Written by The Banking Post
Islamic banks in Bangladesh are facing growing operational risks driven by process failures, cyber threats and governance weaknesses, prompting calls from experts for stronger oversight and dedicated risk-management structures.
The concerns were outlined Wednesday at a research workshop titled “Operational Risk Management in Islamic Banks: Best Practices and Evaluation,” organised by the Bangladesh Institute of Bank Management (BIBM) in Dhaka—just weeks after the merger of five troubled Islamic banks.
Nurun Nahar, deputy governor of Bangladesh Bank and chair of BIBM’s Executive Committee, attended as chief guest. Dr Mahabbat Hossain of BIBM presented the keynote, which detailed systemic lapses across the Islamic banking sector. Senior industry figures and regulators also joined as panelists.
The research shows operational risks have become the sector’s most pressing vulnerability, reflected in repeated shariah violations, documentation errors, digital fraud, collusion and weak process controls. Only one-third of Islamic banks have a dedicated operational risk management (ORM) unit, while nearly a quarter lack any formal ORM framework.
“Operational risk is a growing concern for the banking sector, and the challenge is even greater for Islamic banks due to dual compliance obligations,” Nurun Nahar said. She noted gaps in shariah governance, inconsistent monitoring and poor documentation that expose banks to potential losses. The central bank expects stronger risk frameworks aligned with updated Basel III and IFSB standards, including real-time dashboards, internal audits and external shariah reviews.
Dr Hossain said risk detection largely relies on internal audits rather than proactive tools such as key risk indicators, loss-event databases and scenario analysis, leaving banks vulnerable to recurring failures. He warned that even minor procedural lapses—such as not taking ownership of assets in Murabaha transactions or issuing backdated documents—can invalidate contracts and undermine depositor confidence.
The study finds that shariah supervisory committees sometimes include members with inadequate technical expertise, contributing to inconsistent governance. It also highlights rising cyber risks, agent-banking irregularities and failures in credit monitoring. Case studies point to forged documents, unauthorized withdrawals and digital misuse of customer data.
Despite global standards from Basel and the Islamic Financial Services Board, around 80% of Islamic banks have yet to fully adopt the “three lines of defence” model. Few maintain centralized loss-event databases or run regular scenario-testing exercises.
The paper stresses the need to modernise risk controls by enhancing real-time surveillance, automating workflows, standardising shariah-compliant documentation and improving contract execution. Strengthening internal shariah audit capacity and integrating shariah governance into the core ORM structure were identified as urgent priorities.
Speakers urged regulators to introduce a dedicated operational-risk framework for Islamic banks, expand risk-based inspections, enforce documentation standards, bolster cybersecurity and upgrade liquidity-support tools for the shariah-based banking segment. They also called for external shariah reviews, fiduciary ratings, stronger board oversight and stricter fit-and-proper criteria for Shariah Supervisory Committees.
