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After a long wait, the central bank has finally stepped up the process of introducing the Islamic interbank money market in the country. In this connection, it has also issued a draft guideline for comments and suggestions from the different stakeholders. So, the guideline will be finalised once suggestions and recommendations are compiled and reviewed. There is also the expectation that the new type of interbank money market will come into operation by June this year, providing short-term liquidity support to Sharia-compliant banks and Islamic windows/branches of conventional banks.
At present, there are 10 full-fledged Islamic banks in the country, operating 1,700 branches. There are also 43 Islamic banking branches of 17 conventional commercial banks and 976 Islamic banking windows of 21 conventional commercial banks providing Islamic financial services. Currently, the share of Islamic banks’ deposit accounts for around 25 per cent of the total deposits of the entire banking sector. Again, the share of investment of Islamic banks accounted for 29.10 per cent of total loans and advances of the whole banking sector at the end of December 2025.
Interest-free banking is one of the core principles of the Islamic financial system. That’s why Islamic banks cannot mobilise funds through the traditional interbank money market, in which banks extend loans to one another for a specified term. Most interbank loans have maturities of one week or less, with the majority being overnight. Such loans are made at the interbank rate, also called the overnight rate, provided the loan term is overnight. The interbank rate is the rate of interest charged on short-term loans between banks. Banks borrow and lend in the interbank lending market to manage liquidity and meet regulatory reserve requirements. The market is also known as the call money market, as the loans offered through it are immediate and short-term.
To date, there is no dedicated market for Islamic banks in the country to deploy and redistribute surplus liquidity efficiently. However, one-fourth of the country’s banking activities are sharia-compliant. As a result, Islamic banks have been facing unfair competition in the money market and more challenges in managing liquidity during a crisis. Conventional banks can easily mobilise funds through the inter-bank money market by borrowing. These banks can also invest excess liquidity in treasury bills and bonds. Again, during a liquidity crunch, they can borrow from the central bank using government securities, a process known as a repurchase agreement (repo). As all these transactions are based on interests, it is not permissible for Islamic banks to participate. So, how do these banks mobilise funds when necessary, and where do they invest when surplus liquidity is available?
Under the current system, Islamic banks have limited avenues to borrow from the open market. These are: Islamic Interbank Fund Market (IIFM), used to provide short-term liquidity support, and Bangladesh Government Islamic Investment Bond (BGIIB), for long-term liquidity support. To get cash support from the central bank through IIFM, a Sukuk or Islamic bond is required as collateral. Islamic banks are not participating in this market due to lower yield rates. Since 2020, six government and two corporate Sukuk have been issued, and the outstanding Sukuk amount stood at Tk 240.00 billion by the end of December 2025. In February this year, another Islamic bond named ‘7th Bangladesh Government Investment Sukuk’ was issued, worth a total face value of Tk 25 billion.
A research paper, published in the INCEIF Journal of Islamic Finance and Sustainable Development (Vol. 8, Number 1, 2026), examined the various aspects of the issued Sukuk. It found that though Bangladesh’s Sukuk market is growing, the accountability infrastructure is yet to keep pace. The paper added that all the issued Sukuk, except one, are linked with environmental sustainability. Nevertheless, it pointed out that sustainability-labelled instruments without verified outcomes are not green finance; they are green labelling. The observations in the paper will help overcome the limitations of the Sukuk market in Bangladesh.
Islamic banks also borrow from each other to meet sudden shortfalls through interbank deposits, based on mudaraba principles that offer profit-sharing returns.
The above-mentioned items, however, are inadequate to meet Islamic banks’ requirements. The lack of adequate investment tools makes it difficult for these banks to park their excess liquidity. Excess liquidity of Islamic banks in the country stood at Tk 193.92 billion at the end of December last year.
Though the problem was identified many years ago, there is a lack of the necessary initiative on the part of the government and regulators to introduce Sharia-compliant tools. Several studies have also been conducted over the years to provide recommendations to overcome the problem. For instance, a comprehensive study report titled “Liquidity Management Instruments for the Islamic Banks in Bangladesh” was published in 2019, clearly outlining the necessary actions. It also suggested three Islamic financial instruments for liquidity management by Islamic banks in Bangladesh: Bangladesh Government Islamic Treasury Bill (BGITB), Bangladesh Government Ijarah Sukuk (BGIS), and an Unrestricted Wakalah alternative to Repo and Reverse Repo.
Against this backdrop, ‘Guidelines for Islamic Interbank Money Market (Unsecured)’ is a critical step that provides various measures to establish a shariah-compliant unsecured interbank market, enabling eligible institutions to place and obtain short-term liquidity using approved Islamic contracts. The proposed market is unsecured, meaning transactions are not backed by collateral or pledges and are based solely on counterparties’ creditworthiness and the enforceability of the underlying contract.
Two types of shariah-compliant contracts will be allowed in the market, as per the guidelines. These are: Mudarabah and Wakalah. Mudarabah is a partnership contract where one party (Rab-ul-Mal) provides capital, and the other party (Mudarib) manages the funds. So, it is a fund management where profits will be shared as per an agreed ratio, and losses will be borne by the Rab-ul-Mal except in cases of misconduct, negligence, or breach of contract. Wakalah is an agency contract in which a principal (Muakkil) appoints an agent (Wakil) to invest/manage funds within agreed parameters, in return for an agreed agency fee. Under the system, the principal will bear investment risk, and returns will be linked to the performance of the underlying investment pool.
According to the guideline, only Mudarabah-based and Wakalah-based interbank placements will be allowed in the proposed market. Traditionally, interbank placement is an arrangement where one bank holds funds in an account for another. Banks use a special interest rate on deposits and short-term loans called the interbank rate. In the proposed Islamic money market, placement will be made under either the Mudarabah or Wakalah mechanism.
The draft guideline primarily underscores transforming the current unstructured inter-bank transactions among Islamic banks into a structured one through debt-based operations. As a first step, it is a welcome move, though the guideline does not mention developing new tools. Without necessary and eligible Islamic financial products or instruments, banks may find it difficult to mobilise funds, even with an inter-bank Islamic money market. In this connection, the development of Islamic financial instruments, as recommended in the 2019 study, needs to be taken seriously.