Islamic banking institutions in Bangladesh appear to have safely navigated uncharted waters and emerged stronger and confident about their future. However, in the absence of a legal framework to govern such institutions, the two Islamic banks still face problems transacting business.

The problems mostly stem from an Islamic bank either being unable to accept or give any form of interest — the sharia (Islamic law) forbids interest. Instead, they share the profit of the venture to which they advance funds.

The Islamic Bank of Bangladesh (IBB), the country's first such institution, seems to have done fairly well in 1988, declaring a 15% dividend compared with a mere 6% the year before. It had experienced difficulties with its advances to the garment sector after the US imposed quotas on Bangladeshi garments in 1986. Since Islamic banks are partners of their borrowers, they run the risks of sharing the losses of the borrowers.

The IBB, which has 13 Middle East sponsors holding 75% equity, at the end of 1988 had 27 branches and planned to open another 13 branches this year. The second Islamic bank, Al Baraka, which opened in mid-1987, was sponsored by Saleh Kamel Group of Saudi Arabia. It holds 60% of the equity, the Islamic Development Bank has 10%; the Bangladesh Government 5%, and local sponsors 12.5% while the remainder is reserved for the public.

Meanwhile, the Bangladesh Bank (BB) is devising an arrangement which will allow the Islcimic banks to take a profit from their statutory reserve funds at the BB instead of interest as customarily paid on central bank interest-bearing accounts. IBB's executive vice-president Azizul Huq told the REVIEW that the government could also help Islamic banks by issuing profit-bearing securities as a substitute for interest-bearing government securities.

An insurance company is also planned along Islamic principles. A group of local entrepreneurs have already collected funds to establish Islamic general and life insurance companies, though it will be some time before they open since the government wants to examine how such Islamic companies could fit in the existing system. Ths Malaysian experience with operating an Islamic insurance company since 1984 is likely to provide a guide.