Md Abdullah Al Faisal
The global Islamic finance industry continues to expand at an impressive pace, reaching $4.9 trillion in assets with a sustained annual growth rate of more than 13%. This rise reflects a worldwide shift towards ethical, asset-backed and risk-shared financial structures that are increasingly in demand among both Muslim and non-Muslim investors.
Against this global backdrop, Bangladesh finds itself at a pivotal juncture. The country possesses one of the largest pools of Shari’ah scholars, a deeply rooted Islamic banking ecosystem and a population with strong demand for Shari’ah-compliant financial solutions. Yet, despite these advantages, the Islamic capital market remains shallow, fragmented and underdeveloped. If Bangladesh aims to become a competitive Islamic finance hub, incremental progress is no longer enough. A structural shift is required to transform latent potential into genuine market depth.
A banking-dominated sector under stress
Bangladesh’s Islamic finance industry today stands at more than $42 billion, but nearly 89% of this value is concentrated within Islamic banking. While this dominance helped build scale, it has also exposed vulnerabilities. Rising non-performing loans, inadequate provisions and the forced merger of five distressed banks reveal long-standing governance lapses.
These weaknesses highlight a deeper structural issue: excessive liquidity is trapped within banks, while too little flows into market-based, risk-sharing instruments such as Sukuk and Islamic investment funds. As the economy expands, the constraints of a bank-centric model are becoming increasingly apparent.
A constrained capital market unable to share risk
Bangladesh’s Islamic capital market offers limited scope for corporates, investors and institutions seeking long-term Shari’ah-compliant financing.
Sukuk market: Government Sukuk have gained momentum—with Tk24,000 crore in long-term issuances and Tk12,671 crore in short-term BGIIBs—but corporate Sukuk remain largely absent.
Islamic mutual funds: Islamic funds represent only 7.29% of total mutual fund assets. Many fund managers struggle due to a lack of high-quality Shari’ah-compliant listed corporates, weak fund performance and governance constraints.
With few Islamic equities, insufficient free float and limited listed Sukuk, the capital market cannot adequately support infrastructure, manufacturing, logistics and real estate—sectors dependent on long-term financing.
Where the frictions lie
Several regulatory, legal and structural obstacles restrict the growth of the Islamic capital market:
High issuance and listing costs: Issuing Sukuk remains costly. Multiple fees from BSEC, CDBL, trustees and stock exchanges push costs to about 0.56% of the issue size.
The asset transfer barrier: True Sukuk securitisation requires transferring assets to an SPV, but stamp duty, local government tax and registration fees make this prohibitively expensive. Without transfer, bankruptcy remoteness—essential to investor protection—is compromised.
Regulatory overlaps: After BSEC approval, Islamic banks still need separate consent from Bangladesh Bank to invest in Sukuk SPVs. SPVs also lack recognition for CIB checks and single obligor limits—routine requirements globally.
Dividend taxation distortions: Multi-level taxation reduces returns for investors in Islamic mutual funds.
These frictions prevent the Islamic capital market from becoming a reliable source of long-term financing.
The reform blueprint: Building a market of global parity
Strengthening legal and regulatory foundations: To build a competitive Islamic capital market, Bangladesh must reinforce its regulatory architecture. Aligning labour laws will help create a compliant industrial landscape, strengthening issuer creditworthiness. Updating BSEC’s outdated ABS Rules (2004) is essential to streamline issuance and make costs competitive regionally.
Bangladesh Bank can stimulate development by offering incentives such as refinancing windows or preferential treatment for banks investing in Green, Blue or Social Sukuk. Reducing the cost of transferring underlying assets to SPVs—through exemptions or a unified tax-pass framework—would remove a long-standing barrier and enable true asset-backed structures.
Activating domestic institutional capital: Domestic institutional investors are crucial for building deep demand. A tax pass-through mechanism for mutual funds would eliminate double taxation and improve returns. Insurance companies should receive more flexibility to allocate funds to high-quality Sukuk.
Similarly, pension and provident funds—large, long-term pools of capital—need expanded investment limits. Relaxing the rigid 25% listed-securities cap would allow them to support rated Sukuk and long-term national projects. Listing more governance-strong, Shari’ah-compliant corporates and introducing Islamic ETFs would further enhance liquidity and diversification.
The bull case for Bangladesh
Bangladesh possesses all the essential foundations to become a major Islamic finance hub: a large Muslim population, established Islamic banking capacity and strong Shari’ah governance. What is missing is a modern legal, regulatory and market framework capable of mobilising long-term, risk-sharing capital at scale.
The global Islamic finance community is seeking credible new markets. With competitive instruments and transparent regulation, Bangladesh can attract cross-border capital, support infrastructure expansion, catalyse industrialisation and reduce excessive dependence on banks.
The architecture of opportunity is already within reach. What Bangladesh needs now is the resolve to build it.
—The author is the CEO of CBC Asset Management and a director of Lion City Advisory.
