Acknowledgement
We would like to express our gratitude to our supervisor Mrs. Tabassum,Nafeesa for her
continues effort and guidance throughout last couple of months in report.
We are grateful to the employees of various banks who helped us in collecting data and
other necessary information for the thesis. We would also like to thank our friends and
relatives for their supports.
Finally, our special gratitude to our parents and family members for their encouragements
supports and loves during our studies.
Foundation of Islamic Banking
Introduction
Islamic banking constitutes an important part of the banking system of Bangladesh.
Islamic banking (Arabic: ةيللا ةيفرصملا) is banking or banking activity that is
consistent with the principles of sharia and its practical application through the
development of Islamic economics. As such, a more correct term for ‘Islamic banking’ is
‘Sharia compliant finance’.Sharia prohibits the fixed or floating payment or acceptance of
specific interest or fees (known as riba, or usury) for loans of money. Investing in
businesses that provide goods or services considered contrary to Islamic principles is also
haraam.
Base of IB
Islamic banking system was introduced in Bangladesh more than two decades ago. We can
easily deduce the growth of Islamic banking in Bangladesh by observing the extent of
operations of existing Islamic banks and the shifting of the conventional banks (Export
Import Bank of Bangladesh Limited was an example) and their branches into the Islamic
banking system. Profitability is the ability of a firm to generate net income on a consistent
basis. It is often measured by price to earnings ratio .However, in this paper we will try to
analyze the profitability of the Islamic banks established and operated in Bangladesh. We
know traditional banks depend on interest for maximizing profit, whereas Islamic Banks as
specialized bank do not follow interest as traditional commercial banks. That’s why
analysis of profitability of Islamic Banks is important to the economy. 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.
“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.
Bangladesh is the world’s third largest Muslim majority country, with Muslims making up
more than 80 percent of the nation’s 148 million population.
A list of islamic banks started at the beginning and established the islamic banking system
in Bangladeshi perspective given below;
Concept, Principles, Basic and features
of Islamic Banking
Concept
Conventional banking is essentially based on debtor-creditor relationship between
depositors and the bank in the one hand and between the borrowers and the bank on the
interest is considered as the price of credit, reflecting the opportunity cost of money. Islam,
on the other hand, considers loan to be given or taken, free of charge, to meet contingency
and that the creditor should not lake any advantage of the borrower. The money is lent out
on the basis of interest, more often it happens that it leads to some kind of injustice. The
first Islamic principle underlying such kinds of transactions is that “deal not unjustly and
ye shall not be dealt with unjustly”. Hence, commercial banking in an Islamic framework
is not based on debtor-creditor relationship. [Bley, J., and Kuehn, K., 2004]
The second principle regarding financial transactions in Islam is that there should not be
any reward without risk-taking. This principle is applicable both to labor and capital. 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 risks.
Thus, financial intermediation in an Islamic framework has been visualized on the basis of
the above principles. Consequently financial relationships in Islam have been participatory
in nature. Several theorists suggest that commercial banking in an interest-free system
should be organized on the principle of profit and loss sharing. The institution of interest is
thus replaced by a principle of participation in profit and loss. That means, a fixed rate of
interest is replaced by a variable rate of return based on real economic activities. The
distinct characteristics which provide Islamic banking with its main points of departure
from the traditional interest-based commercial banking system are: (a) the Islamic banking
system is essentially a profit and loss sharing system and not merely an interest-free (Riba)
banking system; and (b) investment (loans and advances in conventional sense) under this
system of banking must serve simultaneously both the interest of the investor and those of
the local community. The financial relationship as pointed above is referred to in Islamic
jurisprudence as Mudarabah.
Principles
Islamic banking operates on some basic principles which include:
R The Sharia prohibits the payment of charges for the renting of money (riba, which in the
definition of Islamic scholars covers any excess in financial dealings, usury or interest) for
specific terms and also investment in businesses that provide goods or services which are
forbidden in Islam (Haram, forbidden).
R The universal nature of these principles is immediately apparent even at a cursory glance
of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the
Bible, while Shakespeare and many other writers, particularly those writing in the 19th
