Striving for Pure Shariah Compliance: The Journey of Islamic Banking

Islamic banking has become an important pillar of the financial landscape in many Muslim-majority countries and beyond. Rooted in the principles of Islamic law or Shariah, this system aims to provide financial services that are not only economically viable but also ethically sound and compliant with religious tenets. At its core, Islamic banking forbids riba, commonly understood as interest, prohibits investments in haram activities such as gambling or alcohol, and promotes risk-sharing and social justice. Over recent decades, Bangladesh has witnessed a significant rise in Islamic banking, with several Islamic banks and Islamic windows in conventional banks operating alongside traditional financial institutions. However, a persistent question remains within the Islamic finance community, regulators, and customers alike: is it truly possible for Islamic banking to be purely Shariah-compliant? Can Islamic banking in Bangladesh or elsewhere fully adhere to the strict principles of Shariah in practice?

The aspiration of Islamic banking is to offer financial products and services that strictly conform to Islamic law. Ideally, Islamic banks should avoid any transactions involving interest, should engage in trade and investment only in halal sectors, and should adopt contracts that embody justice, transparency, and equitable risk-sharing. The fundamental instruments through which Islamic banking operates, such as Murabaha (cost-plus financing), Mudarabah (profit-sharing partnerships), Musharakah (joint ventures), and Ijara (leasing), are all designed to avoid the pitfalls of conventional interest-based lending and to promote shared risk and reward. Shariah supervisory boards composed of qualified Islamic scholars oversee banking operations to ensure compliance, issuing fatwas and guidelines for product development and review. In theory, this system represents a pure, alternative financial model that harmonizes economic activity with religious and ethical values.

Despite this clear framework, the reality is far more complex. Islamic banking in practice often struggles to attain pure Shariah compliance due to various operational, economic, and regulatory challenges. In Bangladesh, the situation reflects both progress and tension between idealistic goals and practical realities. The country’s Islamic banks have flourished since the 1980s, spurred by rising demand for Shariah-compliant financial products among its majority Muslim population. Today, Islamic banks in Bangladesh account for a significant portion of the country’s banking sector assets and deposits, alongside conventional banks that sometimes offer Islamic banking windows. However, the nature of these banks’ operations often involves compromises that complicate the question of purity in compliance.

One of the most visible challenges is the widespread use of the Murabaha contract. While Murabaha is Shariah-compliant in principle - allowing the bank to buy goods and sell them to the customer at a marked-up price with deferred payment - the practical application in Bangladesh often mirrors conventional loans with interest in all but name. Many customers and even bank staff view Murabaha as a straightforward financing facility, where the markup rate effectively functions like an interest rate. This resemblance raises concerns among scholars and consumers about whether such practices genuinely embody the spirit of Islamic finance or merely replicate interest-based lending under a different label. This tension between form and substance is not unique to Bangladesh but is particularly pronounced in emerging Islamic banking markets where legal frameworks and financial literacy are still developing.

Another major hurdle in achieving pure Shariah compliance in Bangladesh is the lack of standardized interpretation and enforcement of Shariah principles. Different Islamic banks have their own Shariah boards, and sometimes individual scholars hold differing views on what constitutes compliance. For example, some may allow certain profit margin structures in Murabaha that others reject. The absence of a unified national Shariah standard creates inconsistency and confusion among consumers. While central bank has issued guidelines on Islamic banking and mandated the formation of Shariah supervisory committees within banks, the regulatory framework is still evolving and often leaves room for interpretation. This fragmentation affects the overall credibility of Islamic banking products and hampers efforts toward pure compliance.

Liquidity management presents another significant challenge. Conventional banks can easily access the money market through interest-bearing instruments such as treasury bills or certificates of deposit, but Islamic banks in Bangladesh cannot participate in interest-based markets without violating Shariah principles. As a result, Islamic banks face difficulties managing short-term liquidity efficiently, often holding idle funds or resorting to commodity murabaha transactions, which are sometimes criticized for lacking genuine trade substance. The absence of a robust, Shariah-compliant money market infrastructure in Bangladesh limits Islamic banks’ ability to maintain liquidity while adhering strictly to Islamic principles. This shortcoming impacts their operational efficiency and competitiveness.

Risk management in Islamic banking also illustrates the gap between ideal and reality. Islamic finance emphasizes profit-and-loss sharing, which theoretically aligns bank and customer interests and distributes risks fairly. In practice, however, many Islamic banks in Bangladesh are reported to rely heavily on debt-like contracts and fixed returns, such as Murabaha and Ijara, to minimize their own risks. These contracts often shift risk to the customer rather than sharing it, effectively mimicking conventional debt financing. While this approach offers banks more predictable income streams and safeguards their stability, it departs from the core Islamic finance principle of equitable risk-sharing. This pragmatic shift is understandable given the commercial pressures Islamic banks face, but it underlines the difficulty of achieving pure Shariah compliance.

Moreover, investment screening presents additional complexity. Islamic banks must avoid investing in sectors deemed haram, and conventional financial services. In Bangladesh, where the economy is still diversifying, Islamic banks are cautious but often limited in their investment opportunities. The lack of widely available Shariah-compliant investment vehicles restricts their ability to channel funds ethically and profitably. In addition, Islamic banks sometimes face difficulties verifying the compliance of business activities, especially in less transparent sectors, which increases the risk of inadvertent involvement in non-compliant activities.

Despite these challenges, significant strides are being made to enhance Shariah compliance in Bangladesh’s Islamic banking sector. Central bank has introduced regulations that improve governance and transparency. The central bank’s circulars require banks to maintain a Shariah supervisory board and report compliance regularly. Efforts to standardize Shariah rulings and harmonize contract structures are ongoing, with support from international bodies like AAOIFI and IFSB. Islamic banks are increasingly investing in human capital by training Shariah scholars and banking professionals, improving both product quality and customer awareness.

Innovations in product development are also reshaping the landscape. Sukuk (Islamic bonds) issuance in Bangladesh has gained momentum, offering Shariah-compliant instruments for both public and private sector financing. Islamic microfinance has expanded access to ethical finance for the underbanked population, adhering more closely to profit-sharing and risk-sharing principles. Additionally, fintech solutions are emerging to facilitate Shariah-compliant digital banking services, which may increase transparency and reduce operational costs.

Looking ahead, the possibility of purely Shariah-compliant Islamic banking in Bangladesh hinges on multiple factors. Strengthening regulatory frameworks with clear, enforceable standards will reduce inconsistencies and improve public confidence. Developing a robust Shariah-compliant money market and secondary market for Islamic financial instruments will enhance liquidity management. Encouraging genuine profit-and-loss sharing contracts rather than debt-like products will align practice closer to the original Islamic finance philosophy. Public education campaigns can help customers understand the nuances of Islamic finance, reducing demand for conventional-like products marketed as Islamic. Importantly, a cultural shift toward valuing ethical finance beyond mere compliance will deepen the sector’s commitment to Shariah principles.

Islamic banking in Bangladesh has made remarkable progress and offers a valuable alternative to conventional finance that aligns with the religious and ethical values of its population. However, pure Shariah compliance remains an aspirational goal rather than a fully realized reality. The sector continues to grapple with practical challenges such as product design, regulatory ambiguity, liquidity management, and risk sharing, which limit the extent of true compliance. In recent times, the central bank has opened a new department focusing on Islamic banking regulations. It can be expected that the central bank will take initiatives to make Islamic banking Shariah compliant to meet the spiritual needs of its people and also contribute to building a more inclusive, ethical, and resilient financial system.


Mehdi Rahman works in the
development sector. He also 
writes on foreign trade 
and monetary issues.