
Religion
Pe
rce
nt
100
80
60
40
20
0
Fig12 Main reason for choosing Islamic Bank
42210 Tenure of customerrsquos transaction with Islamic banks In the survey the
respondents (existing account holders) are asked how long they have been
maintaining the bank account with Islamic Bank The responses are given in
following chart
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
37
Tenure of Transaction with Islamic Banks
Period
More than 10 Years
6-10 Years
1-5 Years
Less than 1 year
Pe
rce
nt
60
50
40
30
20
10
0
Fig 13 Tenure of Transaction with Islamic Bank
It is seen 50 of account holders have been maintaining transaction with Islamic
banks for the period of 1to 5 yearsSimilarly22 for less than 1 years20 for 6-
10years and 8 for more than 10 years This statistics indicates a satisfactory
performance and a good opportunity of the Islamic banks
42211 Customer retention and switching rate of Islamic banks It is seen that
many customers switch from one bank to another due to convenience and better
opportunity Hence the customers were asked whether they switch from any Islamic
bank to conventional bank As we surveyed to both existing and potential customers
missing values are existed for the case of potential customers Based on the question
the responses are as follows
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
38
Switching from Islamic Bank to Conventional Banks
200
680
120
Missing
No
Yes
Fig 14 Switching from Islamic Bank to Conventional Bank
From the responses it is seen that on an average 68 of both existing and potential
customers are retained with Islamic banks Of course this rate will be higher in case of
only existing customers Our total respondents were 50 Among them 40 are existing
customers and 10 are potentials and responses of ldquoYesrdquo andrdquo Nordquo are 6 and 36
respectively So the actual retention rate is 3440=85 and switching rate is 15
43 Bank selection criteria we were set 16 criteria for selecting appropriate bank
The respondents were asked to prioritize (1st to 5th and No priority) each criterion The
questionnaire is attached in the appended part
Through indexing we priorities the 16 criteria according to the responses of
customers
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
39
Table25 Bank Selection Criteria by Customers
Criteria Index Values Prioritized Rankings
Criterion a 0724 V
Criterion b 0664 IX
Criterion c 0692 VII
Criterion d 064 XI
Criterion e 0816 I I
Criterion f 0676 VIII
Criterion g 0612 XI V
Criterion h 0752 III
Criterion i 0628 XI I I
Criterion j 0656 X
Criterion k 0704 V I
Criterion l 0628 XI I I
Criterion m 0744 I V
Criterion n 0656 X
Criterion o 0632 XI I
Criterion p 0824 I
According to the index value Good Customer relationship has got the first priority
electronic and wide electronic and automation system has got the least priority The
top five criteria among the sixteen for selecting the bank is the following in the
descending order
I Good Customer relationship
II Run on Islamic Law and principles
III Convenient branch location
IV Confidence in bank management
V Fast and efficient quality service
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
40
V0 Summary of the Findings Based on the analysis and data the summary of
findings are as follows
There are 7 full- fledged Islamic banks and 9 conventional banks have 20
islamic banking branches in Bangladesh
Islamic banking sector provides more loan in industry sector and then
commercial sector
Market share and market growth of Islamic bank are substantial and it is
almost 30 of total private commercial banks and 18 of total banking sector of
Bangladesh
Average deposit-loan ratio is 10093 and loan recovery rate is 70-90
which is not quite satisfactory and increases bad debt
Credit rating of the banks is good but CAMELS rating Scenario is not
attractive and financial strength is fairly good
The products are not highly compatible with Islamic shariah but authorities are
trying to improve
Compliances with regulatory bodies are satisfactory and central bank is
playing facilitating role
Liquidity of the Islamic banking sector is good
Most of the Islamic bank are automated and offers ATM services but not up to
marks
Absence of Islamic interbank money market and Islamic banking act
Most customers choose Islamic banking only for psycho-religious reason
Lack of communication and promotion of Islamic products and services as
well as Islamic finance
Ambiguity between interest and profit in the regard of rate of return and cost
of debt
Customersrsquo loyalty and retention rate is high
Good customer relationship has got the highest priority and then the
compatibility of laws and principles with Islamic Shariah for selecting the banks by
the both existing and potential customers of islamic banks
Banking charge and cost is reasonable
Lack of knowledge of Islamic banking and finance among the customers
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
41
51 Prospect and challenges of Islamic banks based on our study there are some
problems and challenges as well as opportunities in Islamic banking in Bangladesh
511Challenges Islami banks in Bangladesh have been facing some critical
problems These problems are the challenges for the Islamic banking industry in
Bangladesh Based on our study the main challenges are following
Firstly they have not yet been successful in devising an interest-free mechanism to
place their funds on a short-term basis They face the same problem in financing
consumer loans and government deficits
Secondly the risk involved in profit-sharing seems to be so high that almost all of the
Islamic banks in Bangladesh have resorted to those techniques of financing which
bring them a fixed assured return Presently 60-70 investments of Islamic banks
are made on mark-up basis (Murabaha and Bai-Muajjal etc) As a result the ideal
modes of investment (Mudaraba and Musharaka) are quite absent in their practices
Concentration of Islamic banks investment in short-term trade is a pertinent problem
in Islamic banking Islamic banks are heavily dependent on Bai MuajjalMurabaha in
their operations This is due mainly to two reasons Their orientation is mainly
towards short term financing of trade transactions for which Bai MuajjalMurabaha
appear to be more convenient devices compared to the system of profit-loss sharing
Secondly they are in competition with interest-based banks and are therefore anxious
to earn at least as much on their investments as will enable them to give a return
roughly comparable to prevailing interest rates to their investment account holders
This is easier to achieve by engaging in Bai-MuajjalMurabaha transactions as mark-
up can be fixed in a manner which more or less assures the required return For that
reason the Islamic banks are reluctant to invest under Mudaraba or Musharaka the
true Islamic financial mechanisms
There is a genuine concern among Islamic scholars that if interest is largely
substituted by a device like mark-up it would represent a change just in name rather
than in substance and the new system would not be any different from the interest-
based system so far as equity is concerned It is also emphasized that apart from
equity considerations the prohibition of interest in Islam is meant to stimulate overall
production which is the mainspring of growth These blessings can only be reaped if
the interest system is completely uprooted in the real sense of the term and replaced
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
42
by a fundamentally different system like profitloss sharing The implications of the
Islamic financing modalities for Islamic banking are yet to be fully recognized The
Basel protocols are with reference to the interest-based banking system In their
present form they are not directly applicable to Islamic banking that is essentially a
different way of banking Basel-compatible or Basel-compliant arrangements need to
be worked out and got recognized at the appropriate level
It is evident from the Annual Reports of the Shariah Councils of the Islamic banks
that in many cases Shariah Councils were disappointed at the inordinate delay in
Shariah implementation in the banking transactions or unwillingness to follow
Shariah guidelines in the banks by both the owners and management of the banks In
this regard special mention can be made for Shariah guidelines forwarded to comply
with the actual buying and selling in Bai Modes Non-implementation of this single
advice of the Shariah councils leads the Islamic banks to practice Bai-Muajjal modes
in a corrupted manner which can be termed as Corrupted Bai-Muajjal modes of
financing
However some of the topical problems being faced by the Islamic banks are
Absence of an organized Islamic inter-bank money market
Absence of full-fledged legal framework for Islamic banking
Increasing bad debt and cost of capital
Shortage of trained and efficient manpower committed to Islamic banking
Lack of co-ordination and co-operation among the Islamic banks
Lack of Shariah-compatible regulatory and supervisory standards
Inappropriate organization of the Shariah Councils and weak follow-up of the
Shariah implementation status of the Islamic banks
Conflict with conventional banking legal frame work
Lack of corporate governance in the Islamic banks
Conflicting with present banking company act 1991
Lack of Consortium or Syndication of the Islamic Banks
Lack of Apex Training Institute for the Islamic Banks
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
43
512 Prospects of Islamic bank in Bangladesh Bangladesh is the second largest
muslim country in the world and the people of Bangladesh is fond of practicing
Islamic principles Interest is absolutely forbidden in Islam So if the Islamic banking
is operated through the laws and principles of Quran and Shariah the future
opportunities and potentialities of Islamic bank in Bangladesh would be highly
optimistic prosperous and viable
Our study depicts there is a potential large pool of customers are in the pipeline of
Islamic banks Hence the market share and growth is increasing day by day Showing
this amazing trend of progress of Islamic banks in Bangladesh conventional banks
are also engaging in Islamic banking practices Now there are more than 20 branches
of 17 national and international conventional banks are offering Islamic banking
services and this rate is rapidly increasing
After the journey of Islamic banks in Bangladesh in the year of 1983 there are 7 full-
pledged Islamic bank had established till 2001 and this rate will be increased if govt
issue the license for new banks
Besides central bank is facilitating the Islamic banking and made the guidelines for
Islamic banking which is a good indicator for the prospect of Islamic banks
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
44
60 Conclusion and Recommendations Now Islamic banks in Bangladesh are
operating their business successfully and they will be able to provide more efficient
services to the nation if they overcome the existing challenges and are supported by
the exact Islamic legal frame work and congenial environment for Islamic banking
Still the Islamic bank industry has taken the position in the mind of the customers of
Bangladesh through their exceptional banking system and awaiting huge potentialities
for them
However the following suggestions are given to overcome the existing
challenges and to operate more effectively and efficiently
Govt should enact an separate Banking Act solely for Islamic banking and
insurances
Should have a central shariah council and strict compliance with the board and
council
To promote and make an intensive marketing policy for the Islamic banking
and services
To adopt more attractive product and services compatible of both Islamic and
modern banking practices
To establish an apex regulatory body and training academy for regulating and
training
To ensure the inter-Islamic bank money and capital market
To establish and allocate sufficient fund to Research and Development(RampD)
To ensure Islamic audit and rating system
To make lucrative compensation package for employees motivation
Finally it may be mentioned that if the Islamic financial system is to become truly
liquid and efficient it must develop more standardized and universally (or at least
widely) tradable financial instruments The development of a secondary financial
market for Islamic financial products is crucial if the industry is to achieve true
comparison with the conventional system It must also work hard to develop more
transparency in financial reporting and accounting and ideally - a form of Islamic
GAAP
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
45
Appendix I
Questionnaire for Managers
Namehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Designation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact Nohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
We the students of Bangladesh University of Professionals (BUP) are conducting a study on
ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of
Marketing Research (M-601) at MBA Program For the purpose your co-operation is highly
needed and appreciated We will use all the data provided by you only for our academic
purposes
Please tick mark() or fill in the appropriate gap
01) Is your Bank enlisted in the Stock Exchange Yes No Others (Specify)
helliphelliphelliphelliphellip
If yes authorized and paid up capital arehelliphelliphelliphelliphelliphelliphelliphellipandhelliphelliphelliphelliphelliphellip respectively
02) How many branches of your bank have helliphelliphelliphellip
03) In which sector your bank provides more loans
Agriculture Industry Services Commerce Personal Others (Specify)helliphelliphellip
04) How many products does your bank offer Please tick marks the products you are
offering
Current Account Bai- Murabaha ATM Services Quard and others
Savings Deposit Hire purchase under
Shirkatul Meelk
SWIFT
Term Deposit Musharaka Reuter
Savings Bond Bai-Salam Locker Service
Bai- Muajjal Letter of credit VISA Card
05) What is the market share of your bank in the overall industry Low Medium High
06) How is the market growth of your Bank High Low Medium
07) What is the deposit ndashLoan ratio of your Bank
08) Compliances of the products of your bank with Islamic Sharirsquoah is High Moderate
Low Partial
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
46
09) Do you have any offshore branch Yes No Others(specify) helliphellip
10) Rate of loan recovery is below 70 70-90 above90
11) CAMEL rating of your bank ishelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
12) Credit rating of your bank is helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
13) Financial strength of your bank is Strong Average Weak
14) Average bank charge of your bank than others is High Low Medium
15) Is your Bank declares Dividend every year Yes No
16) Net Profit of your Bank is Industry average below average Above Average
17) CSR activities of your bank is High Low Average
18) Do you think that the role of Govt or Central bank for facilitating Islamic banking in
Bangladesh is - Favorable Unfavorable Favorable but need to change
19) Is your Bank got any localinternational reward Yes No Others(Specify)
20) Remittance flow through your bank is High Low Medium Others
21) Compliances with regulatory bodies are High Low Average Others(Specify)
22) The contribution of your bank as an international trade channel is High average
below average
23) How often does your bank suffer from liquidity problem Often Sometimes Never
24) Deposit and lending rate of your bank arehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
25) Do you have any ATM services Yes No Under process
If yes how many ATM booths your banks have
26) Degree of automation in your bank is High Low Medium
27) Would you please point out few threats of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
28) Would you please point out few strengths of your bank
a) helliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
29) Would you please point out the weaknesses of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
47
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
30) Would you please specify few opportunities of your bank (if any)
a) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
b) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
c) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
d) helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
Thank You for Your Kind Cooperation
Name of interviewerhelliphelliphellip Datehelliphelliphelliphellip
Appendix II
Questionnaire for CustomersNamehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipDesignation amp Addresshelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
48
EmailhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipContact NohelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipWe the students of Bangladesh University of Professionals (BUP) are conducting a study on ldquoIslamic Banking in Bangladesh Prospects and Challengesrdquo as a course requirement of Marketing Research (M-601) of MBA program For the purpose your co-operation is highly needed and appreciated We will use all the data provided by you only for our academic purposesPart One Demographic Information (Please )
1 Your gender 1048977 Male 1048977 Female
2 Your education level 1048977 Below high school 1048977 High school 1048977 Undergraduate 1048977 Post graduate
3 Your age 1048977 18-21 1048977 21-30 1048977 31-40 1048977 40+
4 Your occupation 1048977 Public sector 1048977 Private sector 1048977 Self employed 1048977 Student 1048977 Others Please specify helliphelliphelliphelliphellip
5 Your Monthly Income 1048977 Less than 10000 TK 1048977 TK 10000 to TK 40000 1048977 TK 41000 to TK 100000 1048977 More than TK 100000
6 Your Monthly Savings 1048977 Less than 5000 TK 1048977 TK 5000 to TK 20000 1048977 TK 21000 to TK 50000 1048977 More than TK 50000
Part Two Service Communication and others (Please)
7 Do you have any bank account in Islamic Banking Institutions in Bangladesh 1048977 Yes 1048977 No
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
49
8 If yes what is your overall level of satisfaction 1048977 Very satisfactory 1048977 Satisfactory 1048977 Indifferent 1048977 Unsatisfactory 1048977 Very unsatisfactory
9 Do you know that it is HARAM (not permissible) to receive and charge interest in Islam
1048977 Yes 1048977 No 1048977 Not sure
10 How much do you know about Islamic banking and finance 1048977 Highly informed 1048977 Informed 1048977 Less informed 1048977 Not yet
11 Islamic banks in Bangladesh provide interest-free services Whatrsquos your opinion about the statement
1048977 Strongly Agree 1048977 Agree 1048977 Indifferent 1048977 Disagree 1048977 Strongly Disagree
12 How do you come to know that bank offers interest-free banking in Bangladesh 1048977 Bank employees 1048977 Media (Newspaper TV) 1048977 Internet 1048977 Friends Family
13 Do you feel Islamic or interest free services are costlier than non-Islamic services
1048977 Yes 1048977 No 1048977 Not sure
14 Do you know how your deposits and savings are invested by the banks ie Ethical investment or war arms trade gambling alcohol tobacco etc
1048977 Yes 1048977 No 1048977 Not sure
15 What is the main reason for chosing Islamic Banking 1048977 Religion 1048977 Cheap products 1048977 Quality service 1048977 Convenient location 1048977 Other than above please specify helliphelliphellip
16 For how long are you dealing with or have you become a consumer of Islamic Banking 1048977 Less than 1 year 1048977 1-5 Years
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
50
1048977 6-10 Years 1048977 More than 10 Years
17 Did you switch from one Islamic Banks to conventional bank 1048977 Yes 1048977 No
Part Three Bank Selection Criteria (Please)18 Please prioritize the bank selection criteria for following items Rank them from 1 to 5
lsquo1rsquo represents first priority and lsquo5rsquo represents the least priority and ldquo0rdquo denotes no priority
SI Selection criteria 0 1 2 3 4 5a Fast and efficient quality servicesb Interior comfort of Branchesc Experienced management teamd Availability of financial advicee Run on Islamic law and principlesf Provision of profit-sharing investment
productsg Wide Electronic and automation Systemh Convenient branch locationi Awareness program on product and servicesj Competitive Product Offeringsk Uniform services in all branchesl Overdraft privileges on current accountm Confidence in Banks managementn Lower service chargeo Good rate of returnp Good customer relationship
Thank you for your kind cooperation
Name of interviewerhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip Datehelliphelliphelliphelliphelliphelliphellip
Appendix III
Comparative Position of the Islamic Banking Sector (as of end December 2010) (In billion
Taka)
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
51
Appendix IV
Composite CAMELS and their Interpretation
Appendix V
Comparative Position of the Islamic Banking Sector September 2010 (In million Taka)
Appendix VI
Differences between Islamic Bank and Conventional
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
52
Conventional Banks Islamic Banks
1 The functions and operating modes of conventional banks are based on fully manmade principles
1 The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah
2 The investor is assured of a predetermined rate of interest
2 In contrast it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur)
3 It aims at maximizing profit without any restriction
3 It also aims at maximizing profit but subject to Shariah restrictions
4 It does not deal with Zakat 4 In the modern Islamic banking system it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat
5 Lending money and getting it back with compounding interest is the fundamental function of the conventional banks
5 Participation in partnership business is the fundamental function of the Islamic banks So we have to understand our customers business very well
6 It can charge additional money (penalty and compounded interest) in case of defaulters
6 The Islamic banks have no provision to charge any extra money from the defaulters Only small amount of compensation and these proceeds is given to charity Rebates are give for early settlement at the Banks discretion
7 Very often it results in the banks own interest becoming prominent It makes no effort to ensure growth with equity
7 It gives due importance to the public interest Its ultimate aim is to ensure growth with equity
8 For interest-based commercial banks borrowing from the money market is relatively easier
8 For the Islamic banks it must be based on a Shariah approved underlying transaction
9 Since income from the advances is fixed it gives little importance to developing expertise in project appraisal and evaluations
9 Since it shares profit and loss the Islamic banks pay greater attention to developing project appraisal and evaluations
10 The conventional banks give greater emphasis on credit-worthiness of the clients
10 The Islamic banks on the other hand give greater emphasis on the viability of the projects
BIBLIOGRAPHY
Ahmad K (2000) Islamic finance and banking the challenge and Prospects Review
of Islamic Economics 9 57-82
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml
53
Ahmad A U F amp Hassan M K (2007) Regulation and Performance of Islamic
Banking in Bangladesh Thunderbird International Business Review 49(2) 251ndash277
Ahmed E Rahman Z amp Ahmed R I (2006) Comparative analysis of loan
recovery among nationalized private and Islamic commercial banks of Bangladesh
BRAC University Journal III(1) 35
Alam M N (2000) Islamic banking in Bangladesh A case study of IBBL
International Journal of Islamic Financial Services 1(4)
Al Arafah Islami Bank Ltd 2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Bangladesh Bank (2011) Financial sector review 2010 Available at Bangladesh
Bank website httpwwwbangladesh-bankorg Accessed on June 26 2011
BIBM 2011 Reading Materials on Islamic Banking
EXIM Bank Bangladesh Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
First Security Islamic Bank Ltd2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Hassan M K (1999) Islamic banking in theory and practice The experience of
Bangladesh Managerial Finance 25(5) 60-113
ICB Islamic Bank2011 ldquoAGM Report 2009-2010rdquo 2010-2011
Islami Bank Bangladesh Ltd 2011 ldquoAGM Report 2009 2010 2011rdquo
Sarkar M A A (1999) Islamic banking in Bangladesh Performance problems amp
prospects International Journal of Islamic Financial Services 1(3)
Siddiqi M 2002 Comparative Advantages of Islamic Banking and Finance viewed
24062011 httpwwwsiddiqicommnsAdvantageshtml