Improving Shariah Audit Governance in Islamic Banking in Bangladesh

Islamic banking has emerged as a major force in Bangladesh’s financial landscape, accounting for over a quarter of the country’s banking sector. This impressive growth underscores the public’s trust in a system rooted in Islamic principles. However, recent governance lapses and liquidity concerns have revealed cracks in the sector’s Shariah compliance structure—raising critical questions about Shariah oversight and accountability.

At the heart of Islamic banking is compliance with Shariah law, which prohibits interest (riba), speculative transactions (gharar), and investments in unethical industries. While internal Shariah boards are entrusted with ensuring this compliance, their oversight may be constrained by internal politics, limited resources, or lack of independence. The result: inconsistencies in applying Shariah principles and growing skepticism among stakeholders.

In this context, an external Shariah audit can help address governance concerns.

What Is an External Shariah Audit?

An external Shariah audit is an independent, professional review of a bank’s operations, transactions, and governance by qualified Shariah scholars who have no affiliation with the institution. Unlike internal reviews, these audits offer an objective and transparent evaluation of whether the bank’s products and practices genuinely align with Islamic law.

From financing structures and investment portfolios to profit-sharing mechanisms and contractual terms, the audit covers all facets of the bank’s operations. The result is a comprehensive report that identifies gaps, offers solutions, and assures the public that their funds are being handled in accordance with their faith.

Why It Matters

Islamic banking is not just a financial alternative—it’s a moral and religious commitment. For devout Muslims, knowing that their deposits and investments are halal is essential. External Shariah audits provide that assurance. They also enhance the credibility of Islamic banks among investors and regulators by validating Shariah compliance through an independent lens.

More importantly, external audits serve as an early warning system. They help banks proactively identify weaknesses, address compliance failures, and avoid reputational or financial fallout. In a sector where trust is paramount, this oversight can make the difference between growth and collapse.

The Missing Link in Islamic banking

Surprisingly, while external financial audits are mandatory for all public companies, including Islamic banks, there is no legal requirement for external Shariah audits in Bangladesh. This regulatory blind spot is alarming, especially given the country’s ambitions to become a hub for Islamic finance. Several challenges stand in the way. Bangladesh faces a shortage of trained Shariah auditors. Interpretations of Shariah principles can vary. And there is no unified, standardized audit framework currently in place.

But these are not insurmountable barriers. Rather, they are opportunities for reform.

The Way Forward

To institutionalize Shariah audit practices, the Bangladesh Bank should take the lead. Mandating external Shariah audits for all Islamic financial institutions would mark a crucial step toward better governance and stakeholder protection. In parallel, the central bank could collaborate with professional bodies such as the Institute of Chartered Accountants of Bangladesh (ICAB) and the Financial Reporting Council (FRC) to:

• Develop standardized audit procedures and reporting formats.

• Train and certify qualified Shariah auditors.

• Create an accreditation system for Shariah audit firms.

• Promote public awareness about the significance of external audits.

By embedding external Shariah audits into its regulatory framework, Bangladesh can safeguard the long-term credibility of its Islamic banking sector.

The recent turmoil within the Islamic banking industry in Bangladesh should not be seen as an isolated incident—it is a call to action. Robust oversight mechanisms are essential for sustaining public trust and preserving the ethical foundation of Islamic finance.

Mandating external Shariah audits is not just about compliance—it’s about improving Sharia audit quality, restoring confidence, upholding values, and ensuring the sustainable growth of Islamic banking in Bangladesh.