Diversification of Islamic Financial Insturments
121
into cash to meet its liquidity needs for 30 calendar days. On the other hand, NSFR aims to
limit over-reliance on short-term wholesale funding during abundant market liquidity and
encourage better assessment of liquidity risk across all on- and off-balance sheet items.
The aggregate Investment-Deposit Ratio (IDR) of Islamic banks was 86.3 percent at end-
December 2016, higher from 83.2 percent at end December 2015. The ADR of the overall
banking industry was 71.9 percent42, lower than that of the Islamic bank group, due to a
higher SLR requirement for conventional banks but yet quite below the maximum permissible
level of 90 percent. Since there are limited sources of Shariah-compliant funds, Islamic banks
can borrow funds either from the Islamic inter-bank money market, which started in 2012, or
from the Islamic Investment Bonds Fund issued by the Government.
Since the IDRs of Islamic banks were below the regulatory maximum level of 90 percent, it
indicates no sign of liquidity stress in these banks in CY16. To address the excess liquidity
holding in the Islamic banks, Bangladesh Bank amended the ‘Bangladesh Government Islami
Investment Bond (Islami Bond) Policy, 2004’. The objective of such amendment was to develop
a solid base for the Islamic bond market and also to channel excess liquidity into investments
through Islamic bonds. The Debt Management Department (DMD) of Bangladesh Bank also
issued a circular to introduce the auction process of Islamic bonds, referring to a gazette noti-
fication of 18 August 2014.
With the amendment of the Islamic Bond Policy, the maturity periods of Islamic bonds were
re-fixed at 3 months and 6 months to help the Islamic banks/FIs to manage their funds
smoothly; previously which were 6 months, 1 year and 2 years. The bonds will be issued based
on the Prot Sharing Ratio (PSR) through open auction, i.e., the profit earned by investing in
these bonds will be shared by the buyer and by the Bangladesh Bank as issuer. The profit of
Islamic bonds will be equal to the profit of a three-month fixed deposit scheme of the issuing
Islamic banks, instead of the previous profit rate of savings (Mudaraba) deposits. In the case of
selling Bangladesh Government Islami Investment Bonds (BGIIB), the government has to share
the profit (or loss) with the investing banks that accrue from the use of fund collected from
such sales, and the fund will be used by the government complying Shariah requirements. This
aspect of concern will be taken care of by the government to the satisfaction of the investing
banks. If the government wants to use the funds for a longer term and in specific projects, then
this type of short-term bond would not be the right choice. Financial instruments like long-
term bonds, complying with Shariah requirements, popularly known as 'Sukuk', would be
more appropriate. From specific projects, it becomes easier to calculate profit and loss, and the
profit (also loss) can be shared with the fund suppliers or Sukuk buyers on a pre-agreed terms.
It can be noted here that Bangladesh is yet to issue any Sukuk.
Capital position of Islamic banks: Under the Basel-III framework of Bangladesh, given the
minimum Capital to Risk weighted Assets Ratio of 10 percent; seven out of eight full-edged
Islamic banks complied with the regulatory capital requirement in CY16. For the banking
system to be more resilient and shock absorbent, Basel Committee on Banking Supervision
(BCBS) recommended to raise the quality and levels of regulatory capital. In line with the
international best practices, Bangladesh Bank introduces Capital to Risk Weighted Assets Ratio
(CRAR) in its ‘Guidelines on Risk Based Capital Adequacy’ and instructed the banks to maintain
their CRAR to a fair ratio of at least 10 percent. The stronger capital base maintained by Islamic
banks indicates that these banks are strong enough to meet various kinds of shocks they are
exposed to. Out of 8, 7 banks have CRARs more than 10 percent in CY16. However, from 2006,
one Islamic bank's CRAR remained negative for historical huge cumulative loss and provision