Key highlights
- Stability restored in Islamic financial system by central bank.
- CSE and DSEX are the two Islamic indices in Bangladesh launched in 2014.
- IFN Investor reports 16 public Islamic funds domiciled in Bangladesh with a total value of US$52.84 million.
Overview
While confidence in the Bangladesh Islamic financial system took a dive recently, following reports of liquidity crises, the situation seems to have stabilized toward the end of Q3 2024 when the central bank announced special loans on the 19th September 2024 to alleviate the issue.
With a new governor appointed, Bangladesh Bank guarantees to back interbank loans were provided to five ailing Islamic banks and another eight more had reportedly sought this special financial aid.
Amid this recent turmoil, inclusive of a disruptive change in the ruling government, there has been otherwise little change in the Shariah investment landscape and the domestic Islamic banking system.
Bangladesh Bank has on its registry 16 conventional banks and 10 full-fledged Islamic banks operating in the nation. From the investment point of view, over half of the total investment in the banking industry is in the Islamic sector.
With 35 non-bank financial institutions (NBFIs) operating in Bangladesh, with some of them offering full-fledged Shariah based financing, investments and protection products, the circle of influence and Islamic market outreach of these NBFIs are expanding, with IDLC Finance, DBH Finance being amongst the few who had obtained the rights to establish Islamic windows.
Regulatory framework
Bangladesh Bank acts as the superintendent and regulator for many of the monetary policies and exchange market regulations.
The Securities and Exchange Commission (SEC) is Bangladesh’s main body to perform regulation functions of the capital market intermediaries.
Asset management companies are authorized by the SEC and are required to act by the SEC Rules 2001. There are currently 67 asset management companies listed on the SEC at the time of writing.
The regulations pertaining to fund management such as alternative investments, exchange traded funds (ETFs) and real estate investment trusts (REITs) can be accessed through the SEC. The SEC updated its REITs regulation document in 2024, outlining the new minimum investment requirements and provisions to prevent valuation manipulation, which is a critical factor in REITs management.
This measure may be likely due to the recent capital market loophole pointed out by the SEC, which has caused stock market stagnation over two decades.
Investment market
The development of the Islamic capital market in Bangladesh is parallel to the existing conventional capital markets. Though the market may not be as vibrant as neighboring countries, Bangladesh has made some progress in its Islamic capital market over the years.
The first Islamic bond was issued by Islami Bank Bangladesh Limited in 2007, called the Mudaraba Perpetual Bond, creating opportunities of investment for prospective investors.
To date, there are two Islamic indices in Bangladesh; the Chittagong Stock Exchange (CSE) All Shariah Index and the Dhaka Stock Exchange (DSEX) Shariah Index which were both launched in 2014.
The revised CSE All Shariah Index comprises of all Shariah compliant companies listed on the CSE – where 125 out of 381 listed companies were found to be Shariah compliant according to the newly revised list in March 2024.
The DSEX Shariah Index on the other hand serves as a broad Shariah compliant market benchmark, measuring the performance of the Bangladesh equity market.
Asset management
The development of unit trust funds and ETFs facilitates the Islamic investment schemes with objectives that meet the needs and preferences of investors.
Bangladesh has a very niche market in the Islamic funds space. With over 1,000 funds in the Asia Pacific region, Bangladesh accounts for 0.12% of the total assets under management (AuM).
The IFN Investor Funds Database reports a total of 16 public Islamic funds domiciled in Bangladesh with a combined AuM of US$52.84 million.
The first ever fund launched in Bangladesh is the ICB AMCL Islamic Unit Fund by ICB Asset Management with an AuM of US$4.1 million.
At the time of writing, the largest fund in Bangladesh is the SEML IBBL Shariah Fund hovering at US$9.26 million managed by Strategic Equity Management Limited.
Chart 1: Islamic asset class breakdown by AuM in Bangladesh
Source: IFN Investor Funds Database
At the end of Q3 2024, the 16 Shariah compliant funds based in Bangladesh consist of eight equity funds, which represent 62.91% of the total AuM at US$33.23 million. Additionally, seven mixed asset funds account for 29.62% of the AuM, totaling US$15.65 million. Lastly, there is one fixed income fund with an amount of US$3.96 million.
Outlook
The demographic profile of Bangladesh shows significant opportunities for the development and growth of the Islamic capital markets. With a population of 160 million, where 90% of them are Muslim, the demand for Shariah compliant investment and financing products may grow substantially in the medium- to long-term, especially among the middle-income segments.
To unlock the full potential of the Islamic finance and investment sector in Bangladesh, it is essential to establish comprehensive laws that create a robust legal framework supporting the industry’s expansion. Effective enforcement of these regulations, fostering a culture of compliance, practicing good governance, and promoting ethical transactions are crucial for sustaining dynamic leadership in the sector.
This report was produced by Aravinth Rajendran and Elliot Yip, financial data analysts at IFN Investor.
