Bangladesh Bank Governor Md. Mostaqur Rahman recently pledged “full protection” and functional independence for Shariah board members. It is a refreshing departure from the status quo in the central bank. For the very first time, an in-office governor actually held a discussion with Shariah scholars, acknowledged past supervisory failures, and promised an era where boards can operate meaningfully and fearlessly. This surely matters, but after thirty years of studying Islamic banking governance and serving on the AAOIFI Ethics and Governance Board, I have to be honest: sincere pledges are never a substitute for legally enforceable architecture. Bangladesh’s Islamic banking sector doesn’t need more reassurances; all it needs is a system.
The timing of the governor’s intervention is unsurprising. The sector is just now crawling out from the worst governance crisis in its history. Unfortunately, we witnessed the S. Alam Group systematically capture at least six Shariah-based banks, resulting in an estimated Tk 1.9 lakh crore in irregular lending. Five distressed institutions were forced into a merger, forming what is now called Sammilito Islami Bank. These weren’t just small errors; we are talking about non-performing loans that reached 90 per cent of some of these banks’ portfolios. In 2021, while conducting a study with Mufti Masum regarding defaulted loans in Bangladesh, we documented exactly how this happens. Political interference, regulatory forbearance, and a lack of accountability create a vacuum. These were failures of institutional design in which bank owners treated Shariah boards as decorative appendages rather than real supervisors to guide them.
THE BLUEPRINT FROM MALAYSIA: Malaysia’s Shariah governance was not built overnight. It took them four decades of iterative legal work, starting with the 1983 Islamic Banking Act, and culminating in the 2019 Shariah Governance Policy Document. I have taught at several Malaysian universities and co-authored research on their legal evolution, and I can claim with conviction that their success isn’t just about “good rules.” It is about a layered integration of Shariah principles with uncompromising financial oversight.
There are three specific lessons here for Bangladesh. First, we need the legal supremacy of a central Shariah authority. In Malaysia, the Shariah Advisory Council (SAC) is the final word. Their rulings are binding on courts and banks alike. This stops the “fatwa shopping” I’ve documented in my research (Arab Law Quarterly, 2014), in which banks essentially seek an opinion that suits their bottom line. Bangladesh Bank’s new Shariah Advisory Board is a start, but without statutory teeth, it will just be another committee that powerful borrowers ignore when it suits them best and is convenient.
Second, we must address the internal infrastructure. Malaysia mandates a full ecosystem at every bank, including a dedicated Shariah secretariat and internal audit functions. Most Islamic banks in Bangladesh treat this as an afterthought. My research on board characteristics (International Journal of Islamic and Middle Eastern Finance and Management, 2019) shows a clear link: when Shariah boards are under-resourced, risk-taking goes up. This finding speaks directly to Bangladesh’s predicament. The Governor’s pledge might address the mere symptoms, but it doesn’t build the internal machinery that makes protection sustainable.
Finally, a Shariah violation must be treated as a regulatory violation. The S. Alam crisis wasn’t just a religious failure, a Shariah non-compliance; it was money laundering and fraud hidden behind an Islamic label. A Shariah board cannot be successful in stopping crimes like this unless it has access to the transaction-level data.
FOUR FRONTS FOR REFORM: So, where do we go from here? The path forward requires moving on at least four fronts simultaneously.
The first priority is the Islamic Banking Act. Frankly speaking, it is an anomaly that our Islamic banks have operated for forty years without a dedicated legal framework. I first wrote about this “original sin” of our sector in 2003 (in the Textbook on Islamic Banking), and it remains the biggest hurdle today. We cannot keep relying on central bank circulars to govern a multi-trillion-taka industry.
Then there is the issue of human capital. We cannot simply import a Malaysian framework and expect it to work in Bangladesh without trained professionals. We need a massive investment in scholars, auditors, and compliance officers. In my current role as chair of the AAOIFI Education Board, I’ve seen how standardised certification can transform an institution in just a few years. But this will not come to fruition without money and intent.
We also need to mandate separate core banking systems for Islamic operations. As long as Islamic banks use software designed for interest-based transactions, their Shariah compliance will remain superficial. It’s like trying to run a modern operating system (OS) onobsolete hardware:the system crash is theinevitable, eventual outcome.
Lastly, we must insulate these reforms from our political cycles. Our banking sector has been a playground for political interests for too long. My research on political systems and bank performance (Journal of Financial Stability, 2017) found that Islamic banks outperform their peers only when shielded by robust governance frameworks. We need legislation that can survive a change in government.
A NOTE OF REALISM: We must be realistic; Malaysia built its system during a time of relative stability. Our capital adequacy is below the Basel III minimums, and depositor confidence is on a knife-edge.
Having said that, we must also know that being in a difficult position is no excuse for incrementalism. The Governor’s recent meeting was a necessary, welcome beginning, but it cannot be the end. Shariah boards do not need “protection” in the form of a promise. They need power, the kind of power that is legally defined, institutionally supported, and backed by the full weight of the law.
M. Kabir Hassan is Professor of Finance and Moffett Chair at the University of New Orleans, the 2016 IDB Prize Laureate in Islamic Banking and Finance, and a member of the AAOIFI Ethics and Governance Board.