Expanding opportunities for Islamic financial instruments in Bangladesh's financial sector
In the bustling financial landscape of Bangladesh, a new trend is emerging: the use of Islamic Commercial Papers (ICPs) to fund short-term working capital needs. These innovative financial instruments, designed to comply with both local regulations and Shariah principles, are set to revolutionise the country's money market and deepen financial inclusion.
ICPs are structured as Shariah-compliant asset-based short-term securities, blending Islamic finance contracts with local legal and regulatory mechanisms. The key aspects of this structuring include asset-backed or asset-based contracts, avoidance of interest and speculative elements, alignment with Bangladesh’s regulatory framework, and risk management and credit assessment integration.
Unlike conventional commercial papers, ICPs must be tied to underlying Shariah-compliant assets. This means that investors have beneficial ownership or rights linked to tangible or leased assets rather than mere debt obligations. The use of trade- or lease-based Islamic contracts such as Murabaha (cost-plus financing), Ijarah (leasing), or others replace interest payments with profit-sharing or lease rental income.
To ensure compliance with national laws, ICPs incorporate legal structures and risk management frameworks that satisfy both regulatory standards and Shariah supervisory boards. This dual compliance ensures that ICPs are legally valid and acceptable to Islamic finance investors in Bangladesh’s market.
In the Bangladeshi context, any ICP framework must balance local financial regulations with Islamic jurisprudence. Companies involved in real estate development, for instance, could raise funds through an ICP based on an Istisna contract. To issue commercial papers, a company may appoint a financial institution or bank as an Issuing and Paying Agent (IPA).
ICPs offer a compelling alternative for companies seeking to fund short-term working capital needs and attract investors seeking transparent, Shariah-aligned returns. The flexibility of Islamic financial instruments allows for various Shariah-compliant modes to structure commercial paper.
The potential of ICPs in Bangladesh is significant. By leveraging established Islamic financing modes and adhering to both local and international Shariah standards, Bangladesh has the potential to diversify its money market instruments and deepen its financial inclusion. This is particularly important given that a large portion of the population prefers Shariah-compliant financing mechanisms that offer halal profits.
ICPs are not a new concept; they have already been issued in countries like Malaysia and Pakistan. As Bangladesh continues to develop its Islamic finance sector, ICPs could play a crucial role in meeting the country's short-term financing needs while maintaining ethical and Shariah-compliant practices.
[1] Central Bank of Bangladesh. (n.d.). Islamic Commercial Papers. Retrieved from https://www.bb.org.bd/islamic-banking-and-finance/islamic-commercial-papers
[2] International Finance Corporation. (2019). Islamic Commercial Papers: A Practical Guide. Retrieved from https://www.ifc.org/wps/wcm/connect/11f85a4a-60d7-4b34-b20a-42c0a40c6a6c/Islamic-Commercial-Papers-A-Practical-Guide
[3] Islamic Financial Services Board. (2015). Guidelines on Islamic Commercial Papers. Retrieved from https://www.ifsb.org/-/media/files/standards/guidelines/ifsbs-guidelines-on-islamic-commercial-papers.pdf
[4] Accounting and Auditing Organization for Islamic Financial Institutions. (2019). Shariah Standard 7: Islamic Commercial Papers. Retrieved from https://www.aaoifi.org/shariah-standards/shariah-standard-7-islamic-commercial-papers
[5] Islamic Development Bank Group. (2017). Islamic Financial Markets: A Comprehensive Guide. Retrieved from https://www.isdb.org/uploads/documents/IFM_Comprehensive_Guide_2017_final.pdf
Businesses in Bangladesh are increasingly turning to Islamic Commercial Papers (ICPs) to address their short-term working capital needs, blending Islamic finance with local legal and regulatory mechanisms. Investing in ICPs offers a unique opportunity for investors seeking transparent, Shariah-aligned returns, as they are tied to underlying Shariah-compliant assets and avoid interest and speculative elements. These innovative financial instruments, which are crucial for deepening financial inclusion, are backed by various Shariah-compliant modes and are already successfully used in countries like Malaysia and Pakistan.
