Economic Development of Bangladesh:
The Role of IBBL
*Shafiqur Rahman ** Nicholas McDonald
Abstract
This paper presents the role of Islami Bank Bangladesh Limited (IBBL) to the recent economic development in Bangladesh. The study analyses published texts, articles, websites and annual report of IBBL through a content analysis. Key findings of this study manifest the different areas of economic development in Bangladesh by IBBL like generating employment, earning foreign remittance, strengthening rural economy, promoting ecology and green banking, boosting industrialization, developing the SMEs, assisting in foreign trade (import-export), developing the housing sector etc. This study also identifies IBBL’s contribution to Corporate Social Responsibility in Bangladesh as well as significant contribution to the national exchequer. This paper contributes to the field of economic development of Bangladesh the role of IBBL behind it, especially where there is a lack of literature in this specific area.
Keywords – Economic Development, Bangladesh, Islami Bank Bangladesh Limited (IBBL)
* Shafiqur Rahman is an MBA Coordinator for International Islamic University Chittagong (Dhaka Campus); Director, Centre for Law Development and Governance, PhD Candidate, Macquarie University, Sydney, Australia.
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** Nicholas McDonald is a Management Consultant in Sydney, Australia.
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1.0 Introduction:
A bank is a financial institution, where people secure their money and use this institution as a source of possible finance. Banking in the form in which it exists nowadays is comparatively of recent origin [1]. Before the advent of modern banking, direct finance, where the owner of capital deals directly with the user of capital, was the customary mode of transference of funds from savers to investors. Nowadays, banks are organizations engaged in any or various functions i.e., receiving, collecting, transferring, paying, lending, investing, dealing, exchanging, and servicing money and claims to money both locally and internationally [2].
Bangladesh is a country suffering from immense social, political, economic and environmental issues and these issues need to be addressed for the overall development of this country. However, the economic development is one of the prime factors, which can resolve many of its current problems. The growth of business sectors and open market economy has created a great opportunity for Bangladesh for its development. The contribution of the banking sector is playing significant role in the development of this country. However, the emergence of Islamic banking in Bangladesh has added a new height in the banking sector. The role of IBBL seems to be magnificently surpassed among all the Banks in Bangladesh during last one decade.
Economic Development refers to changes that affect a local economy's capacity to create wealth for local residents [3]. Economic development for Bangladesh can be identified through number of indicators, including GDP growth, poverty issues, employment, healthcare, environment, education, trade and commerce etc. This study clearly identifies that during last 28 years, IBBL has contributed in improving Bangladesh economy through making positive changes to all its economic indicators.
The core question addressed by this study was: What role IBBL has been playing towards the economic development in Bangladesh? This study contains a few steps below. Firstly, the introduction of this paper has been placed; secondly, the relevant literature has been reviewed; thirdly, the research context, Bangladesh has been presented; fourthly, the origin and development of Islamic banking and the commencement of IBBL’s journey has been briefed; fifthly, key information of IBBL has been included; sixthly, the theoretical framework, under which IBBL operates has been narrated; seventhly, methodological framework of this study and its relevance has been explained; eighthly, the role of IBBL in different business sectors of Bangladesh has been described; ninthly, noted the limitation and finally, summary and conclusion.
2.0 Relevant Literature review:
Banking system has significant role in the economic development, historically (4). On one hand, banks give the security of savings of the general people; on the other hand, lend money to the entrepreneurs to start a news business or expand an existing business, which ultimately create velocity of money and generation of employment within an economic territory. Modern banking system is involved in numerous financial services activities starting from lending money to exchange money nowadays [5].
The aim of Islamic economics is not only the elimination of interest based transactions and the introduction of the zakah (obligatory contribution to poor by Muslims) system but also the establishment of just and balanced social order free from all kinds of exploitation [6]. Zakah system takes the wealth from the rich according to the guideline of Shariah (Islamic Jurisprudence) and spreads the wealth among the deserving people that helps the society to sustain and grow.
The principles of Islamic economics recommend interest-free and equity-based financing through the Islamic banking system. A great scholar on Islamic economics, Ahmad says that elimination of interest does not mean zero-return on capital [7]. 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. Instead of interest, Islamic economics introduced profit and loss based banking transaction which spreads the risk between borrower and the banks, which made Islamic banks fundamentally different from the conventional interest based banks.
Referring to the existence of Islamic banking amid of conventional banking system and economy, another expert of Islamic banking system, Sarkar expresses that Islamic banking system can provide efficient banking services if they are supported with appropriate banking laws, and regulations [8]. Islamic banks are operating facing immense national and global challenges, when it is making financial transactions, trading or as a working partner. However, when appropriate laws and regulations are persists in a society or at the global level, Islamic banks can manifest its performance well.
Two prolific scholars of Islamic finance, Ahmad and Hassan remarks that Islamic banks in Bangladesh came into existence with certain objectives, in line with the philosophy of Islamic banking, that imply a direct and specific responsibility on their part to play an effective role in the socioeconomic development of the country [9]. Islamic banking in Bangladesh effectively following the Islamic philosophy of banking, performing better than the conventional banks in many cases, gained widespread support from the customers and contributing significantly in the socioeconomic development of Bangladesh.
Defining Economic Development, Pokrant refers to the raising of the productive capacity of a country through the introduction of policies designed to enhance the productivity of land, labour and capital, raise standards of living and reduce or alleviate the poverty of the inhabitants of the country [10]. Though there are a number of definitions of economic development exist, it is generally understood that the standard of living of the citizens can be improved by alleviating poverty through increased productivity. Also Kifle, Olukoshi, Wohlgemuth support this idea that there is a strong relationship between poverty elevation and economic development [11].
A contemporary scholar on Islamic banking Hassan views that the successful launching and operation of Islamic banks in Bangladesh has established that banking with out interest is feasible. He also observes that Islamic banks have brought together many depositors and entrepreneurs under the banking system [12]. It has been found that these depositors and entrepreneurs have got the opportunity to practice Shariah based banking and fulfill their religious obligation.
Another scholar on Islamic Banking in Bangladesh, Alam describes the reasons behind the success of IBBL and narrated that in addition of Shariah compliance, senior officials of the Bank also keep a regular contact with customers and bank managers frequently visit them in their places of business. Referring the chief of the Investment Department of the IBBL, Alam also commented that though IBBL initially faced some challenges, but the situation is getting better than before [13].
3.0 Contextualizing the Proposed Research:
Bangladesh is a country, the research context, where IBBL operates, suffers from immense economic, social and environmental challenges, has been described below.
Economic situation of Bangladesh: Bangladesh has been facing severe economic problems. This country has a per capita income of only US$781 [14]. Feeding 160 million people with a piece of land measuring 0.15 million square kilometers is really challenging. Having an annual budget of USD $ 23.37 billion the country is struggling to meet the basic needs for its citizens. However, over the past years, the economic situation of Bangladesh seems to be improving. For example, various steps by the private sector supported by the government has generated USD $36.44 million Foreign Direct Investment in CY 2010 and generated $ 22.93 billion export earning in [15].
Social condition of Bangladesh: This country also suffers from severe social problems. Over two million female workers are employed in Bangladesh is its export oriented garments sector, which is low paid and barely their salary meet the day to day expenditure. In Bangladesh, women workers in this garments sector have to survive particularly harsh working condition. Child labour is another major problem in Bangladesh. Among factors contributing to child labour are rapid population growth, adult unemployment, bad working conditions, lack of minimum wages, exploitation of workers, low standard of living, low quality of education, lack of legal provisions and enforcement, low capacity of institutions, gender discrimination, conceptual thinking about childhood, etc. One or more of the above contribute to the large numbers of children working under exploitative or hazardous conditions [16]. Another major social problem is acid attacks on women, mainly due to refusal of marriage proposal and failure to give dowry to the husband. These attacks are increasing at alarming rates as government has failed to prosecute the attackers. Easily available sulphuric acid, which can deeply injure a human face in seconds, has emerged as a weapon nowadays used to disfigure a woman’s body. Gradual increase of acid attacks suggests that legal provisions and their enforcement are not adequate, nor effective. Social awareness, economic and psychological support, rehabilitation, and strict enforcement of laws are key to combat acid violence in Bangladesh [17]. Drug addiction is increasing in Bangladesh as well. It has been recognized as a social, health and also a political problem, and it needs to be addressed urgently. Bangladesh is a country where 40 percent of the people go to bed hungry every night, where 40 percent of the people are chronically malnourished and stunted. It is a country where too many mothers die in childbirth, where too many infants die before they reach their first birthday [18].
Environmental challenges in Bangladesh: Bangladesh has a number of environmental concerns as well. Bangladesh is the most vulnerable country to climate change impact. Being the largest delta in the world located at the downstream of the second largest river system, the country is subject to a series of climatic events. The probable impacts of global climate change (GCC), particularly sea-level rise and the associated impact on ecosystems and economic loss, adds to the already daunting array of environmental issues. Climate change will change the physiography and demography of Bangladesh. By 2050, 70 million people could be affected annually by floods; 8 million by drought; up to 8% of the low-lying lands may become permanently inundated [19]. Bangladesh has been high risk prone area for last couple of years, for arsenic polluted water due to arsenic release in groundwater from the sediments deposited during the Holocene period. So, supply of safe drinking water remains the most crucial issue in a large area in Bangladesh [20]. In addition to its human caused environmental problems, Bangladesh has been severely affected by natural disasters in last few years. For example, in 1991, nearly 150,000 lives were taken by a cyclone. Hundreds of natural disasters, both large and small, occur each year in Bangladesh [21].
However, banking sector plays a vital role in Bangladesh economy. Islamic banking system is becoming popular since 1983 over the conventional banks in this country. In addition to the six Islamic banks (shariah based banks) in Bangladesh, almost all the banks (except Janata Bank) are having Islamic banking windows as well as a few foreign banks. Most of the Islamic banks are performing well. Islami Bank Bangladesh Limited is playing leading role in the banking sector for last one decade due to its excellent performance. Due to its outstanding acceptance among the banking consumers (both borrowers and depositors), it is contributing significantly in Bangladesh Economy. The Islamic banking system, specifically the IBBL’s contribution to the economy may help improve current situation of the country.
4.0 Origin and development of Islamic Banking System and the commencement of IBBL’s journey:
Islamic banking refers to a banking activity that is consistent with the principles of the Shari'ah (Islamic jurisprudence) and its practical application through the development of Islamic economics [22]. Islamic banks have the following specialized characteristics: a) to achieve certain philosophical missions of Islamic banking (conforming with Islamic laws, practices and principles; b) to provide credit to those who have the talent and the expertise but unable to provide collateral to the conventional banks; and c) to create harmony in society based on the Islamic concept to achieve economic, financial, and political stability. Dubai Islamic Bank, world’s first fully-fledged Islamic bank, was established in 1975 [23]. In the same year, Islamic Development Bank was established as a follow-up of decision of Conference of Finance Ministers of Muslim Countries [24]. Today, there are 280 Islamic banks in 48 countries, whose total deposits have reached US$400 billion, in addition to 300 conventional banks, which opened branches, windows or provide Islamic financial products.
Many conventional banks around the world opened Islamic banking windows. In Australia, both Westpac and National Australia Bank have taken steps to enter into Islamic banking parallel to their conventional system. Islamic banks are based on Profit and Loss Sharing (PLS) system, rather than interest. These banks are socially responsible while giving loans and monitored by expert bankers side by side guided by the Shariah (Islamic law) Board. Islamic banks do not lend money to the tobacco industry, gambling industry, production of goods that damage physical or mental health or harmful to the environment or any product or service industry involve in unethical practices, which has a very close proximity to the SRI (Socially Responsible Investment) of the western world. The first Islamic Bank in Bangladesh, Islamic Bank Bangladesh Limited (IBBL) was established in 1983 and later five more banks have joined in the same journey with the growing demand of shariah based banking system in this country.