A joint study has identified major weaknesses in Shariah governance in Bangladesh's Islamic banking sector, warning that gaps in oversight and accountability are contributing to financial stress and eroding depositor confidence.
The research, conducted by the Bangladesh Institute of Bank Management (BIBM) and Malaysia's INCEIF University, finds that although Islamic banking now accounts for nearly one-fourth of the country's financial system, governance frameworks have not kept pace with rapid expansion.
The study highlights a sharp deterioration in key financial indicators.
Return on equity (ROE) fell to just over 3 per cent in 2024, while capital adequacy turned negative, signalling heightened solvency risks within the sector.
Asset quality has also worsened significantly, with classified investments exceeding 23 per cent, reflecting a deepening non-performing financing crisis. These vulnerabilities are mirrored in broader assessments of the banking system.
According to S&P Global Ratings, Bangladesh's banking sector remains in one of the highest risk categories globally, with a score of 9 out of 10, placing it among the riskiest systems in the Asia-Pacific region.
The rating agency has linked these risks partly to governance failures and liquidity crises in some Shariah-based banks.
The study further notes that governance breakdowns have already triggered regulatory intervention.
In 2024, boards of several Islamic banks were restructured following severe financial distress, with non-performing loan ratios in affected institutions reaching as high as 98 per cent.
Beyond financial stress, the research identifies persistent institutional weaknesses.
Only a limited number of banks disclose Shariah Supervisory Committee activities, and reporting on Shariah awareness programmes remains minimal.
Audit coverage is also uneven, with many banks failing to conduct or disclose comprehensive Shariah audits across their operational networks, raising concerns about effective compliance monitoring.
The study proposes a broad reform agenda, including strengthening board independence, aligning corporate and Shariah governance, introducing external Shariah audits, and improving regulatory oversight.
It also calls for capacity development and stricter fit-and-proper criteria for Shariah Supervisory Committee members.
The study findings were presented at a seminar titled "Shariah Governance in Islamic Banks of Bangladesh: An Evaluation" in Dhaka on Monday.
The event was jointly organised by BIBM and INCEIF University.
Chairman of the BIBM Executive Committee and Deputy Governor of Bangladesh Bank Nurun Nahar inaugurated the event, stressing that robust Shariah governance is essential to ensure both regulatory compliance and adherence to Islamic principles, thereby strengthening the sector's resilience.
Professor Dr Said Bouheraoua of INCEIF University, attending as the guest of honour, shared global perspectives and best practices in Shariah governance.
The keynote paper was presented by Dr Md Mahabbat Hossain of BIBM, along with a research team comprising Mezbah Uddin Ahmed, Md Alamgir, and Muhammad Habibur Rahman.
A panel of discussants, including Abdul Awal Sarker, Md Abdus Salam, Mosleh Uddin Ahmed, Nabil Ahmad, and Mohammad Anisur Rahman, highlighted the need for stronger regulatory oversight, improved internal compliance, and greater coordination between regulators and banks.
In his concluding remarks, BIBM Director General Dr Md Ezazul Islam said governance in Islamic banks must go beyond formal compliance to encompass institutional culture, professional competence, depositor protection, transparency, and ethical accountability.
He noted that while Islamic banking has grown significantly in Bangladesh, governance arrangements have not always kept pace, echoing the study's findings.
"Shariah governance is no longer a narrow institutional issue; it is now a matter of financial stability, public confidence, and the credibility of Islamic banking," he said.
He emphasised that effective governance requires not just well-designed policies but also sincere implementation, stronger independence, and clear accountability across institutions.
Dr Islam also underscored the importance of coordinated action among regulators, banks, Shariah scholars, and training institutions to strengthen governance frameworks and restore trust in the sector.
The seminar was attended by senior bankers, regulators, academics, and researchers.
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