Diversification of Islamic Financial Instruments
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shortfall, and not changed much despite change of ownership. This bank has been operating
under a restructuring plan since 2008.
Classified investments of Islamic banks: Islamic banks also showed a better position regarding
the classified investments to total investments ratio in the review year 2016. The ratio was 4.3
percent, substantially lower than the industry score of 9.2 percent. However, if only private
commercial banks are considered rather than the overall banking industry, the ratio drops to
4.6 percent from 9.2 percent. Islamic banks, therefore, had slightly less NPL compared to their
closest peer group (PCBs). The classified investment to total equity was 49.7 percent for
Islamic banks, as compared with 72.7 percent for the overall banking industry, indicating that
Islamic banks were more resilient in case of possible losses from their investments (loans and
advances) compared to the overall banking industry. From the stability point of view, Islamic
banks are less vulnerable to risks as they are able to pass the negative shocks on the asset side
(Loss in Musharaka a/c) to the investment depositors (Mudaraba a/c arrangement). Such
arrangements proportionately transfer the credit, market, and liquidity risk of their assets to
their depositors, and thereby, in principle, discourage the shareholders from taking excessive
risks compared to conventional banks. In other words, depositors may provide a degree of
market discipline. However, it is evident that Islamic banks, in practice, do not necessarily pass
the risk from its assets to its depositors in stressed scenarios. Instead, Islamic banks smoothly
distribute their profits to depositors at benchmark rates and thereby do pass the asset
portfolio risk onto the shareholders.
Moreover, when investment revenues are substantially higher, Islamic banks usually provide a
higher percentage of revenues to depositors as a rate of return in line with market deposit
interest rates rather than the full profit due to them. On the other hand, they will do the
opposite in years when investment revenues are low by reducing its own management
(Mudarib) fee share to increase the share of distributions for the depositors.
Financial Instruments used by the Islamic Banks
The principal financial instruments used by the Islamic banks are Bai-Murabaha, Bai-Muajjal,
Qard-e-Hasan, Ijarah-bil-Bai and HPSM (Hire Purchase under Sirkatul Melk). Role of the
Islamic Banking industry, as a whole, in respect of Islamic Microfinance is commendable. Since
the core objectives of Islamic banking industry is to fulfill the Maqasid-al-Shariah i.e. to help
expedite the financial inclusion drives with Islamic financial literacy programs to associate the
poor and disadvantaged people of the country in small types of income generating activities so
that they can get a space to live as a respectable human being. As the bulk of the investments
made by Islamic banks have been concentrated in trade and rent-related sectors, they may
invest more in socially desirable and sustainable real sectors especially in micro, share-
cropping, non-traditional agriculture and small enterprises. Islamic banks through profit and
loss sharing mode of investment including Zakat, Awqaf (plural of waqf) and charitable
activities have been able to create an alternative pathway to reduce poverty in Bangladesh. As
the people of Bangladesh have strong desire to abide by the rules and principles set by Shariah
so the demand for interest free banking in Bangladesh is increasing tremendously. As Shariah
is the backbone of the Islamic banking industry, a comprehensive Islamic legal infrastructure
with clear ground and commitment is necessary to help expedite Islamic financial industry to
spur as it intended for ensuring human welfare.
Presently, it is seen that most of the Muslim countries have adopted common or western civil
legal systems. The absence of a comprehensive legal system on the basis of Islamic Shariah for