Islamic banks in Bangladesh are confronting a widening spectrum of operational risks, prompting experts to call for stronger Shariah governance, specialised risk-management units, and a unified operational-risk framework to safeguard institutional stability.
Process failures, cyber-attacks, documentation errors, governance gaps and recurring Shariah violations have significantly amplified the threat landscape, according to economists and banking specialists.
These concerns were highlighted on Wednesday at a research workshop titled ‘Operational Risk Management in Islamic Banks: Best Practices and Evaluation’ hosted by the Bangladesh Institute of Bank Management (BIBM) in Dhaka. The discussion gained added significance in light of the recent merger of five crisis-stricken Islamic banks.
Nurun Nahar, Deputy Governor of Bangladesh Bank and Chair of BIBM’s Executive Committee, attended as chief guest. The keynote paper was presented by Dr Mahabbat Hossain, Associate Professor at BIBM.
Panel experts included Islamic banking specialist Md Fariduddin Ahmed, Union Bank administrator Mohammad Abul Hashem, Bangladesh Bank IBRPD director Mohammad Anisur Rahman, and Trust Bank’s Deputy Managing Director Md Kamal Hossain Sarker.
The keynote report reveals that operational risks have become the most critical vulnerability for Islamic banks, manifested through Shariah non-compliance, digital fraud, internal collusion, procedural inefficiencies and flawed documentation.
Only one-third of Islamic banks currently maintain a dedicated operational-risk management (ORM) unit, while nearly a quarter operate without any formal ORM framework. Many institutions still depend on fragmented, compliance-driven mechanisms.
Speaking at the event, Nurun Nahar noted that operational risk is escalating across the banking sector but is particularly acute for Islamic banks, which must adhere to both regulatory rules and Shariah principles. Documentation weaknesses, governance gaps and inconsistent monitoring, she said, expose banks to significant losses.
The central bank now expects more robust mechanisms aligned with updated Basel III and Islamic Financial Services Board (IFSB) standards, emphasising real-time dashboards, internal audits, standardised documentation and external Shariah reviews.
Dr Mahabbat Hossain observed that risk identification remains overly reliant on internal audits rather than proactive tools such as loss-event databases, scenario analysis and key risk indicators—leaving banks vulnerable to repeated failures.
He stressed that even minor procedural lapses, such as failing to take ownership of assets in Murabaha transactions or issuing backdated documents, can invalidate contracts and undermine depositor confidence.
The paper highlights rising threats from cyber vulnerabilities, collusive activities, credit-monitoring failures, agent-banking irregularities and misuse of customer data. Evidence shows recurring incidents involving forged paperwork, unauthorised withdrawals and digital-platform fraud.
Despite global guidance, nearly 80 per cent of Islamic banks have yet to fully implement the “three lines of defence” model, and only a limited number maintain comprehensive loss-event databases or conduct scenario-based stress tests.
The study calls for modernising risk controls through workflow automation, enhanced real-time surveillance, improved contract-execution processes and fully standardised Shariah-compliant documentation.
Speakers urged the regulator to introduce a dedicated operational-risk framework for Islamic banks, strengthen risk-based inspections, bolster cybersecurity, enforce strict documentation standards and modernise liquidity support systems.