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Regulatory and Supervisory Framework for Islamic Banking in Bangladesh

Project Development Objective (PDO)

The aim of this project is to support Bangladesh Bank in developing and implementing a robust regulatory and supervisory framework for Islamic banks, thereby improving overall financial stability in Bangladesh.

Background

In Bangladesh, Islamic banking represents a sizable part of the total banking system, accounting for 17.0 percent of total banking assets, 20.7 percent of loans, and 18.0 percent of deposits. Thus, the absence of a dedicated regulatory and supervisory framework for Islamic banking represents a significant source of vulnerability. To close this regulatory and supervisory gap and to mitigate the associated vulnerability, this project will support Bangladesh Bank in developing a comprehensive framework for the prudential oversight of Islamic banks that includes appropriate regulations, policies, procedures, and processes. In particular, specific regulations covering areas such as risk management, compliance and control, corporate governance, and capital adequacy will be required. 

Activities

The tangible activities of this technical assistance include the following:

1.    Diagnostic assessment and report
Provide a diagnostic assessment of the existing regulatory and supervisory framework for Islamic banks in Bangladesh, and identify gaps and other impediments to effective prudential oversight. In turn, the diagnostic report will provide detailed recommendations for improving the current regulatory and supervisory arrangements, drawing on relevant international standards and sound practices. 

2.    Action plan
Provide technical support and advice to Bangladesh Bank to design a time-bound action plan to implement an improved framework for the regulation and supervision of Islamic banks. The plan will also include activities and a realistic time line for the transition from conventional oversight to that for Islamic banking oversight, with the respective frameworks being parallel and aligned.

3.    Updated and improved legal and regulatory framework
Provide technical support and advice to Bangladesh Bank to enhance the legal and regulatory framework, and potentially include support to draft new regulations and guidelines or to draft amendments to existing regulations.

4.    Development of a supervisory framework
Provide technical support and advice to Bangladesh Bank to develop a supervisory framework for Islamic banks. This may include (a) enhancing off-site and on-site policies and procedures and (b) developing performance and early warning indicators, reporting formats, risk-based supervisory approaches, and so on.

5.    Capacity building and training
Provide initial capacity building for Bangladesh Bank to implement (a) proper supervisory evaluation of the unique risks facing Islamic banks and (b) global sound practices on conducting effective prudential oversight. The capacity building will consist of a set of practical seminars and workshops on applying the enhanced regulatory and supervisory framework. 

Expected Outcomes

The expected outcomes of this project include the following:

1.   Establishment of a regulatory framework for Islamic banks 

2.   Adoption of supervisory processes, procedures, tools, and manuals for Islamic banks

3.  Improved compliance by Islamic banks with prudential regulations, thereby contributing to
     a stable banking sector