INTRODUCTION

Capitalization could not solve the global economic problems. The world is looking for a new economic order. Islamic economic system will be that new economic order. The globally-booming Islamic finance is making strides and gaining popularity in Bangladesh, with experts predicting that the shari`ah-compliant industry will continue in steady steps to become the mainstream banking system in Muslim South Asian nation. Bangladesh entered the Islamic banking system only in 1983, with the establishment of Islami Bank Bangladesh. Patwary says that his bank is now one of the top performer banks in terms of business and profits among the 48 commercial banks operating in the country. Islamic Bank Bangladesh Limited has gained first position in the all private banks in term of deposits, investment, export & import and remittance collection.People of this country are religious, Patwary, of the Islami Bank, agrees. Islam forbids Muslims from usury, receiving or paying interest on loans. According to the Bangladesh Bank (BB), the central bank of the country, the deposits of the Islamic banking systems are now 25 percent of all private banks deposits and its investments are 30 percent. Bahauddin Mohammad Yousuf, vice chairman of Al-Arafah Islamic Bank, has an explanation for Bangladeshs Islamic finance boom. A Muslim, whose religion prohibits earning or paying interests, Islamic banking makes it possible to operate interest-free business. Bankers believe that the Islamic banking is set for even more progress, if a law governing Islamic Banking policies is introduced. If an Islamic banking Act is introduced, the Islamic banking systems will even further flourish. Experts predict that with the rapid rise of Shari`ah-based systems, the industry will ultimately turn to be the financial mainstream in Bangladesh. The interest-free Shari`ah-based systems will be mainstream Banking and the conventional banks will be the minority systems in the OIC countries including Bangladesh within 2002, M Azizul Haque, a leading expert on Islamic banking in Bangladesh, told IOL. Azizul Haque, who is also chairman of the Shari`ah Council of Dhaka, believes that Bangladesh will follow the rest of the world to the Islamic banking sector. He explains that the growth rate of Islamic banking in the OIC countries for example is 15 to 20 percent while that of conventional banks is 10 to 15 percent. Islamic finance is one of the fastest growing sectors in the global financial industry. In defiance of the credit crunch, the global Islamic finance market has grown about 15 percent in each of the past three years, and is now worth about $700 billion worldwide. Currently, there are nearly 300 Islamic banks and financial institutions worldwide. Its assets are predicted to grow to $1 trillion by 2013. Azizul Haque expects that higher growth rates in the next decade will force the global financial systems to Islamic banking. There is not any sort of apprehension regarding the success of Islamic banking, the renowned economic expert said. The future of the Islamic banking systems is so bright. Mominul Islam Patwary, Chairman of the executive committee of Islami Bank Bangladesh Limited, told IslamOnline.net. THE recent measures taken by Bangladesh Bank with regard to Islamic banks are indeed unprecedented and absolutely uncalled for. While it is true that ever since the inception of Islamic banking system in Bangladesh, there was no expert group in Bangladesh Bank to monitor the activities of Islamic banks in Bangladesh, Islamic banks operating in Bangladesh have formed their own Shariah council to look into whether Islamic banking as a whole is in compliance with the Islamic principles. A central shariah council has also been formed. Although Bangladesh Bank has made a focus group, consisting of members of Shariah council and Islami bankers, to

formulate detailed guidelines for the Islami banks on the basis of the Banking Company Act, Bangladesh Bank utterly ignored the report that has been finalised by the focus group. There are currently six commercial banks operating under Islamic principles. They are: Islami Bank Bangladesh Limited, Al-Arafah Bank, Social Investment Bank Ltd, Exim Bank Ltd, Oriental Bank Ltd, and Shahjalal Islami Bank Ltd. apart from some other banks that also provide Islamic banking services in some of their branches. There are more than 300 Islamic banks operating all over the world -- from Africa and Europe to Asia and America. The Islamic banking industry is worth more than $200 billion and is growing at 15 percent annually, a rate much higher than that of conventional banking.1

OBJECTIVE
Islamic banking systems are a quiet new phenomenon in the money market of Bangladesh. In order to go deep into this particular area of study and also to realize the objectives. Interest Free Banking Islamic Banking and Finance-Sharjah Islamic Bank Modern Vs Islamic Banking Good prospects for Islamic banking The basic principle of Islamic banking Islamic Banks Success Story in Bangladesh Understand problems of the Islamic banking activities Islamic banks functions among other established conventional

REVIEW

JEDDAH, 27 June 2006 Name the first country in South and Southeast Asia to have successfully established an Islamic bank. Bangladesh. Yes, that is right. The local Islamic banking and takaful industry has made steady progress since the establishment of the first Islamic bank in 1983 and the formation of the first Islamic insurance company or takaful in 1984. As at end-2000, the Islamic financial sector was represented by two Islamic banks and 47 conventional banking institutions (17 domestic commercial banks, four foreignowned banks, 14 finance companies, five merchant banks and seven discount houses) participating in the Islamic Banking Scheme (IBS), which was made up of an Islamic money market, two takaful companies and a broad range of financial products. Upon completion of the merger exercise among the domestic banking institutions, the number of conventional banking institutions participating in the IBS has now increased to 33, comprising nine domestic commercial banks, four foreign-owned banks, eight finance companies, five merchant banks and seven discount houses. The significance of Islamic banking has been on a progressive trend, recording an average annual growth of 49% in terms of assets over the 1995-1999 period. In 2000, the sector continued to register strong asset growth of 30% to RM47.1 billion while deposits and financing increased to RM35.9 billion and RM20.9 billion respectively. In terms of performance relative to the whole banking system, as at end- 2000, the share of Islamic banking assets has increased to 6.9%, with deposits and financing also rising in tandem, to 7.4% and 5.3% respectively. The delivery channels have also improved significantly as there are now more than 2,200 branches of Islamic banks and IBS banks offering Islamic banking products and services. Islamic banking has also spurred efforts by other non-bank financial intermediaries such as development financial institutions, savings institutions and housing credit institutions to introduce Islamic schemes and instruments to meet customer demand. In addition, the capital market has seen the rapid growth of Islamic debt and equity markets. To complement these developments, the Labuan IOFC (International Offshore Financial Centre) has embarked on a serious effort to establish an International Islamic Financial Market to stimulate the creation of liquidity and financial instruments as well as enhance investment opportunities aimed at greater mobilisation of Islamic funds. For example, in 2006, the Malaysia International Islamic Financial Centre (MIFC) initiative was launched to promote Islamic financial products and services in international currencies for the global market. According to Bank Negara's 2006 annual report, the share of revenue from lending and fee-based activity from Islamic banks has tripled to account for 6.4% of the revenue of the total banking system over the 2002-2006 period. Table 1 clearly shows that the fouryear CAGRs (compounded annual growth rates) of the total deposits and loans of the IBS in the country have been rising steadily. However, more efforts are needed to fullfil the aspiration of having a 20% Islamic banking and insurance market share by 2010. As at end2007, Islamic banking deposits and loans accounted for 11.9% and 13.7% respectively of the entire banking sector. Apart from its growing share, the prospects of Islamic banking are also bright with the flush of petroleum money. According to Aseambanker Research, with oil prices averaging US$70 per barrel in 2007, the six countries making up the Gulf States, namely Saudi Arabia, Kuwait, United Arab Emirates (UAE), Qatar, Oman and Bahrain, should reap a total of US$320 billion in oil exports in 2007. And with their total proven reserves of 484 billion barrels, there is actually US$38.7 trillion worth of inventory sitting in the Arabian Peninsula, assuming a sustainable price level of US$80 per barrel. In

1983 Islami Bank Bangladesh Limited (IBBL) became the first interest-free Shariah-based bank to have been established in South and Southeast Asia. According to a report posted on the banks website, IBBL started operations with an authorized and paid-up capital of 500 million taka and 67.50 million taka respectively. The capital is divided into ordinary shares of 1,000 taka each. The paid-up capital of the bank was enhanced to 640 million taka in 2001. Of the 79,500 ordinary shares of the bank in 1985, foreign sponsors, including the Jeddah-based Islamic Development Bank, owned 56,000, while local sponsors and the general public owned 23,500 shares. The Investment Corporation of Bangladesh was allocated 20 percent of the banks issued capital, but the corporation subscribed shares of 0.5 million taka only. The bank is listed on both Dhaka and Chittagong stock exchanges. The brain behind the bank was the late Fouad Abdul Hameed Al-Khateeb, Saudi Arabias first ambassador to Bangladesh (1977-1982). He mobilized a group of entrepreneurial Saudis and other industrialists from the Gulf to launch the financial institution. Another founder was Dr. Ali S. Al-Ghamdi, who was posted at the Saudi Embassy in Dhaka in the 1980s. With more than 150 branches spread throughout the country, the bank has become a phenomenal success story and a role model for other Islamic banks. At a Bangladeshi community gathering in Jeddah on Saturday night, Al-Ghamdi recalled how people would laugh at the idea of an Islamic bank in the 1980s. Islamic banking was unheard of in those days. I would meet so many Bangladeshi professionals doctors, engineers, teachers, etc. and they would all laugh when the idea of Islamic banking was discussed. That was then. Al-Ghamdi said he recently met one of those Bangladeshi professionals. He talked enthusiastically about his investments in Islami Bank Bangladesh Limited. He told me he was making good money on his investments in the bank, Al-Ghamdi said with a chuckle. This is a source of pride for all of us, especially those of us who were associated with it in its embryonic stage. Mominul Islam Patwary, the executive committee chairman of the bank in whose honor the event was organized, said what was once an unheard of idea has become a welcome option for Muslims. Islamic banking, Patwary said, is no longer an alien concept. The idea has proved to be very successful and now that Islamic banks are available there is no reason for us to deal with regular banks. Earlier, there were no options. Now we have a choice. All the major banks are now coming up with Shariah-compliant instruments. This indicates that Islamic banking is here to stay. Al-Ghamdi reminded the gathering that the idea behind the bank was not to make money. It was certainly not a commercial venture. All those businessmen who came forward at the urging of Fouad AlKhateeb did so out of their love and responsibility toward their religion and their brethren in Bangladesh. Material benefit was not on anybodys mind. That it would be such a huge commercial success was something that nobody really imagined. We are glad we took that crucial and all-important first step and the rest, as they say, is for you to judge, Al-Ghamdi said. Al-Ghamdi pointed out that Islami Bank Bangladesh Limited should not be merely seen as a bank. It is an institution in itself. It is a charity institution, a medical institution, and a cultural institution. The bank is playing an important role in almost every aspect of the lives of Bangladeshis, he said while exhorting everyone to join the institution and support it by either opening accounts at the bank or purchasing its shares. Patwary listed the banks many achievements and answered many questions from the Bangladeshi expatriates at the gathering. He recalled one particular episode with pride. One of the government ministers told us to take charge of the government-run Krishi Bank. Why? Because he said it had become a burden on the government? And why us? Because he said

we demonstrated how to run a bank successfully. This is a matter of great pride, Patwary said. He said the bank is committed to conducting all banking and investment activities on the basis of an interest-free profit-loss sharing system. In doing so, it has unveiled a new horizon and ushered in a new silver lining of hope toward materializing a long-cherished dream of the people of Bangladesh for doing their banking transactions in line with what is prescribed by Islam, Patwary said. He said when people talk of Bangladesh they inevitably talk about the high level of corruption. Here we are, running the bank with no stain of corruption. Transparency has been and is the key to our success. We have become the role model for others. And for no small reason, we are the No. 2 bank in the private sector. Ashraf Uddin, the Bangladeshi consul general in Jeddah, acknowledged the banks contribution in the development of the country. It is beyond the pale of doubt, Responding to some mild criticism from the community members that he was not proactive in promoting the bank here in Jeddah, Ashraf Uddin said as a diplomat he has certain bindings. Since I am diplomat, I cannot support any specific bank. However, I have always openly supported the concept of Islamic banking, he said. Ashraf Uddin also praised the banks representative in Jeddah. Mosharraf Hossain is the right man for the right job. He created a lot of visibility for the bank in Saudi Arabia, the consul general said. The two sons of Fouad Al-Khateeb Muhammad Al-Khateeb and Abu Bakr AlKhateeb spoke about their late fathers vision and recalled how he would always talk about it in the 1980s. He was very confident of the banks success but he had a tough task in explaining his idea to others, recalled Muhammad Al-Khateeb who is the member of the banks board of directors. The bank helped us win the trust of the good people of Bangladesh. Abu Bakr Al-Khateeb, who is the senior general manager (engineering) at United Sugar Company, spoke in Bengali amid loud cheers from those present. He too recalled his fathers passion for doing something good for Bangladesh. He would always be busy thinking about giving the project a practical shape. It is a moment of pride for us as the bank marches ahead, he said. Abdullahil Mamoon Al-Azami, community development specialist at the IDB, recalled the contribution of the Al-Khateebs in the development of Bangladesh. Ustaz Fuad Al-Khateeb was a great man, a visionary. He thought about an Islamic bank at a time when nobody would give it a second thought, he said. Al-Azami is highly respected by the Bangladeshi community and is the son of professor Ghulam Azam, the former chief of Jamaat-e-Islami, Bangladesh. We all should support the bank not only by opening accounts in the bank but also by generating ideas. That can also be a wonderful contribution, Al-Azami said.

Goals, Objectives, Characteristics and Functions of Conventional Bainking System

1. Background

The financial system in Bangladesh includes Bangladesh Bank (the Central Bank), scheduled banks, non-bank financial institutions, microfinance institutions (MFIs), insurance companies, co-operative banks, credit rating agencies and stock exchange. Among scheduled banks there are 4 nationalised commercial banks (NCBs), 5 state-owned specialised banks (SBs), 30 domestic private commercial banks (PCBs), 9 foreign commercial banks (FCBs) and 29 nonbank financial institutions (NBFIs) as of December 2006. However, Rupali Bank, an NCB is being sold to a foreign buyer, and once this transaction is completed, the country will have only 3 NCBs. Which are being corporatized. Over and above the institutions cited above, three development financial institutions namely House Building Finance Corporation (HBFC), Ansar-VDP Unnayan Bank and Karma Shangsthan Bank are operating in Bangladesh, all of which are state owned. 2. Central Bank and its Policies The objectives of the Bangladesh Bank (BB) is to formulate monetary policy which aims at supporting the highest sustainable output growth while maintaining price stability, adjusting smoothly to the internal and external shocks faced by the economy from time to time. Within this mandate, BB also supervises and regulates scheduled banks and non-bank financial institutions operating in Bangladesh. It maintains the traditional central banking roles of note issuance and the banker to the government and banks. Its prudential regulations include, among others, ensuring minimum capital requirements, applying limits on loan concentration and insider borrowing, and, providing guidelines for asset classification and income recognition. The Bangladesh Bank has the legal authority to impose penalties for non-compliance and also to intervene in the management of a bank if serious problems arise. It has the delegated authority of issuing policy directives regarding the foreign exchange regime. 3. Scheduled Banks Out of 6562 scheduled bank branches operating in the country, upto end December 2006 the NCBs operate 3384 branches, of which 2146 are in rural areas and 1238 are in urban areas; SBs have 1354 branches of which 1200 are in rural areas and 154 are in urban areas; PCBs have 1776 branches of which 488 are in rural areas and 1288 are in urban areas; and FCBs have 48 branches exclusively in urban areas. Out of 30 PCBs, six have been operating as Islamic banks. Besides these full-fledged Islamic banks, 10 conventional banks in the private sector have opened selected branches and Islamic banking counters respectively to deal with the Islamic banking business parallel to their conventional operations. NCBs owned 65.3 percent while PCBs, SBs and FCBs own 24.5, 6.6 and 3.6 percent respectively of total assets of the scheduled banks. Of the total deposits, NCBs' share stood at 38.8 percent while SBs, PCBs and FCBs shared 5.8, 48.7 and 6.8 percent respectively. Among PCBs, the Islamic Banks' share of deposits is 12.5 percent. On the other hand, NCBs disbursed 32.3 percent of total advances while SBs, PCBs and FCBs

disbursed 9.3, 51.5 (of which 14.8 percent was disbursed by the Islamic Banks) and 6.9 percent respectively at the end of September 2006. 4. Non-Bank Financial Institutions (NBFIs) Non-Bank Financial Institutions are an important part of financial system in Bangladesh. NBFIs operations are regulated under the Financial Institutions Act, 1993. The NBFIs consist of investment, finance, leasing companies etc. There were 29 financial institutions operating in Bangladesh as of 31 December 2006. Of these one is government owned, 15 are local (private) and the other 13 are established under joint venture with foreign participation. Bangladesh Bank has introduced a policy for loan and lease classification and provisioning for NBFIs from December 2000 on a half-yearly basis. Among the 29 financial institutions, 12 have been listed in the stock exchanges up to 31 December 2006 to strengthen financial capability and the rest are under process to be listed in due course. 5. Capital Market The capital market in Bangladesh is regulated and supervised by the Securities and Exchange Commission (SEC) under the SEC Act, 1993. The SEC so far has issued licenses to 27 nonbank institutions to participate in the capital market of which 19 institutions are Merchant Banker and Portfolio Manager while 7 are Issue Managers and l(one) acts as Issue Manager and Underwriter. The Dhaka Stock Exchange (DSE), which was established as a public limited company in April 1954, and the Chittagong Stock Exchange (CSE), established in April 1995, dealing in the secondary capital market. As of end December 2006 the total number of enlisted securities with DSE stood at 310 of which 255 are listed companies, 13 mutual funds, 8 debentures and 34 treasury bonds. Recently, two power sector companies namely Dhaka Electric Supply Company (DESCO) and Power Grid Company of Bangladesh (PGCB) have been listed in the capital market under the newly introduced direct listing regulation. The Investment Corporation of Bangladesh (ICB) was established in 1976 with the objective of encouraging and broadening the base of industrial investment. ICB underwrites issues of securities, provides substantial bridge financing programs, and maintains investment accounts, floats and manages closed-end and open-end mutual funds and closed-end unit funds to ensure supply of securities as well as generating demand for securities. ICB also operates in both DSE and CSE as dealer. Some SBs, such as Bangladesh Shilpa Bank (BSB), Bangladesh Shilpa Rin Sangstha (BSRS), Bangladesh Small Industries and Commerce (BASIC) Bank Ltd. As well as NCBs and some foreign banks are engaged in long-term industrial financing.

6. Insurance

The insurance sector is regulated by the Insurance Act, 1938 with regulatory oversight provided by the Controller of Insurance on authority under the Ministry of Commerce. A separate Insurance Regulatory Authority is being established. A total of 62 insurance companies have been operating in Bangladesh, of which 18 provide life insurance and 44 are in the general insurance field. Among the life insurance companies, except the stateowned Jiban Bima Corporation (GBC) foreign owned American Life Insurance Company (ALl CO), and the rest of the private. Among the general insurance companies, state-owned Shadharan Bima Corporation (SBC) is the most active in the insurance sector. A total of 31 insurance companies are listed in the capital market, of which 8 offer life insurances. 7. Microfinance Institutions (MFIs) MFIs in Bangladesh were left unregulated for a long time since their inception. The government, with the close cooperation of Bangladesh Bank, undertook efforts to establish a regulatory framework which culminated in the enactment of the Microcredit Regulatory Authority Act, 2006. An Executive Board consisting of eight members is responsible for executing the general and administrative tasks of the management. The Board consists of the Governor of Bangladesh Bank as ex-officio chairman, six government officials nominated by the government and one executive vice-president who serves as the member secretary of the board. The main responsibilities of the authority include issuance and cancellation of the license for microcredit, overseeing, supervising and facilitating the entire activities of MFls. In recognition of the robust poverty eradication via microfinance activities, the Grameen Bank and its founder, Dr. Muhammad Yunus have been awarded The 2006 Nobel Peace Prize. Now it has been recognised worldwide that microfinance can be easily adapted and thus replicated in diverse cultural and geographic locations all over the world. The member-owned Microfinance Institutions (MFIs) have an explicit social agenda to cater to the needs of the poorer sections of population, and have a particular focus toward rural women clients. Grameen Bank was established in 1983 under a special law with the initial support from the Bangladesh Bank. The typically landless borrowers of Grameen Bank mostly women, are owners of the bank and it is the pioneer organization of this type. Besides Grameen Bank, there are more than 1000 semiformal institutions operating mostly in the rural sector of the country; of these, BRAC, ASA, and PROSHIKA are considered three largest NGO-MFIs.

8. Cooperative Banks In Bangladesh 119 cooperative banks are operating, of which 64 are central cooperative banks, 48 are land mortgage and rest 7 are other cooperative banks. The maximum share of

total assets, 90 percent, is controlled by central cooperatives. Similarly the maximum share deposits (85 percent) and advances (90 percent) are likewise handled by the same central cooperatives.

Goals,Objectives, Characteristics and Functions of Islamic Banking System

Introduction The introduction of interest-free and equity-based financing by the Islamic banking system is based on the principles of Islamic economics. The aim of Islamic economics, as observed by Molla et.al. (1988), is not only the elimination of interest based transactions and the introduction of the zakah (contribution to poor) system but also the establishment of just and balanced social order free from all kinds of exploitation. The Islamic banking system is highlighted in the World Development report (1989, Box 6.3), as under; Islamic banks offer savers risky open-ended mutual fund certificates instead of fixed-interest deposits. (This is not unlike cooperative banks and mutual in the west, where deposits earn variable interest and double as equity.) Difficulties arise on the lending side. Arrangements to share profits and losses lead to considerable problems of monitoring and control, especially in lending to small business. Ahmed (1994), argues that elimination of interest does not mean zero-return on capital. Rather, Islam forbids a fixed predetermined return for a certain factor of production i.e. one party having assured return and the whole risk of an entrepreneurship to be shared by others. The author also observed that it is the capital entrepreneurship that shares both the real contribution and the real profitability. The Islamic bank follows the principle of equity basedinvestment. The Islamic banking system also proposes that resources can be contracted on the basis of venture capital and risk sharing deals. The idea of equity-based investment banking is not new to the financial market. If we look into history it may be observed that capital, as loan capital as well as venture capital played a great role in promoting industrial and economic development of various countries of the world. For example, during the 19th and 20th centuries investment banks played a great role in French tradition while in British model of banking equitybased investment was limited. Similarly in Germany equity-based investment was being practiced by commercial banks during that period. Even the banking crisis in the western world during the great depression in the 30s or the 80s proposed two-tire banking i.e. hundred percent deposit banking and the equity-based investment banking. In the modern financial market an alternate arrangement for participation of capital and entreprenurship started with the advent of Islamic Banking in the 70s. In a number of studies such as IMF, World Bank and IFC, the Islamic bank activities were discussed in detail. Highlighting Islamic banks principle Khan (1986, p. 19), in the IMF staff Paper, observed as; Indeed it is really apparent that the Islamic model of banking based on the principle of equity participation bears a striking resemblance to proposals made in the literature on the reform of banking system in many countries. The Islamic System may well prove to be better suited to adjusting to shocks that result in banking crises and disruption on the payment mechanism of the country. In an equity-based system that exclude predetermined interest rate and does not guarantee the nominal value of deposits, shock to asset position are immediately absorbed by changes in the values of the share deposits held by the public in the banks. Therefore, the real value of assets and liabilities of banks in such a system will be equal at all points in time. In the more traditional banking system since the nominal value of deposits is fixed, such shocks can cause a diversion between real assets and liabilities. It is not clear if this would be correct and how long the process would take. A study by OECD of the European countries, Paris, (1983) reveals the fact that interest-free banking is a novel form of finance and they are not only trying to give interest another name but that legal instruments within the framework of Shariah exist which permit profitability on a different, albeit Qoranically acceptable basis. Islamic banks belong to the

class of equity-participation bank. In this regard Ahmad (1994, P. 190) in his study quoted the idea of Albach as; They supply equity in the form of venture capital to investors whose share is their ingenuity and their labor. Secondly, they supply equity in the form of equity capital participants in the type of project, which in general has majority shareholders. They may be ideally suited to meet the need for equity capital in developing countries where the business risk is particularly high as well as in the industrialized countries where the development of new processes and new projects involves high risk and requires large amount of venture capital Scharf (1983, P. 94-95), in his study entitled Arab and Islamic Bank conducted by Development center, Organization of Economic Cooperation and Development (OECD), highlighted the Islamic banking principles and prospect as follows; Islamic banking is trying to develop the relationship between finance on one hand and industry and commerce on the other. This new relationship is the basis of the Islamic economic system being set up. Though Islamic principles have yet to be put to the test in the competitive of international finance, the two systems are similar in that they both strive for closer ties between financial intermediation and economic asset creation. Islamic banks could make a useful contribution to economic growth and development particularly in a situation of recession, stagflation and low-growth level because the core of their operation is oriented towards productive investment All countries both in the North and in the South, need more venture capital. Loan capital is available, particularly from industrialized countries but at high interest rates. However, even from expansion and innovation. This has acted as a brake on productivity and economic growth in the North. Thus practical and immediate cooperation possibility exists between Islamic banks and enterprises all over the world. The intermediation process remains to be fully developed. About the possibility of introducing an interest-free financing system through Islamic banking principle Scharf (1983) also argues that the establishment Islamic Financial System based on the principle of Shariah is not only feasible but also profitable. Western countries today realize the truth that interest is an unbearable burden for the developing countries. Due to that, as observed by Ahmad (1994, p. 188), Canada has already waived of all the interest. Australia has made a similar move. President Mitterrand of France has officially suggested in the Group-7 meeting that at least 30-35 percent of the present interest element of the debt should be waived off.

Basis and Business Practice of Islamic Banking

From the viewpoint of Islamic Shariah, in order to be justified islamically the banking system has to avoid interest. Consequently, financial intermediation in Islamic banking between the bank and the client takes place as a partner rather than a debtor-creditor. The financial activities of modern conventional banks are based on a creditor-debtor relationship between depositors and bank on the one hand and between the borrower and

the bank on the other. Interest is regarded by conventional banks as the price of credit reflecting the opportunity cost of money. As interest is prohibited in Islam, commercial banking in an Islamic framework could not be based on the creditordebtor relationship. The other aspect of the theoretical basis of Islamic banking is that the interest free bank is not risk free. This principle is applicable to two main factors of production, i.e. labor and capital. According to this principle, as no payment is allowed to labor, unless it is applied to work, no reward for capital should be allowed, unless it is exposed to business risk. From these two principles of the theoretical basis of Islamic banking, it may be said that Islamic financial relationships are of a participatory nature (Ahmad, 1993). Based on the theoretical background, business practices of Islamic bank, especially sources and uses of banks funds, are characterized by the following modes or techniques. Sources of Funds of Islamic Banks Current Accounts Islamic banks accept deposits from customers on current accounts as conventional banks do. This account is also known as Demand Deposit as the deposited amount is payable to customers on demand without any notice. As banks use current account deposits on their own risk the depositors of this type of account are not entitled to any share in the profit earned by the bank. Savings Accounts Islamic banks accept saving deposits from customers under Al-Wadia and Al-Mudaraba Sharia Principles. The word Al-Wadia means Trusteeship. In this case banks act as trustee for its customers. In Saving Accounts under the Al-Wadia principle the bank is given an authorization by depositors to use the fund at the banks own risk. This type of deposit is almost similar to a Current Account or Demand Deposit except that the bank guarantees its customer the full return of the deposited fund with any profit voluntarily. Under the Al-Mudaraba Shariah principle there are two different types of savings accounts, such as
-savings under profit and loss sharing agreement and -savings under Investment Account.

The word Al-Mudaraba originates from the word Mudarib and means The Manager of the fund. The bank in this case acts as a manager of customers funds. The depositors on the other hand are known as Sahib-Al-Mal meaning the owner of the fund. Deposits accepted on savings under the Profit and Loss sharing agreement is invested by the bank on its own risk. Customers give authorization to the bank to invest funds and share profit or loss on agreed proportions. Account holders of this type of account are required to maintain a minimum balance in the account. Further to the above, Islamic banks accept deposits from customers under the Investment Account on a Profit and Loss Sharing basis. The

saving account of such a nature in an interest-free banking system is also known as a participatory account or a Profit or Loss Sharing (PLS) account. Depositors of this type of account receive share of profit to the agreed ratio from their funds invested by the bank. The profit and loss sharing also depends on the total amount deposited and the length of period the money is held by the bank. Depositors of an Investment Account are required to give prior notice to the bank if they withdraw their invested funds under any special circumstance. In such a case no share of profit is given for the amount withdrawn. Investment accounts are again subdivided into the following various categories. Joint or General Investment Account Limited-Period Investment Deposit Unlimited-Period Investment Deposit Specified Investment Deposit Under the Joint or General Investment Account the bank pools together investment deposits of different maturities which are not invested in any specified project but utilized for different financing operations of the bank. Depositors of this type of account receive profits at the end of the period, which is accounted and distributed on a pro rata basis. The Investment Deposits on Limited Period basis indicates a type of investment, where the bank accepts deposits from customers for a specified period of time. The bank refunds the money to depositors after the time is expired. The profit generated from such funds is distributed at the end of the financial year. The bank also accepts deposits from its customers under an Unlimited-Period Investment Deposit, where investment deposits are automatically renewable without specifying the period. Depositors of this type of account may withdraw their funds within three months notice to the bank. Profits are distributed to depositors at the end of the financial year. Some Islamic banks accept a Specified Investment Deposit, where the bank and the customer agree to invest this fund to a specific project or trade. Profits accrued from this type of investment are shared by the bank and the customer. The bank in this regard, works as an agent for the customer, and may charge an agreed fee for the investment function or may share the profit at an agreed proportion.

Saving Deposit as Quard E Hasan Apart from the above Islamic banks accept savings from customers as Quard E hasan (benevolent loan) from the customers. Depositors of this sort of savings deposits receive financial or non-financial benefits from the bank. Uses of Funds of Islamic Banks

Based on the theoretical viewpoint as discussed earlier two fundamental techniques or modes of investment advocated by the Islamic Shariah Principle is; - Mudaraba (Capital Financing) - Musharaka (Partnership )
Mudaraba (Capital Financing) Capital Trust financing is a contract between at least two parties in which the bank as the investor supplies the entire capital of the business forming a relationship between the supplier of capital and the user of capital. These two parties work together and share profits and losses. Under Murabaha financing the investor is known as Rab-Al-Mal which means the owner of the property and the entrepreneur is called Mudarab, meaning the manager of capital. When the venture ends, the manager of capital i.e. the entrepreneur returns the entire capital to the bank, along with an agreed proportion of profit. If there is any loss, it is born by the bank. The main advantage with this type of partnership is that it combines the efforts of human beings and their skills with the capital, which contribute greatly towards the development activities in a society and also assists to solve unemployment problems by utilizing manpower resources in a productive way. Musharaka (Partnership) The word Musharaka means a profit sharing joint venture, designed to limited production or commercial activities of long duration. In this case the bank and the customer contribute capital jointly. They also contribute managerial expertise and other essential services at agreed proportions. Profit or losses are shared according to the contract agreed upon. An individual partner does not become liable for the losses caused by others. In addition to the above two financial arrangements, Islamic Banks currently in existence are also engaging in or actively considering several other financial practices usually acceptable in Islamic Law. These are: Murabaha (Mark-up or Cost-Plus-based Financing) Ijara (Leasing) and Quard- E- Hasan (Interest-Free Loan) Murabaha (Cost plus profit) The word Murabaha means a cost-plus Profit contract. In this system of financing the bank agrees to purchase for a client who will then reimburse the bank in a stated time period at an agreed upon profit margin. The mark-up price that the bank and the buyer agree to is mainly based on the market price of the commodity. Thus the bank earns a profit without bearing any risk.

Ijara (Leasing) The word Ijara indicates leasing. The leasing purchase is another technique followed by Islamic banks in financing customers. This system is almost similar to the leasing activity provided in traditional banking. Leasing is a contract between the bank and the customer to use particular assets. In this case the bank is called lessor and the customer is called lessee who wants to use the assets and pays rent. Zineldin(1990, p.83), in this regard argues as, The leasing agreement is based on profit sharing in which the bank buys the movable or immovable property and lease it to one of its client for an agreed sum by installments and

for a limited period of time into a saving account held with the same bank. These installments are invested in Mudaraba investment (Venture) for the customers account. The accumulated profit generated from the payments, and the payments themselves are invested in the banks investment ventures over the time period of lease, contributing to eventual purchase of the leased assets. According to the Western leasing system the lessee pays specific rentals and a fixed rate of interest over a given period for the use of specific assets. But in the Islamic banking system of leasing the risk related to leasing has to be shared between the bank and the lessee, in case of any damage to the leased assets. The contract is called ijara-wa-iqtina i.e. leasing purchase, when the ownership of the assets is transferred to the clients after the completion of the leasing contract. Quard E Hasan (Interest free loan) Quard E Hasan means an interest-free loan given by the Islamic bank to the needy people in a society. The practice of dealing with this sort of investment differs from bank to bank. Quard E Hasan is normally given to needy students, small producers, farmers, entrepreneurs and economically weaker sections of the society, who are not in a position to obtain loan or any financial assistance from any other institutional sources. The main aim of this loan is to help needy people in a society in order to, make them self-sufficient and to raise their income and standards of living. (Zineldin, 1990; Khan, 1897; Kazarian, 1991, Ahmad, 1993)

REASONS
Capitalization could not solve the global economic problems. The world is looking

for a new economic order. Islamic economic system will be that new economic order. Islamic finance is one of the fastest growing sectors in the global financial industry. The interest-free Shari`ah-based systems will be mainstream Banking and the conventional banks will be the minority systems in the OIC countries including

Bangladesh within 2002, M Azizul Haque, a leading expert on Islamic banking in Bangladesh, told IOL. Azizul Haque, who is also chairman of the Shari`ah Council of Dhaka, believes that Bangladesh will follow the rest of the world to the Islamic banking sector. He explains that the growth rate of Islamic banking in the OIC countries for example is 15 to 20 percent while that of conventional banks is 10 to 15 percent. In defiance of the credit crunch, the global Islamic finance market has grown about 15 percent in each of the past three years, and is now worth about $700 billion worldwide. Currently, there are nearly 300 Islamic banks and financial institutions worldwide. Its assets are predicted to grow to $1 trillion by 2013. Azizul Haque expects that higher growth rates in the next decade will force the global financial systems to Islamic banking. There is not any sort of apprehension regarding the success of Islamic banking, The renowned economic. Bangladesh entered the Islamic banking system only in 1983, with the establishment of Islami Bank Bangladesh. Since then, five more full-fledged private Islamic banks and 20 Islamic banking branches of conventional banks have been established. Patwary says that his bank is now one of the top performer banks in terms of business and profits among the 48 commercial banks operating in the country. Islamic Bank Bangladesh Limited has gained first position in the all private banks in term of deposits, investment, export & import and remittance collection. According to the Bangladesh Bank (BB), the central bank of the country, the deposits of the Islamic banking systems are now 25 percent of all private banks deposits and its investments are 30 percent. A Muslim, whose religion prohibits earning or paying interests, Islamic banking makes it possible to operate interest-free business. Islam forbids Muslims from usury, receiving or paying interest on loans. Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork. Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships. Bangladesh is the worlds third largest Muslim majority country, with Muslims making up more than 80 percent of the nations 148 million population.

SUGGESTION
Banking Environment in Bangladesh Bangladesh appeared as a new nation on the world map in the year 1971. After independence financial institutions, especially banks played a vital role in re-constructing the war-torn economy of Bangladesh. As reported by BSB (P. 29, 1993), the banking system of Bangladesh is a mixed one comprising nationalized, private and foreign commercial banks. Bangladesh Bank is the central bank of the country and is in charge of monetary policies of the Government and controls all commercial banks. Immediately

after independence the government of Bangladesh nationalized most of the banking institutions, though, within a short period, due to the failure in administering them properly, many of them were returned to their owners. The banking sector is one of the fast growing sectors of economy in Bangladesh. At present there are 34 banks working in the financial market of the country, including four Islamic banks and a number of foreign banks. The total figure of banking institutions in Bangladesh may be stated by the following Table.

Source: GOB 1993/1994 During the Fiscal Year 1993-94 the banking institutions of Bangladesh transacted their business through 5,780 branches (BSB, 1994). The deposit of scheduled banks (excluding inter-bank items) amounted to TK. 309,884 million*. The bank deposits during the year 1993-94 were increased by TK. 27,629 million, of which 12.29% was in time deposits and TK. 22,043 million or 25.50% in demand deposits. The total bank credit in the same year was TK. 240,870 million. Of this, credit to the government sector recorded a decrease of 55.05% and credit to the private sector expanded by 8.55%. (GB, 1993/94).
Establish a partnership relationship with customers and to eliminate the idea of

the debtor-creditor Relationship of traditional banks. Establish welfare oriented banking system; Mobilize savings towards productive sectors; Invest on profit and risk sharing basis; Invest to those businesses sectors that are found legal from

 The religious point of view. Create employment opportunities by investing savings towards prospective

economic sectors. Extend banking services towards the poor, helpless and low-income group of people in the society in order to uplift of their standard of living. Contribute to establishment of a society by equitable distribution of wealth Establish justice in trade and commerce in the country; Develop morals among the people and to establish the shariah in the field of trade and commerce; Render services for the economic development of the nation. Contribute towards establishment of an Islamic Economic System in the Country. Need to Combine Islamic Economic History with Islamic Institutional Economics. Mudaraba Frame Work. Islamic Discipline of Economics Emerged in late-colonial India Islamic Economics Needs a Great Deal of Creative Thinking. Bankers believe that the Islamic banking is set for even more progress, if a law governing Islamic Banking policies is introduced. If an Islamic banking Act is introduced, the Islamic banking systems will even further flourish. Experts predict that with the rapid rise of Shari`ah-based systems, the industry will ultimately turn to be the financial mainstream in Bangladesh.

CONCLUSION
It may be concluded from the above discussion that the Islamic Banking System shows an overall success in both deposits and investment positions since it started its banking activities. ISLAMIC BANKING is increasingly becoming an area to watch in the local banking industry. This is especially so given that Bangladesh is already quite well known for its Islamic banking infrastructure and may thus be a draw for petrodollars. Islamic

banking, which started as experiments of individuals. But its tremendous progress also carries a lot of challenges for those who work in the field. Need for investing more in human capital development. We know that humans, the makers of progress and success, are also behind failures and collapses. Emphasizing the need to focus more on education and training to strengthen the sector. Employees lack of knowledge of Islamic banking principles would have a negative effect on the system, as they would not be able to market products effectively. Well also advise member countries on how to manage Zakah and Waqf successfully, following modern asset management principles. It is also observed that, the bank did not succeed much in accumulating deposits under various term deposits. This ultimately results in a reduction of the long-term investment of the bank, especially investment towards industrial sectors. It is always assigned that the growth rate of bank branches should increase the savings position of the bank, which was not the case with the Islami Bank. Apart from its growing share, the prospects of Islamic banking are also bright with the flush of petroleum money. Islamic banking is seeing rapid expansion worldwide, with strong growth in the Middle East. As regards the overall investment position of the Islami Bank Bangladesh it may be concluded that, since the beginning of banking activities the bank has not invested any amount in any project on the Mudarab mode of investment. Although, the Islamic banking theory as regards investment of funds and acceptance of deposits is based on two fundamental techniques such as Mudaraba (capital financing) and Musharaka (Partnership), It was observed from the response of a few small-scale industrialists that the remarkable advantages they get from the bank are easy formalities of obtaining loan and quick action in processing loan activities. Moreover, clients of all levels can have free access to the bank and can discuss business matters with senior officials. There is an immense need for Bangladesh Bank to have a group of Islamic bankers and Shariah experts of its own who can properly monitor and formulate guidelines for all Islamic banks and Islamic banking windows in the conventional banks.

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