Diversification of Islamic Financial Insturments
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There is strong demand from the Islamic banking community in Bangladesh for a thorough
review of the legislative framework for Islamic banking and Islamic NBFIs. A separate and
completely self-contained legislative framework for Islamic banking is highly emphasized by
all sorts of stakeholders because of the systemically importance the Islamic banking sector.
Islamic NBFI Sector
The Islamic NBFIs play an important role in the financial system of the country by providing
financing facility to both retail and commercial clients. Since Islamic NBFIs cannot accept
demand deposits, they incur higher cost of funds than banks which makes it difficult for them
to compete. They try to make up for this by providing some special products usually not
available from banks. The main problems confronting the Islamic NBFIs in Bangladesh are:
they can not avail Bangladesh Bank fund (SME financing, green banking etc.) due to absence of
Sharih rules, they cannot invest in all sectors due to restrictions imposed by central bank,
cannot issue cheques in their own name, cannot receive cash from the investment clients,
cannot participate in foreign exchange trade, period of Bai-Muajjal facility (working capital and
trade facility) is only one year etc. To get rid of these problems, the Central Bank should
provide some rules and regulations and amend the Financial Institutions Act.
Islamic Capital Market Sector
There is an expectation that the capital market of the country has already started to move
upword and the outlook for the next few years are quite optimistic. This will help NBFIs
income both through capital gain from direct investment and provision savings from margin
lending. The financially sound Islamic NBFIs with good asset quality and the ones with strong
presence in the capital market through direct investment and/or capital market subsidiaries
pose profitable investment opportunities for the investors in the coming years. But the
regulatory framework for the Islamic NBFIs may also be in place for facilitating their activities
at the desired level.
Capital Market plays a vital role in attracting savings and channeling them for productive
purposes. Both primary and secondary markets are important in this regard. The issue of
development of Islamic capital market is not separate from the issue of development of capital
market in general. While the primary market directly effects the supply of funds for
investment, the secondary market does the same indirectly. The capital market provides long-
term capital through a series of short-term contracts. The subject of development of Islamic
capital markets is very broad. It can include a variety of aspects such as: the state of regulatory
system and possible approaches for further development; market micro-structure and
practices; product range and product development; nature and preferences of market players;
identification and development of support institutions; market performance evaluation; cost
benefit analysis of market expansion and integration; designing of incentive and corporate
governance system; evaluation of the nature and role of Islamic capital markets in the overall
Islamic financial system; and many other dimensions. Priority must be given to the creation of
an enabling financial infrastructure consisting of common international standards for
development, supervision and regulation of Islamic capital market that may facilitate not only
continuous development of a sound, resilient and stable Islamic capital market industry, but
also one that promotes innovation and growth.