Practice of Islamic Financial Management in Bangladesh: Evidence from Islamic Banks

The growing awareness of the systemic importance of Islamic banking and finance to the development has prepared the ground for the work of upgrading the existing Islamic banking practices. Hence, this study aims to evaluate the Islamic Financial Management (IFM) practices of Islamic banks in Bangladesh. In line with the objective of the study, several ratio analyses were conducted based on ANNOVA test and the sample size includes 8 Islamic banks from 2007 to 2013.The findings revealed that the Islamic banks in Bangladesh are homogenous; however, they are not financially healthy when liquidity measurements are concerned. Additionally, capital structure efficiency results revealed that most of the Islamic Banks in Bangladesh are practicing debt-based financing rather than equity. While the study has observed that the practices of IFM in Bangladesh are promising, however, there are numerous challenges encroaching the industry. Hence, immediate attention from the respective authorities, including practitioners and policy makers are indeed vital.


Introduction
In the recent era, Islamic banking and finance becomes an important topic both in the academic literature and among practitioners since it represents a new reality to the conventional banking practices (Sundararajan &Errico, 2002;Khan & Ahmed, 2001). This is mainly due to the fact that Islamic banking and finance aims to provide justice, honest and fairness to all parties in any financial transaction by ensuring that their rights and dues are preserved accordingly (Abu-Tapanjeh, 2009). Another major ethical component of this system is that Islamic financial institutions (Islamic banks) are less risky due to the elimination of interest-based transactions. As a result of this uniqueness in Islamic banking and finance, it has progressed in many economies during the last few decades, including Bangladesh. Several researchers have examined the reasons behind such spectacular growth of the Islamic banking and finance industry. Such as, Iqbal, Aḥmad and Khan (1998) found that the rapid growth in Islamic finance and banking in Muslim countries, and around the world during the last twenty years is influenced by the introduction of broad economic and structural reforms in financial systems, the liberalization of capital movement, privatization, the The second era started from the era of the caliphates until the fall of the Uthmaniyah Empire. This era witnessed the continuation of banking activities practiced in the early era. For instance, trading activities carried out in Basrah (presently a city in Iraq) with cheque instead of money. Although Islamic finance failed to expand during this period, however, development took place in terms of legal maxim (fatwa) by Muslim jurists pertaining to issues of financial transaction (muamalat), particularly those involving usury (riba). Many renowned scholars (jurists/ ulama) established their school of thought such as Imam al-Azam Abu Hanifah (698-7670), Imam Malik ibn Anas (712-795), Imam Ahmad ibn Hambal (778-855) and al-Shafil (767-820) during this phase. The views of these jurists, particularly on Muamalat, have been used as a reference for taking any decision pertaining to Islamic financial activities. This includes whether a conduct is lawful and in accordance with Shariah principles or otherwise. Finally, after the second phase, the revolutionary modern era of banking and finance has started (Sudin&Nursofiza, 2009). In this era, the first Islamic financial institution has been established in the Indian subcontinent during the 1940s (Laldin, 2008). After that, an Islamic bank was made in Pakistan in the 1950s. Further, the development of the Islamic financial system started with the establishment of the Pilgrimage Fund known as "Tabung Haji" of Malaysia, a first formal Islamic savings institution that started in 1963 (Erol& El-Bdour, 1989). However, MitGhamr savings bank, an experimental bank of Islamic banking in Egypt, was started in 1963, and paved the way for the establishment of other Islamic banks in the region. The list of Islamic banks in different countries with establishment year is in the following Table 1.

Overview of Islamic Banking Industry in Bangladesh
First of all, the financial sector in Bangladesh is classified into three broad categories based on regulation:  Formal sector  Semi-formal sector and  Informal sector. Among this financial sector, banking sector, which is the major part of formal financial sector dominants other types of financial institutions in the industry. Due to its significant effect in the economy of Bangladesh, banking industry is highly regulated and monitored by the Bangladesh Bank (BB), the central bank of Bangladesh. Though Bangladesh inherited an interest-based banking system since its independence, the first Islamic bank, Islami Bank Bangladesh Limited (IBBL), was established in 1983. In 2017, out of 57 banks in Bangladesh, eight private commercial banks (PCBs) operated as full-fledged Islamic banks and 16 conventional banks (including three foreign commercial banks-FCBs) were involved in Islamic banking activities through window Islamic banking. The Islamic banks have continued to show strong growth since its inception, as reflected by the increasing market share of the Islamic banking sector in terms of assets, financing and deposits compared to the total banking system. A brief analysis on the performance of Islamic banks is given in Table 2. It is evident from the Table 2

Issues and Challenges of IFM
Despite having a considerable expansion in terms of number of IFI and its branches along with the client based in most of the Muslim majority country, the sector has encroached with several issues and challenges (few of them are highlighted above) that have hindered the potential growth of the sector in Bangladesh.
Among some of the problems and issues facing by the Islamic banking and finance industry and IFM in particular, Ather (2007) highlighted several crucial issues. The issues are mostly related to managerial functions, Islamic planning and organizing, Islamic management, motivation under Islamic management and control system and, regulatory and legal aspects. Iqbal, Aḥmad and Khan (1998) classified challenges of Islamic Banking in two ways; Islamic banking institutional aspects and Islamic Banking operational aspects. Challenges of institutional aspects are as follows:  Islamic banks suffer from the lack of institutional support. Building a proper institutional set up is most serious challenge for the Islamic finance.  Lack of appropriate legal framework and supportive policies  Lack of effective supervisory framework  Lack of Accounting Standards Boards for Islamic finance practicing companies  Lack of equity institutions  Establishment of organised secondary financial markets  Necessity to have a market for short term placements of funds Usmani (1998) has highlighted the problems of Islamic banking and identified three types of important challenges; i) capital budgeting, ii) financing and iii) working capital management. On the other hand, Akkas (2008) categorized challenges into two ways; i) macro operational challenges and ii) micro operational challenges. Problems related with macro operation are: liquidity and capital, valuation of banks assets, credit creation and monetary policy, financial stability, the ownership of banks, lack of capital market and financial instruments, insufficient legal protection. In contrast, problems related to micro operation of Islamic banks are increased cost of information, control over cost of funds, mark-up financing, excessive resort to the murabaha mode, utilization of interest rate for fixing the profit margin in murabaha sales, financing social concern, lack of positive response to the requirement of government financing. On top of that, there are few other issues that have hindered the growth of the IFM practices in most of the countries including Bangladesh. Firstly, in the era of globalization and rapid development, there is still a lack of sufficient infrastructures for Islamic trade financing on an international basis. This is significantly important as the international trade has gained momentum in most of the developing countries both in terms of import and export. As a result of this, the Islamic banking requires competitive financial products and services to cater the growing demand of exporters/importers in a majority of the Muslim countries and, Bangladesh in particular. Secondly, the practices of Islamic banking and finance, and IFM in particular require conformity of both the national conventional laws and Shariah rules. Without the cooperation of these both institutions that implement these two types of laws in a country, achieving the expected growth in the esteemed sector would not be possible. However, it is observed that these two segments of the government in majority of the cases are in non-conformity, hence raising several issues and challenges to practically implement in the country. Third, Islamic banking and finance is part of the financial sector of a country, hence, corporate sector plays an important role in this context. Similarly, there should be coexistence of both the Islamic banking and finance along with the corporate sector for sustainable development of an economy. However, it is understood that the corporate sector in Bangladesh is still rather poor, and no adequate supports are given to this industry in an aim to promote IFM in the country. Fourth, surprising enough, although the majority of the people in Bangladesh are Muslim and the country"s economy is booming in the recent decade as well as considerable size of the Islamic banking and finance industry, unfortunately, there is no Islamic capital market exist as of yet. However, countries like Malaysia have its own Islamic capital market (Oseni& Hassan, 2012). Fifth, since the history of Islamic banking and finance is not old and still in its beginning/growth stage in most of the Muslim countries including Bangladesh, there is a lack of professionals that are conversant with IFM. Due to the shortage of the professionals, the sector experienced significant turbulence in its growth path. In a seminal work recently in Dhaka, one of the authority in a think tank reported that "To ensure true benefit from Islamic banking practices, we need to concentrate more on the concept and need to develop human resources with adequate knowledge of Islamic banking" (The Financial Express, 2018). Sixth, the successful and effective Islamic banking and finance practices requires that both the supplier and creditor of a loan contract uphold the rules and regulations prescribed for the financial transaction. However, a bitter truth is that, there are a mounting of loan defaulters, at least, 230,000 in Bangladesh as of 2018, reported by the country"s finance minister that dry out funds from the financial industry (Dhaka Tribune, 2018). This is also a great obstacle for the industry to perform efficiently and progress well in their operation. Lastly, as described initially, the Islamic banking and finance sector has a lack of supportive institutions and instruments, which is considered as an important determinant to promote IFM practices in the country.   The results suggest that most of the Islamic banks have less ability to use their quick assets or near cash assets to retire their liability. This is because they are applying restricted policy of quick asset investment. Standard deviations of quick ratio for the banks lies between 0.09 and 3.22 indicate that variations are relatively lower. However, the findings may also reveal that all Islamic banks are not in a healthy financial position in terms of quick ratio. No difference is found among the Islamic banks in Bangladesh based on ANOVA results.  Table 5 provides the cash ratio of Islamic banks in Bangladesh and the comparison among them using ANOVA. The results find that AAIBL is in the top position among the Islamic banks in Bangladesh based on the mean cash ratio (1.73) followed by SIBL (0.59) and SJIBL (0.38) respectively. The average cash ratios (0.08 ≤ µ≤1.73) suggest that Islamic banks in Bangladesh maintain low amount of cash and cash equivalents to meet their current liabilities. Their standard deviations (vary from 0.02 to 2.09 over the seven years periods) reveals that the banks are bearing high risk in short-term solvency. The results also support the findings of Olson and Zoubi (2008) who argued that Islamic banks have more cash relative to deposits. Like the current and quick ratios, sampled Islamic banks in Bangladesh have no variation in cash ratio, thus, no significant different among the Islamic banks. This may mean that all Islamic banks may have high risk, according to ANOVA results.  Table 6 shows the receivable turnover of Islamic banks in Bangladesh and the comparison among the islamic banks using ANOVA test. The results show that AAIBL (on average 16.83) manitains high receivable turnover compare to other islamic banks in bangladesh over the period 2007 to 2013. A part from AAIBL, IBBL (10.61) and EXIM (9.19) banks having reasonably good receivable turnover. This reflects that AAIBL, IBBL ans EXIM banks can use their assets efficiently. On the other hand, FSIBL (0.5), SIBL (1.57), SJIBL (0.65), and ICBIBL (0.81) maintain low value of receivable turnover indicating that these banks are providing more credits to their clients without managing credits in an efficient manner. Thus, it is necessary for FSIBL, SIBL, SJIBL and ICBIBL to reduce the laxity while managing receivable in particular. There is no significant difference in receivable turnover among the Islamic banks in Bangladesh based on the ANOVA results. This suggests that Islamic banks in Bangladesh are homogenous and maintaining the same receivable turnover ratio pattern except for few banks. Overall, it may be reasonably good to argue that the Islamic banks in Bangladesh are homogenous, however, they are not financially healthy when liquidity measurements are concerned. Similar with the study of Olson and Zoubi (2008), Islamic banks have enough cash in their hand but not able to utilise their assets in an efficient way except for AAIBL, IBBL and EXIM banks. This indicates that working capital management of Islamic banks in Bangladesh is not at the optimum level if conventional parameters are considered. Table 7 shows the results of total debt ratio of Islamic banks in Bangladesh and the comparison among the Islamic banks using ANOVA test. The findings show that the average debt ratios over the period of 2007 to 2013 of AAIBL, EXIM, IBBL, FSIBL, SIBL, SJIBL, and ICBIBL banks are 85%, 91%, 94%, 94%, 89%, 92% and 118% respectively. Interestingly, the results revealed that most of the Islamic Banks in Bangladesh are practicing debtbased financing rather than equity-based financing.Thus, the leverage attributes for an Islamic bank are the same as those for a conventional bank. This can be explained by the several factors. Firstly, a lack of autonomous body to oversee the Shariah compliance of Islamic banks in Bangladesh. Secondly, there is no separate regulatory and institutional systems for Islamic banking practice who can share the experience and promote truly innovative, competitive and Shariah based Islamic banking practice in Bangladesh (Khan & Bhatti, 2008). In addition to capital structure, there is no significant difference among the Islamic banks in Bangladesh as of ANOVA results.  Table 8 displays the findings of fixed asset turnover ratio of Islamic banks in Bangladesh and the comparison among the Islamic banks using ANOVA test. The result suggests that the performance of EXIM bank (8.78) in terms of fixed asset turnover ratio is higher than other Islamic banks in Bangladesh. With the exception of ICBIBL, all the Islamic banks somehow utilise their fixed assets to generate income, but unefficeintly as the ratios are not up to the mark while considering conventional benchmark. It indicates that islamic banks in bangladesh are facing capital budgeting problem. The findings are different with the study of Bellalah (2013) who studied on Islamic banks in Pakistan found on average the fixed asset turnover ratio is 20%. Additionally, since the Islamic banks are homogenous in Bangladesh, the ANOVA test did not find any signIslamic bankscant difference among the Islamic banks.  Table 9 summarises the results of profit margin of Islamic banks in Bangladesh and the comparison among the Islamic banks using ANOVA test. The results find that the average profit margins (µ) of AAIBL, EXIM Bank Ltd, IBBL, FSIBL, SIBL, SJIBL, and ICBIBL are 4.57%, 2.13%, 38.64%, 44%, 53 %, 13.30% and 5.20% respectively. Interestingly, SIBL is performing higher that other Islamic banks over the period of 20017 to 2013 based on profit margin. Besides, FSIBL and IBBL are in a good profitable position after SIBL while EXIM, AAIBL and ICBIBL are not in a satisfied position. Thus, the results suggest that most of the Islamic banks in Bangladesh are facing highoperating cost due to the inefficiency of managerial skills and inefficient utilisation of resources (Gitman, 1994).    The findings of return on equity of Islamic banks in Bangladesh and the comparison among the Islamic banks using ANOVA test are summarised in Table 11. Over the period of 2007 to 2013, the mean return on equity (ROE) of AAIBL, EXIM Bank Ltd, IBBL, FSIBL, SIBL, SJIBL, and ICBIBL are 18. 84%, 19.46%, 15.68%, 11.30%, 9.19%, 20.05% and -7% respectively. As expected, the ROE of the banks is higher than the ROA. The low fluctuated standard deviations (0.03≤ơ≤30.45) of the ROE over the periods indicate the stability of ROE in the Islamic banks in Bangladesh. With the exception of ICBIBL, overall Islamic banks are having high return on equity ratio suggesting that the resource management of the banks are both efficient and effective. The results are similar withNabi et al. (2015) where they found that the average ROE of Islamic banks in Bangladesh is 11.71 percent in 2013, which is higher than that of the overall banking industry ROE of 10.70 percent in 2013. Furthermore, the results of this study reveal that Islamic banks in Bangladesh have ability to attract future investors. Based on the ANOVA result, no significant difference of ROE is found among the Islamic banks in Bangladesh.

Conclusion
For Islamic banking -it may be reasonably good to argue that the Islamic banks in Bangladesh are homogenous; however, they are not financially healthy when liquidity measurements are concerned. This indicates that working capital management of Islamic banks in Bangladesh is not at the optimum level if conventional parameters are considered. Therefore, it is critical for the Islamic banks to manage their working capital efficiently and they should increase the amount of working capital as much as possible. On the basis of working capital management, no significant difference found among the sampled Islamic banks. From the evaluation of capital structure efficiency, the results revealed that most of the Islamic Banks in Bangladesh are practicing debt-based financing rather than equity-based financing. Thus, the leverage attributes for an Islamic bank are the same as those for a conventional bank. In addition to capital structure, there is no significant difference among the Islamic banks in Bangladesh. In case of capital budgeting efficiency, most of the Islamic banks somehow utilise their fixed assets to generate income, but inefficiently as the fixed asset turn over ratios are not up to the mark while considering conventional benchmark. It indicates that Islamic banks in Bangladesh are facing capital budgeting problem. Additionally, since the Islamic banks are homogenous in Bangladesh, the result did not find any significant difference among the Islamic banks. The findings of overall Islamic bank financial management"s operating efficiency suggest that most of the Islamic banks in Bangladesh are facing high-operating cost due to the inefficiency of managerial skills and inefficient utilization of resources. However, based on the return on equity, it is suggested the resource management of the banks are both efficient and effective and the earnings of Islamic banks are higher as compared to their equity position. Similarly, no significance difference found among the Islamic banks. The study has put forward an important question by analyzing IFM practices in Bangladesh and derived several conclusions based on the findings. Best on the author"s knowledge, this study is one of the few that has comprehensively investigated the issue from a single country perspective. While the study has observed that the practices of IFM in Bangladesh are promising, however, there are numerous challenges encroaching the industry. Hence, immediate attention from the respective authorities, including practitioners and policy makers are indeed vital. In that aspect, establishing an independent regulatory authority to supervise and monitor the activities of Islamic should be prioritized in the government agenda. This would ensure and create more congenial infrastructure for the smooth functioning of IFM practices of Islamic banks in Bangladesh.