Bangladesh Bank is set to launch an Islamic interbank money market by June 30 in an effort to address long-standing liquidity management challenges faced by Islamic banks in the country. The move is aimed at providing Shariah-compliant short-term financing options for Islamic financial institutions that cannot participate in the conventional call-money market because it relies on interest-based transactions prohibited under Islamic principles.
Currently, Islamic banks in Bangladesh have very limited liquidity management tools available to them. Their main Shariah-compliant investment avenue, the Bangladesh Government Islamic Investment Bond (BIIIB), has remained largely inactive for years. As a result, Islamic banks facing short-term liquidity shortages often struggle to access organised funding support from other financial institutions.
While banking experts agree that establishing an Islamic interbank market is necessary, many believe the proposed framework may not succeed unless deeper structural problems within the sector are addressed first. Several Islamic banks in Bangladesh continue to face serious financial stress, including weak capital positions, rising non-performing loans and allegations of fraud and financial mismanagement.
Analysts warn that creating a liquidity-sharing platform among financially troubled banks could increase contagion risks rather than improve stability. They argue that allowing distressed institutions to access unsecured interbank financing without stronger safeguards may expose healthier banks to additional financial pressure.
Bangladesh Bank has reportedly studied Islamic interbank market models implemented in countries such as Malaysia, Indonesia and Bahrain. Experts note that Malaysia’s Islamic Interbank Money Market became successful because it was supported by tradable Shariah-compliant instruments such as Islamic monetary notes, central bank investment issues and commodity murabaha contracts, alongside strong regulatory oversight and a centralised Shariah governance structure.
In contrast, Bangladesh currently lacks active Shariah-compliant government securities and Islamic financial instruments that can support a functional money market. There are no central bank sukuk, Islamic treasury bills or actively traded Islamic papers available in the market. Experts say that without these instruments, the proposed system would mainly operate as unsecured bilateral lending between banks instead of a fully developed money market with proper price discovery and secondary trading activity.
Concerns over the Islamic banking sector have intensified following recent financial scandals and institutional failures. Several troubled Islamic banks were merged into Sammilito Islami Bank after suffering severe balance sheet deterioration linked to politically influenced lending. Reports also highlighted major loan irregularities involving Islami Bank Bangladesh PLC and the S Alam Group, including allegations of large-scale fund withdrawals and money laundering through shell companies.
Banking specialists believe Bangladesh Bank should first introduce stronger safeguards before fully launching the Islamic interbank market. Recommended measures include minimum capital adequacy requirements for participating banks, counterparty exposure limits and the establishment of separate settlement and clearing systems for Islamic financial transactions.
Experts have also urged the central bank to introduce Shariah-compliant instruments such as murabaha-based or ijarah-based central bank securities, which could serve as tradable assets and collateral within the market. In addition, they stress the need for a dedicated and centralised Shariah oversight mechanism to strengthen governance and restore investor confidence.
Islamic banking represents nearly one-third of total deposits in Bangladesh, making public trust in the sector highly important. Analysts believe that while a properly structured Islamic interbank market could strengthen liquidity management and improve confidence, launching the system without adequate reforms may place additional pressure on an already fragile banking sector.