Whilst it cannot be denied that both the PLS (Profit-and-Loss sharing) based Islamic banks and the interest-based conventional banks are making significant contributions to the development of the Bangladeshi economy, many in Bangladesh believe that on the questions of creating a stable economic climate and promoting banking services, the two types of banks stand at opposite ends of the spectrum.

According to Bangladesh Bank (Central Bank) reports, the PLS-based Islamic banks - the Islamic Bank Bangladesh (IBBL) and the Al Baraka Bank Bangladesh Limited (ABBL) - are making very rapid progress whilst the interest-based conventional banks, although undoubtedly making progress also are, at the same time, experiencing a rapid increase in the number of credit defaulters.

Professor Ziauddin Ahmed, speaking at the Islamic economics conference held recently at the Islamic Centre in Leicester, UK claims that "in the conventional banking system, there is no assurance on the assets side that all loans and advances will be recovered." He concludes that in the long run, nothing less than a total switch over to interest-free banking will bring greater stability to the banking system.

It is an economic axiom that the nominal value of deposit liabilities in the interest-based system is fixed while in the PLS based system the nominal value of investment deposits is not guarantied.

Because of this, the shocks on the assets side in the former case react differently and disproportionately to the assets and liabilities. This is not true in Islamic banks,

where shocks to the assets position are promptly absorbed into the value of investment deposits.

This absorbing of shocks minimises the risk of bank failures and so enhances the stability of the banking system. It is only in the interest-based system where there is a risk that such shocks will lead to a crisis in the banking system.

A comparative statement of the operations of the two types of banking will demonstrate the progress and expansion of these institutions in the capital market of Bangladesh.

According to the Bangladesh Bank, since independence, a sum of taka 1m (equivalent to US $2,500m) awarded by the commercial banks as industrial and commercial loans has fallen overdue, out of the sum of taka 25,0000m (US 6250m).

Indeed, the Daily Ittefaq, the biggest local daily, has quoted other sources to put the defaulting amount as high as taka 150,000m (US $3,750m) and reported widespread fears that the debt would never be recovered.

Examples of corruption are also cited in the paper, such as that of an ex-journalist, procuring a loan of US $1m and refusing to start repayments. The money borrows was not used for the stated purpose of establishing a business, but was used instead as a loan for purely consumptive purposes. In this case, it took the bank two years to chase up the borrower for the amount owing, whereupon the defaulter threatened to utilise his journalistic contacts and publish sensitive comments regarding the banks activities. This unfortunately had the desired effect and the bank dropped its case. The paper cites many other cases prominent figures who have faced criminal charges for misusing their positions to obtain loans from nationalised commercial banks and who later defaulted on their repayments. In fact, one of the country's top lawyers to recently been criticised by his contemporaries for obtaining an irregular loan and of willfully defaulting the Shilpa Bank (Industrial bank) of US$1m. Bank officials have even been accused of collaborating with the accused to obtain the loan - showing how far corruption in Bangladesh banks has spread.

The Financial Express in Dhaka, recently published a lead story on the bank's position and said that seven nationalised commercial and specialised banks have so far filed 39,964 cases against borrowers responsible for defaulting on an amount worth a total of US $775m. Of these, 23,364 cases were filed with the loan recovery court and the rest with the civil court as certificate cases.

To the supporters of the Islamic banking system, these cases are seen as representing inherent defects within the conventional banking system. Especially because, in contrast to the problems being experienced by the conventional banks, the Islamic banks have been faring well. The Islamic Bank Bangladesh Limited, one of the two banks conducting all their banking and investment activities according to the PLS system, and sponsored by a group of local and foreign personal investors and institutions - including the Islamic Development Bank, Jeddah, Kuwait Finance House (KFH), Kuwait, Jordan Islamic Bank, Jordan, the Islamic Investment and Exchange Corporation Doha, Qatar, Bahrain Islamic Bank, Bahrain - has been making rapid progress.

According to Professor A.R. Khan of the Department of Finance and Banking at the University of Dhaka, the income performance and cost effectiveness of the bank is improving, although of course there is still room for further improvements.

And the IBBL is not alone in their achievements, the Al Baraka Bank Bangladesh, a joint venture Islamic bank with the Al Baraka Bank, the Islamic Development Bank, Jeddah, and the government of Bangladesh and some local bankers is also making steady progress and is contributing to the economic growth of the country.

The Al Baraka Bank Bangladesh commenced operations as a scheduled bank in May 1987 with the objective of offering a wide range of banking services in accordance with the Shariah and a three-member Shariah council has been appointed so as to oversee the Islamic bank’s activities.

The total deposits of the bank as 31stDecember1992 rose to a sum of US $85.92575m as against US $76.47375m recorded in 1991. The total investment of the bank in 1992 was US $99.57925. The deposits of the bank increased by 12.37 per cent and the number of accounts showed an increase of 14 per cent during 1992.

Investments were made in the pulp and paper industry, iron and steel mills, edible oil refinery, textile mills, food and beverage industries, small scale industries including garment and real estate development, specialised textile mills, shipping and ship-breaking, the transport and the trade sector.

According to Professor Khan both Islamic banks and the IBBL in particular are symbols of the Islamic movement and as such the expectations of their operations must be different to those of conventional banking. "Ideological achievements need not be judged from the value of operations. Rather it should be judged by how closely they are able to base their activities on interest-free banking and emphasising the PLS principle, and also from the contribution they can make to the socio-economic development of Bangladesh."

In truth, the only litmus test for a bank is the range and sophistication of the financial services on offer and the contribution it makes to its country's economic development On both these counts there is so far at least, no need for the ideological apologies of Professor Khan - as both IBBL and ABBL appear to be making the grade.