On the core reform of Islamic banking

Although Islamic Shariah-based banking began in the country in 1983, a fully Shariah-compliant Islamic bank has yet to be established. Currently, there are 10 full-fledged Shariah-compliant banks. Additionally, 11 conventional banks offer Islamic banking services through their Islamic windows. In other words, out of the 61 banks in the country, 34.42 per cent are involved in providing Islamic Shariah-based banking services.

According to the 2022 census, the country’s total population was 165 million, of which 91.04 per cent—or approximately 150 million—are Muslims. A large portion of the Muslim population tries to avoid interest-based transactions in obedience to the commands of Allah and His Messenger. They consider interest (riba) to be as strictly forbidden (haram) as alcohol and pork, and therefore avoid conventional banking. As a result, the growth of Islamic banks in the country has become quite noticeable. By the end of March 2025, Islamic banking systems accounted for 24.36 per cent of total deposits and 28.93 per cent of total investments (loans) in the banking sector.

Devout Muslims engage in banking with Islamic banks due to their religious values. It is the responsibility of the state to prevent entrepreneurs from exploiting these religious sentiments for unethical profit. There exists a significant opportunity for illegitimate gains in this sector under the guise of religion, with hundreds of crores of taka potentially manipulated unethically while appearing legitimate. As a result, it appears that the Islamic banking sector has been the most significantly disrupted following the July 2024 revolution in Bangladesh. Therefore, alongside reforms in the overall banking sector, the Islamisation of Shariah-based Islamic banks should be considered as the core reform of the Islamic banking sector.

It is widely known that Shariah-based Islamic banks do not engage in interest-based transactions. Shariah compliance, a key principle of Islamic banking, means that all financial activities and products must adhere to Islamic law. In these banks, profit is shared between depositors and the bank according to pre-agreed terms, rather than paying a fixed interest rate on deposits. At the end of the year, profits are calculated and distributed proportionally based on the weightage of each deposit product. The terms of the profit-sharing contract can vary, such as a 65:35 ratio, meaning depositors receive 65 per cent of the profit, and the bank retains 35 per cent. Each Islamic bank has a Shariah Board to oversee whether profit distribution is compliant with Islamic principles. However, if this board fails to ensure proper Shariah compliance, there remains the possibility of manipulative accounting, whereby depositors receive less profit while the directors enrich themselves. Interestingly, information on how much profit is distributed to depositors is rarely published in the media, yet the annual dividend rate given to shareholders is prominently displayed in newspapers. This is ironic, considering that banks operate primarily using depositors’ money. But rather than protecting the interests of depositors, Islamic banks often appear more focused on safeguarding the interests of dividend-receiving shareholders. This calls for a fundamental reform in the system—an urgent Islamisation of Islamic banks. For example, suppose an Islamic bank introduces a “double-your-money-in-five-years” scheme. If a customer tries to withdraw their matured deposit after five years and is told that the bank could not generate sufficient profit during the related tenure, the amount cannot be doubled. In case of protest and dissatisfaction of the customers, the bank tries to pacify them with the argument that profit rates in Islamic banking are not fixed, as per Shariah. But if that’s the case, why advertise it as a “double scheme” in the first place? Islamic banks must stop such misleading practices. Even if the account opening form includes terms that legally support the bank’s stance, how many customers read those conditions before signing?

Islamic banks require Islamisation in their loan and investment management systems. Although there are fundamental differences between the credit management systems of conventional banks and Islamic banks, in practice, many Islamic banks often disregard Shariah principles and operate under rules similar to those of interest-based institutions. When Shariah compliance is absent, investments become riskier and are more likely to default. Take, for example, Bai-Muajjal, a standard Islamic investment mode. In this model, the bank purchases a product on behalf of the client, pays the seller through a pay-order, takes ownership of the product (even for a moment), and then sells it to the client at a fixed profit margin, with the total amount to be repaid within a specified time—usually up to a year. Bai-Muajjal is a deferred payment sale, where the bank buys a product for the customer and then sells it back at a higher price, allowing the customer to pay in installments. However, in reality, many investments are approved under Bai-Muajjal without the actual physical presence of the goods. Such transactions, lacking real goods, are not Shariah-compliant. These kinds of transactions often involve high-profile clients and become major liabilities for the bank. Without adequate collateral as security, the bank cannot take legal action against the borrower, fearing loan classification issues. A large classified loan can lower the bank’s credit rating, reduce profits, negatively impact stock market performance, and erode depositor confidence. Once trapped in such a cycle, it becomes difficult for the bank to recover. Every year, they are compelled to renew these non-compliant investments through additional Shariah-violating measures, thereby perpetuating the crisis.

Another investment method is called Murabaha Trust Receipt (MTR). Under this arrangement, the client imports goods and, without immediately paying the import bill, receives the import documents from the bank to clear the goods from the port, subject to settling the payment within a maximum of three to six months. Often, the client may have already arranged a forward sale of the goods, and even after receiving payment from the buyer, they may not repay the bank on time. Instead, the funds are diverted, frequently to repay loans received from other banks. In this way, clients repay bank loans by borrowing money from different banks to keep all their loan accounts up to date, while their total debt burden continues to increase. Eventually, this can lead the client to bankruptcy. Since banks often do not take sufficient collateral for such investments, they lack the leverage to take strict action when the client defaults.

In contrast, Murabaha Post-Import Investment is a Shariah-compliant and more secure alternative for clients. In this model, if the client lacks the funds to clear the goods from the port, the bank creates an investment in the client’s name, clears the goods at its own expense, and stores them in the bank’s warehouse. Later, the client can gradually pay for the goods and take delivery (DO) in parts. Although this approach is more troublesome for bankers, it ensures full Shariah compliance and significantly reduces the risk of default, since the goods remain under the bank’s control until fully paid for. Yet, for unknown reasons, Islamic banks are less inclined to adopt this method. As a result, dishonest clients exploit the system and fail to make repayments. Despite Shariah’s apparent preference for such controlled and secure transactions, the banks continue to use less compliant, risk-prone alternatives. Therefore, to finance clients in a truly Shariah-compliant manner and protect both the bank’s and depositors’ interests, there is no alternative but to Islamise the operations of Islamic banks fully.

Shariah does not permit the practice of adjusting one deal with another. However, Islamic banks are often compelled to do so. Instead of settling past deals properly from their own source, they tend to renew them, which goes against Shariah principles. A ‘re-deal’ is a term used to describe the renewal of a deal for another year without actually depositing the client’s money into the bank. Initially, the deal was made for the purchase of goods, and after selling those goods, the proceeds were intended to settle the original transaction. But when clients are given the benefit of re-dealing, they often keep the money from the sale and avoid depositing it into the bank. This allows them to renew the loan without actual repayment, which is clearly contrary to Shariah. If the process of Islamisation is carried out with firmness, clients will no longer request re-deals, and banks will also avoid renewing such deals. Instead, they will make every effort to recover the outstanding amount from the client in accordance with the original agreement.

Another two of the purest Shariah-compliant investment methods are Mudarabah and Musharakah. These methods involve a higher level of participation and partnership from the bank. However, no bank in this country shows much interest in these truly Shariah-compliant investments. The main obstacle is the lack of full Islamisation of the banks, which prevents them from pursuing these investment paths seriously.

In short, if Islamic banking in Bangladesh were truly operated based on Shariah principles, the current hardships faced by Islamic banks here would not exist. It is a proven fact from various countries that genuine adherence to Shariah can ensure authentic Islamic banking services. Setting aside Malaysia and Indonesia, even Western banks like Standard Chartered and HSBC have provided Islamic banking services through their Islamic windows without any significant problems, precisely because they strictly adhere to Shariah in delivering these services. This underscores the paramount importance of Shariah compliance in the functioning of Islamic banks.

After the July 2024 revolution, among the banks that faced liquidity crises and various problems, Islamic banks were the most affected. Meanwhile, wrongdoers have taken this opportunity to claim that implementing Islamic banking in this country is impossible. However, if Islamic banks had been financed through asset-backed investments, such as Mudarabah and Musharakah, and strictly adhered to Shariah principles, they would not have suffered such severe reputational damage during this period. It is also one of the state’s key responsibilities to ensure that those serving on the boards of directors and Shariah boards of Islamic banks possess adequate knowledge of Islamic banking, the Quran, and Hadith. Because we have failed to enact the Shariah Banking Act even after so many years, the deceivers have exploited the system to loot banks and avoid repaying loans. Entrusting a cat to watch fish and expecting it to do so fairly—isn’t that like living in a fool’s paradise?
The potential for expanding the Islamic banking business in Bangladesh by ensuring adherence to pure Shariah principles is vast. Therefore, the area of Islamic banking should not be contracted but instead expanded, giving due importance to the vital needs of the country’s 160 million Muslims. The Islamisation of Islamic banks is not just a demand of the time, but a crucial and urgent reform that needs to be implemented at this moment.

The writer is Vice President of the Bangladesh Economic Association,- Chattogram Chapter and ADMD of a private bank.
smabuzaker@gmail.com