Partnership-based investment, or the provision of credit on a profit-and-loss sharing basis, is regarded as the founding principle of Islamic banking. Under the model, known as musharaka and mudaraba, the bank and the entrepreneur share investment profits in accordance with an agreed contract. Losses are borne in proportion to the capital contributed by each party, depending on the type of contract.
Financing of this kind creates scope for fostering entrepreneurs, developing small and medium-sized enterprises and increasing investment in productive sectors.
Islamic banking operations globally have developed with this distinctive feature at their core. In Bangladesh, however, Shariah-compliant banking does not operate on a profit-and-loss sharing (PLS) basis; instead, a fixed profit margin is added to the purchase price of goods. The share of partnership-based profit-and-loss financing has now fallen below 1 percent.
A Bangladesh Bank study shows that among countries where Shariah-based banking is prevalent, Bangladesh has the lowest share of profit-and-loss partnership. In Indonesia, the world’s largest Muslim-majority country, 35 to 40 percent of Islamic banking is conducted on a profit-and-loss basis. In Bahrain, the figure is 18 to 22 percent. Pakistan records 8 to 12 percent and Malaysia 6 to 8 percent. The rate in Bangladesh has now dropped to 0.5 percent. As recently as 2019, 1.6 percent of Islamic banks’ investment in the country was conducted on a profit-and-loss basis, meaning that partnership-based investment or lending has declined in the six years since.
The central bank’s observation is that although Islamic banks are Shariah-based in name, in practice they mirror conventional banks in their investment operations. The finding is set out in a study titled “An Analysis of Mode-Wise Investment of Islamic Banks in Bangladesh”, which examines the investment patterns of Islamic banks from June 2019 to June 2025.
Four officials from the Islamic Economic Wing of Bangladesh Bank’s research department conducted the study, which also notes that more than 70 percent of the total investment of the country’s Islamic banks is now conducted through sale-based methods.
Asked about the matter, Arief Hossain Khan, executive director and spokesman for Bangladesh Bank, told Bonik Barta: “We had long received complaints that Islamic banks were not conducting banking in line with Shariah principles. Now research has revealed that. Previously, little importance was attached to banks’ Shariah boards and compliance with the relevant rules. Now we are issuing directives from the central bank itself for Shariah boards to be formed, and a Shariah board has been set up at the central level to monitor the matter.”
Shariah-based banking in Bangladesh began in 1983 with Islami Bank Bangladesh PLC. Inspired by that bank’s success, nine more full-fledged Islamic banks subsequently began operations in the country. A further 31 commercial banks have entered this segment through Islamic banking branches or windows.
A large share of these Shariah-based banks, however, are now burdened by irregularities and corruption. Five Shariah-based banks that were systematically looted are currently in the process of being merged into a single entity — Sammilito Islami Bank PLC.
The central bank’s study says total Islamic banking investment in the country rose from BDT 2.15 trillion to BDT 5.14 trillion in the six years after 2019, an expansion of 139.2 percent.
Most of that growth, however, was driven by fixed-profit sales and asset-based financing. Investment conducted on a genuine profit-and-loss sharing basis between bank and entrepreneur has declined steadily.
At the end of June 2025, 50.3 percent of total Islamic banking investment was deployed through the bai-murabaha method, up from 45.4 percent in June 2019. Bai-muajjal accounted for 20.1 percent. Together, the two methods accounted for 70.4 percent of total investment, concentrated in sale-based financing.
Under bai-murabaha, the bank buys the goods a customer needs and sells them to the customer at a set profit. Bai-muajjal involves financing through credit sales. Because profits under both methods are relatively predetermined and predictable, operations and risk management become straightforward. The Bangladesh Bank study also identifies lower monitoring costs, simpler operating procedures and assured profits as being among the key factors driving banks’ preference for such investment.
Investment on a partnership basis, through musharaka and mudaraba, has moved in the opposite direction. By June 2025, the musharaka share had fallen to just 0.3 percent and mudaraba to 0.2 percent. Musharaka accounted for 1.4 percent in June 2019.
According to the study, PLS financing drives up banks’ operating costs as they must monitor a project’s actual income and expenditure, verify the entrepreneur’s financial information and navigate the complexities of calculating profit. Moral hazard on the part of the entrepreneur, information asymmetry and uncertainty over dispute resolution also hinder the expansion of such investment. Fixed-profit financing, by contrast, allows banks to assess risk and manage returns with relative ease.
A further marked shift has occurred in ijara and hire purchase under shirkatul melk (HPSM) used to finance houses, flats, cars, machinery and other fixed assets. The two methods together accounted for 5.8 percent in June 2019; by June 2025 that had risen to 21 percent.
Demand for financing in real estate, infrastructure and capital machinery is cited in the study as a driver of the growth. It also warns, however, that long-term asset-based investment set against short-term, deposit-dependent funding can expose banks to liquidity and maturity-mismatch risks.
To address the situation, the Bangladesh Bank research team recommends setting time-bound targets for directing a share of new investment into musharaka and mudaraba, technical support for PLS financing, expansion of the sukuk market and reforming the regulatory framework. It also stresses increasing partnership-based investment in agriculture, small and medium-sized enterprises and priority development sectors.
The study says the primary policy challenge now is ensuring that the expansion of Islamic banking remains consistent with its founding principles. Whether the banks’ role in risk-sharing, entrepreneurial finance and inclusive growth expands alongside investment volumes will determine the true trajectory of the sector’s future development.
Mohammad Abdul Mannan, a former managing director of Islami Bank Bangladesh, argues that the core purpose behind the founding of such banks must be questioned before any discussion of their investment patterns.
“Many other banks of this kind were not established with the same purpose as Islami Bank Bangladesh,” he told Bonik Barta. “Some entered Shariah-based banking purely to make extra profit. Others had dishonest motives as well. The current plight of many Shariah-based banks makes this clear.”
Mannan said: “To follow Shariah principles, the bank’s managing director must first be set right. The bank’s board, the Shariah board and everyone down to the branch manager must have both the drive and the knowledge to follow Shariah. Without that, there will be no full-fledged Islamic banking. And it is not the case that Islamic banking means investment on a partnership basis alone.”