Diversification of Islamic Financial Instruments
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deposits and financing in the real sector industries, services and other key sectors of the
economy and collecting 39.95% of total foreign remittances in Bangladesh.
For the continuous increasing market share of Islamic banking and Takaful companies in
Bangladesh qualifies to be selected as a test case for reviewing the development indicators and
Islamic financial infrastructures of the country.
Market Share of Islamic Banks
Islamic banks' market share remains mostly static at about one-fifth of the total banking
system. The aggregate market share of Islamic banks in CY16 (excluding Islamic banking
branches/ windows of conventional banks) remained almost same as CY15. In a nutshell, at
end December 2016, Islamic banks possessed 18 percent (18 percent in CY15) of total assets,
23 percent (22 percent in CY15) of investments (loans), 20 percent (19 percent in CY15) of
deposits, 16 percent (15 percent in CY15) of equity and 19 percent (19 percent in CY15) of
liabilities of the overall banking industry. Profitability of Islamic banking sector in CY16 was
higher compared to the overall banking industry. The key indicators of profitability were very
competitive with the banking sector. In terms of individual earning of banks, one of the Islamic
banks ranked at third from the top in the entire banking industry. In 2016, the net profit of
Islamic banks increased by 18.1 percent from CY15. In contrast, the net profitt of the overall
banking system was increased by 4.9 percent in CY16 (31.7 percent in CY15). On the other
hand, in the absence of an established Islamic bond market, these banks operate with a special
liquidity arrangement, and that may also help them to generate more income with higher
investment funds compared to loanable funds of conventional banks. During CY15, Islamic
banks contributed to 21.2 percent of total industry profits. The profit income39 to total assets
ratio of Islamic banks reached 7.3 percent, which is higher than that of the industry average
(interest income to total assets ratio was 5.5 percent). On the other hand, the non-profit
income to total assets ratio was only 0.9 percent as compared with the industry average of 2.4
percent, representing a lower income from off-balance sheet (OBS) transactions and service
and fee-based incomes.
The ROA of the Islamic banking industry was 0.8 percent, a bit higher than the overall banking
Industry in CY16, indicating a comparatively more efficient use of assets by the Shariah
compliant banks. On the other hand, the ROE of the Islamic banking industry in CY16 stood at
13.1 percent, which is higher than the overall banking industry's ROE of 9.7 percent, indicating
the higher earnings of Islamic banks with relatively lower amount of equity.
Islamic banks’ liquidity: Islamic banks are found to have sufficient liquidity over the CY16
considering their Cash Reserve Ratio (CRR), Statutory Liquidity Requirement (SLR), and newly
introduced Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) under Basel
III accord. Islamic banks are allowed to maintain their statutory liquidity requirement (SLR) at
a concessional rate compared to that of the conventional banks, as Shariah-compliant SLR
eligible instruments are not widely available in the market. Islamic banks are consistently
maintaining statutory liquidity requirement of CRR and SLR as 6.5 percent and 5.5 percent of
their total time and demand liabilities40 respectively. According to the roadmap towards
implementation of Basel III, banks are required to maintain at least 100 percent (the minimum
standard) of Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) from January
201541. It may be mentioned that the banks in Bangladesh are maintaining LCR and NSFR, a
new liquidity standard, introduced by the Basel Committee. LCR aims to ensure that a bank
maintains an adequate level of unencumbered, high-quality liquid assets that can be converted