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Prospects and Challenges in the Development of Islamic Finance for Bangladesh

The rapid growth of Islamic finance during the last decade has drawn the increasing attention of national policy makers as well as of international institutions. At one level, there is growing recognition of the contribution that Islamic finance can make to the goals of economic and social development. At another level, the expanding size of the sector underscores the importance of a strong public policy stance to ensure that legal and regulatory frameworks are adequate to ensuring orderly growth and resilience. These two broad sets of issues have direct relevance to Bangladesh, which has a large and growing Islamic finance industry.

Islamic finance is an increasingly important means for the financing of physical and social infrastructure that supports economic development and job creation in an expanding group of emerging economies. Countries are seeing the increasing use of Islamic financial instruments to finance long-tenor public infrastructure investments using a variety of Sharī`ah-compliant structures. These investments, and the use of Sukūk to finance them, now span a wide range of social and physical infrastructure and are becoming increasingly important to driving growth in both Asia and the Gulf Cooperation Council countries (GCC). These investments have been made possible by the development of Islamic capital markets, most notably in Southeast Asia and in the Middle East.

Similarly, Islamic finance is an instrument for reaching out to under-served segments of society, which include the poor as well as vulnerable non-poor, amongst whom are very significant numbers of people who have voluntarily limited their access to an interest- based financial system. With the strengthening of regulatory and public expenditure frameworks, an increasing number of countries are integrating Islamic finance into public spending and public financing decisions through issuance of sovereign Islamic securities that further helps to provide a benchmark for corporate Islamic securities. The countries where this is happening are those which have made a long-term commitment to developing a broad-based Islamic financial system, including of Islamic banks.

Islamic finance has proven to be resilient during the Global Financial Crisis. However, Islamic finance is not immune to change and countries that promote Islamic finance are visibly at different stages of economic, market and institutional developments. Reflecting these differences, these countries are also at different phases of regulatory development for Islamic finance. Despite these differences however, there is a common set of issues that each jurisdiction faces, and there is an international dialogue on good practices. Unity in principle, and diversity in practice, would be a good characterisation of the approaches to the regulation and supervision of Islamic finance.

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