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Islamic banks in Bangladesh confront multiple risks and need stronger shariah governance, dedicated risk-management units and a unified operational-risk framework to safeguard institutional stability, experts say.
The risk factors stem from rising process failures, cyber-threats and governance lapses.
Experts and economists listed the headwinds and remedies Wednesday at a research workshop on 'Operation Risk Management in Islamic Banks: Best Practices and Evaluation' arranged by Bangladesh Institute of Bank Management (BIBM) at its auditorium in Dhaka-hot on the heels of merger of five crisis-ridden Islamic banks.
Nurun Nahar, Chairman, BIBM Executive Committee and Deputy Governor of Bangladesh Bank, attended the event as chief guest while Dr Mahabbat Hossain, Associate Professor, BIBM, presented keynote from research findings.
Md Fariduddin Ahmed, Islamic banking expert and former chairman of Union Bank PLC, Mohammad Abul Hashem, administrator of Union Bank and Bangladesh Bank director, Mohammad Anisur Rahman, director of IBRPD at Bangladesh Bank, and Md Kamal Hossain Sarker, deputy managing director and head of Islamic Banking at Trust Bank PLC, shared their insights as panelists at the event.
The keynote reveals that operational risks have emerged as the most critical vulnerability for Islamic banks, reflected in recurring incidents of shariah violations, documentation errors, digital fraud, internal collusion and inefficiencies in process management.
Only one-third of Islamic banks maintain a dedicated operational risk management (ORM) unit, while many still rely on fragmented, compliance-driven mechanisms. Nearly a quarter of banks operate without a formal ORM framework.
Operational risk is a growing concern for Bangladesh's banking sector, intensified for Islamic banks by the need to comply with both regulatory standards and Islamic shariah rules, said Nurun Nahar while speaking at the event.
She adds that gaps remain in shariah governance, weak documentation, and inconsistent risk monitoring, exposing banks to potential losses.
The central bank expects stronger frameworks under updated Basel III and IFSB standards, emphasizing internal audits, standardized documentation, real-time dashboards, and external shariah reviews, she says.
Dr Mahabbat Hossain notes that risk identification remains dependent on internal audits rather than proactive tools such as key risk indicators, loss-event databases and scenario analysis. This leaves institutions vulnerable to recurring operational lapses.
"Shariah non-compliance emerged as one of the most severe risks facing Islamic banks," he says and explains even minor procedural errors-such as not taking ownership of assets in Murabaha transactions or issuing backdated documents-can void contracts, create financial liabilities and erode depositor confidence.
The keynote notes that shariah governance inconsistencies often arise when supervisory committees include members lacking professional expertise or appointed through non-technical influence.
The study also highlights growing threats from cyber-vulnerabilities, collusive fraud, weak documentation, irregularities in agent banking and failures in credit monitoring.
Case evidence shows repeated incidents involving forged documents, unauthorized withdrawals and misuse of customer data through digital platforms.
Despite global standards set by Basel and the Islamic Financial Services Board (IFSB), adoption of the "three lines of defence" model remains limited, with about 80 per cent of Islamic banks yet to implement it effectively, Mahabbat Hossain says, adding that only a small number maintains centralized loss-event data repositories or conducts regular scenario analyses.
The paper underscores the need for modernizing risk controls and strengthening internal capacity and says Islamic banks must enhance real-time surveillance, adopt workflow automation, standardize shariah-compliant documentation, and improve contract-execution processes.
The workshop identifies strengthening internal shariah-audit capacity and integrating shariah governance within the overall ORM structure as urgent priorities.
Speakers at the event urge regulators to introduce a dedicated operational-risk framework for Islamic banks, step up risk-based inspections, enforce documentation standards, strengthen digital security, and modernise liquidity support for the shariah-based banking sector.
They also recommend external shariah reviews, fiduciary ratings, stronger board oversight, and stricter fit-and-proper criteria for Shariah Supervisory Committees.
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