Recent trends in Islamic banks’ lending modes in Bangladesh: an evaluation

Abstract

Purpose – This paper aims to assess recent trends in lending modes and to address the reasons for and consequences of changes in Bangladesh’s Islamic banking sector. Design/methodology/approach – Theoretical discourse is used to generate an underpinning for the issues covered by the study. In addition, empirical evidence from the banking sector, including the information derived from interviews with the staff of three Islamic banks, is presented to achieve the research objectives. Findings – The findings clearly demonstrate that the Islamic banking sector has experienced a paradigm shift from participatory financing to asset-based financing. In particular, the murabaha mode of financing dominates the current lending structure, which follows the general trend of the global Islamic banking sector. Research limitations/implications – It is necessary to concentrate on the potential negative outcomes of the trade-based murabaha mode of financing in a developing country such as Bangladesh, as banks have less incentive under protective rent (profit) opportunities to train the experts to screen and monitor projects in other socially desirable sectors such as agriculture and manufacturing including the small and medium enterprises. Originality/value – Despite substantial growth of the Islamic banking sector, less research has been conducted to shed analytical light on the operations of Islamic banks from the perspective of loan disbursement to identify the disparities, if any, in between theory and practice in countries where both Islamic and conventional banks operate simultaneously. Using country-specific evidence, this study contributes to the debate by highlighting the paradigm shift of Islamic banks from participatory financing to the dominance of asset-based murabaha and other modes of lending, by identifying the fundamental causes that contribute to such a shift and by highlighting the consequences of such changes.