What's next for the Islamic banking department at Bangladesh Bank?

Bangladesh has long advocated for a dedicated Islamic banking department. The earliest recorded proposal dates back to 2003, when a joint team from the Islamic Banking Consultative Forum (IBCF) and the Central Shariah Board for Islamic Banks of Bangladesh (CSBIB) recommended establishing such a department at the Bangladesh Bank. 

However, this proposal did not gain traction until reform demands surfaced following the fall of the Sheikh Hasina regime on 5 August last year.

The regime's fall resulted from a mass uprising, which marked a profound awakening across all segments of society, with calls for reform emanating from various sectors. Islamic banking was no exception, particularly as it had been one of the sectors most adversely affected during the regime, suffering from widespread governance failures and a collapse in regulatory oversight. 

In response, the CSBIB, IBCF, and the Bangladesh Institute of Bank Management (BIBM) organised a series of discussions involving industry leaders and senior officials from the Bangladesh Bank.

Reports and newspaper articles followed, offering recommendations to reform and restore trust in the Islamic banking sector. Among the reform priorities identified by stakeholders was the creation of a dedicated Islamic banking department within the Bangladesh Bank. Ultimately, on 3 March 2025, Bangladesh Bank issued an official circular announcing its decision to establish the IBRPD, which began operations in May 2025.

The establishment of the IBRPD signals that the current leadership recognises both the importance of Islamic banking and the scale of the task involved in developing appropriate regulations and policies for the sector. It raises hopes among stakeholders that the era of neglect and mischaracterisation of the sector will come to an end. Until now, Bangladesh Bank has generally issued common regulations for both conventional and Islamic banking. This approach, combined with various legal obstacles, has hindered efforts to ensure Shariah compliance and to meet international standards.

The new department is mandated to draft regulations and policies aligned with global standards, such as those issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB). 

AAOIFI provides standards related to Shariah, accounting, auditing, governance, and ethics, while the IFSB issues prudential and supervisory guidelines. Adopting these standards marks a significant step towards enhancing the practice of Islamic banking in Bangladesh.

The key challenge now is how to implement these standards effectively, particularly given the industry's existing structural issues, the pressing need for reform, and the limited human resources currently assigned to the department. Since recapitalisation of several Islamic banks, improved Shariah compliance, and strengthened governance are among the industry's top priorities, the department may consider the following immediate steps.

The Governor of the Bangladesh Bank has repeatedly outlined plans to merge, take over, and recapitalise several Islamic banks. An urgent priority should be to ensure that every aspect of this process, along with the instruments employed, fully complies with Shariah requirements. 

Institutions such as the IBCF, CSBIB, and BIBM can be invited to submit proposals and participate in detailed consultations with industry leaders, Shariah scholars, and relevant experts. Failure to act promptly may lead to serious challenges regarding Shariah compliance during the implementation phase.

To strengthen Shariah compliance in the Islamic banking sector, Bangladesh Bank could issue a circular requiring all banks offering Islamic banking services to adhere to AAOIFI Shariah standards on a 'comply or explain' basis—allowing a grace period of, say, one year. This would reduce the need for Bangladesh Bank to draft detailed regulations in the short term, lowering the risk of failure that has plagued similar initiatives in the past. 

It would also allow for a gradual alignment with international best practices, while enabling banks to communicate any difficulties they face. In doing so, Bangladesh Bank could build a comprehensive database of sector-wide challenges, thereby identifying areas for regulatory amendment and targeted policy interventions in an orderly and informed manner.

Some resistance to this approach may arise, particularly due to concerns that AAOIFI standards are subject to revision. However, it is worth noting that AAOIFI is a globally recognised standard-setting body with membership from regulators worldwide, including the Bangladesh Bank. When revisions occur, they follow extensive consultation with stakeholders. If Bangladesh Bank deems it necessary to diverge from AAOIFI standards while maintaining Shariah compliance, it can issue separate circulars following appropriate industry feedback.

Another priority for the department should be the development of a comprehensive Shariah governance framework. This would not be overly time-consuming, as it can draw directly from AAOIFI and IFSB standards with the necessary adjustments to fit existing national laws. However, meaningful stakeholder consultation must precede finalisation.

Historically, Bangladesh Bank has not published its draft regulations for public scrutiny. These documents are often shared only with top executives of full-fledged Islamic banks, excluding Islamic banking branches and windows. 

As a result, independent experts and academics are frequently denied the opportunity to offer feedback. A more inclusive approach is required—one that seeks broad input to create higher-quality, more practical regulations. It would also be wise to record all feedback received and document how it is addressed, ensuring a transparent and structured regulatory development process. Public hearings, stakeholder roundtables, seminars, and similar engagements would further enrich the process.

Given the Islamic banking sector's limited policy support in past decades — and sometimes even hostility — the establishment of a dedicated department is a landmark step. However, for the department to be truly effective, additional functions must be incorporated, and staffing levels must be significantly increased.

Specifically, the department should include a Shariah Secretariat, which would be responsible for conducting research and providing analytical support for Shariah-related policymaking. A Shariah Review Unit is also necessary, serving as the primary point of reference for Shariah matters in supervision and inspection activities.

In addition, a Reporting Unit should be created to monitor and manage Islamic banking disclosures, while an Islamic Financial Market Unit could be established to develop liquidity management instruments and facilitate the introduction of systemically important financial products.

Finally, the department must develop internal policies, standard operating procedures, and governance frameworks to function in a systematic, consistent, and impartial manner. These internal mechanisms are essential for ensuring transparency and accountability. Regular reviews will be needed to adapt and expand these systems in line with the growing scale and complexity of the Islamic banking industry.

Mezbah Uddin Ahmed is a research fellow at the ISRA Institute of INCEIF, University in Malaysia. He can be contacted at mezbah-isra@inceif.edu.my.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.