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Sharıʿah scrutiny of Islamic Banks’ Financial Compensation Fund in Bangladesh: governance principles in the COVID-19 perspective

Author

Listed:
  • Masum, Abdullah

    (IFA Consultancy Ltd.)

  • Islam, S M Shariful

    (University of Dhaka)

Abstract

Purpose – The purpose of this study is to critically analyze the Financial Compensation Funds being accumulated by Islamic Banks of Bangladesh in credit-based transactions. In this connection, due to the evolved liquidity crisis amidst the COVID-19, industry opinions are observed that suggest including the compensations or the donation funds directly into the bank’s income account. But the Sharıʿah does not permit it. Such alternative proposals of using compensation or donation fund during crises are scrutinized under Sharıʿah principles to come to a logical conclusion. Design/methodology/approach – The approach followed in the study is textual and discourse analysis through descriptions of ideal Sharıʿah-compliant methods for handling late payment of credit and comparison with the industry practices. Findings – It is observed that there are conceptual gaps in the industry as is reflected in the Islamic Banking Guideline of Bangladesh. The funds collected from the debtor due to late payment are named as compensation (Ta‘whıd) whereas the nature of the transaction is a donation (Tabarru’). The misconception can lead to various Sharıʿah non-compliant activities later with the funds. The proposals brought out in the industry to use such compensation/donation funds during a crisis are a consequence of this. The proposals of using such funds for banks’ purposes in any situation are not supported by Sharıʿah principles and are against the Islamic banking philosophy. Originality/value – The study is very relevant to the current crisis of COVID-19 in the domestic Islamic Banking Industry and also instrumental for the future guidance to stick to the Sharıʿah principles in managing compensation or donation funds by the Islamic Banks.

Suggested Citation

  • Masum, Abdullah & Islam, S M Shariful, 2022. "Sharıʿah scrutiny of Islamic Banks’ Financial Compensation Fund in Bangladesh: governance principles in the COVID-19 perspective," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 29, pages 139-158.
  • Handle: RePEc:ris:isecst:0205
    as

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    More about this item

    Keywords

    Ta‘whıd; Gharamah; Al-Iltizam bi-al-Tabarru’; Penalty clause; Islamic bank; Bangladesh;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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