Misr Development Bank, known to be the first Islamic bank in the world, was established only in 1962. The bank did not explicitly claim to be Islamic, for fear of being antagonizing the ruling secular government. Instead, the bank started operation in the form of a savings bank based on profit-sharing.

By the year l967, nine similar banks were established in Egypt. These banks, which neither charged nor paid interest, invested mostly by engaging in trade and industry and shared the profits with their depositors. In 1971, The Nasir Social Bank was established in Egypt with the declaration of "interest-free commercial bank," although its charter made no reference to Islamic principles.

In the mid-seventies, Islamic banking industry received a big impetus with the establishment of two large Islamic banks, i.e. Islamic Development Bank (based in Saudi Arabia) and Dubai Islamic Bank (based in the UAE). Islamic Development Bank was established as a multilateral development bank to foster economic development in the OIC member countries. On the other hand, Dubai Islamic Bank was founded to offer a full range of commercial banking services in line with Islamic principles.

Though Bangladesh can boast of being the third largest Muslim country in the world, Islamic banking practices in Bangladesh started only in the mid-eighties. The country delved into this industry with the debut of Islami Bank Bangladesh Limited (IBBL) in 1983. However, over the past two decades, growth of Islamic banking in Bangladesh vis-a-vis conventional banking has been somewhat slow.

The banking sector is still dominated by conventional banks -- a legacy of interest-based banking system from the colonial era. Presently the banking sector comprises four categories of scheduled banks: nationalized commercial banks, government-owned development finance institutions, private commercial banks and foreign commercial banks.

According to Bangladesh Bank statistics, as of December 2004, out of 49 banks, there were only seven full-fledged Islamic banks: Islami Bank Bangladesh Ltd, The Oriental Bank Bangladesh Ltd, Al-Arafah Islami Bank Ltd, Social Investment Bank Ltd, Shahjalal Islami Bank Ltd, Export Import Bank of Bangladesh Ltd, and Bank Al-Falah Ltd.

Some other conventional banks are also offering Islamic financing services through special windows in order to capture a slice of the market. The operations of these special windows are maintained separately from the mainstream business of the parent banks in order to prevent commingling of Islamic and conventional funds. Taken together, as of September 2005, Islamic banks in Bangladesh held approximately 13% of total banking deposits and 15% of total investments.

Financial products and services currently available with Islami banks are concentrated in Murabaha financing, which is also known as Islamic trade financing. These banks also offer Ijara and Istisnaa financing, for the purpose of machinery procurement and construction works respectively. However, the essence of Islamic financing i.e. profit and loss sharing, manifested through Musharakah investment (similar to equity investment), is yet to emerge as a major mode of financing.

Islamic banks also are neither very visible in areas such as Islamic insurance (known as Takaful), Islamic bonds (known as Sukuk) or Islamic fund management. Some bankers maintain that the dearth of product variety is due to lack of awareness among the customers. Mass people are acquainted with conventional banking terms and sometimes find Islamic banking products obscure to comprehend, which calls for the Islamic banks to assume a proactive role to popularize Islamic banking. They simply should not wait till the awareness and demand emerge.

In this context, Islamic securitization, a way to raise financing from the capital market in a way that is compatible with the shariah, can be of immediate interest to these banks. Since Islamic financial transactions are assets backed by nature, over years these transactions have resulted in culmination of assets on the balance sheet of Islamic banks. Through securitization, popularly known as Sukuk in the industry, these banks can raise and recycle their funds from the capital market.

One pertinent issue as regards the growth potential of Islamic bank is the overall regulatory framework. Until recently, there has not been any policy guidelines/law regarding Islamic banks. These banks are regulated under the general framework used for the conventional banks. Lately, the Central Bank published guidelines to streamline Islamic banking activities. The guidelines cover issues related to establishment of new Islamic banks, setting up Islamic windows by commercial banks or opening separate Islamic bank branches. The guidelines also deal with issues related to converting conventional banks to Islamic banks. This is a commendable initiative by the Central Bank, which will certainly help the growth of Islamic banking. However, the Central Bank needs to do more in terms of regulating the industry.

Currently, Bangladesh Bank oversees the activities of Islamic banks in the same manner as it does for the conventional banks. Bangladesh Bank does not have any specialized body to deal with Islamic banks. Monitoring Islamic banking practices requires proper understanding of Islamic principles, especially shariah rulings on financial transactions, hence there is an urgent need to set up a specialized body within the Central Bank. Similar specialized bodies are present elsewhere. In countries such as Pakistan, Iran and Malaysia, there are Central Shariah Supervisory Boards/Councils to investigate and monitor the operations of the Islamic banks.

Finally, misconception about Islamic banking also acts as a bottleneck to this industry. Due to lack of proper understanding, many of us fail to distinguish Islamic banking from conventional banking. Profits charged by Islamic banks are considered similar to interest charged by the conventional banks, which is far from true. Anybody who has probed into the literature of Islamic finances will appreciate that Islamic mode of financing and the underlying principles are quite different from the practices of conventional banking.

Although the future of Islamic banking is extremely bright, the market players need to do more in designing, developing and implementing innovative products as well as marketing those. The government, on the other hand, can assist in providing the necessary impetus for the advancement of this sector by enacting a comprehensive Islamic banking law.

The author is currently working with Jeddah-based Islamic Development Bank.