This week marked another milestone for Islamic finance in Bangladesh. On June 28, the central bank auctioned the country’s first-ever short-term sukuk, a nine-month instrument, to raise Tk 5,500 crore for rural infrastructure. By that measure, the programme is thriving.
And yet, more than five years after Bangladesh issued its first sovereign sukuk in December 2020 to fund a national safe water project, a quieter truth has set in. The sukuk works, but the market it was supposed to build does not. With more than Tk 53,000 crore raised so far, and Tk 30,000 crore more planned next fiscal year, it’s time to ask why all this activity has not produced a real Islamic capital market.
The answer lies in a choice made at the beginning. Every sovereign sukuk Bangladesh has issued follows the same recipe: the government hands an existing public asset—a water network, schools, or rural roads—to the Bangladesh Bank, which acts as a holding vehicle. BB leases it back to the government. Investors receive a fixed “rent” until the deal ends, at which point the government buys it back at the original price.
Strip away the terminology and it is a sale-and-leaseback. The state sells something it already owns, rents it back, and promises to buy it again. Financiers call this asset-based sukuk, not asset-backed sukuk. The distinction matters. In an asset-backed structure, investors genuinely own the asset and share in its risks and returns. In an asset-based one, the asset is mostly a legal formality. Investors rely on the government’s promise to pay.
In practice, Bangladesh has taken an ordinary treasury bond and dressed it in religious clothing. Recent issues, priced between roughly 9.4 and 10.5 percent, move closely with conventional government paper; the new short-term sukuk offers 9.36 percent. The differences are largely cosmetic. This is not a criticism of the officials who built the structure or the scholars who approved it. The problem is not religious compliance. It is a strategy—the same mistake I have seen across the global sukuk market.
Governments that want to issue sukuk face a fork in the road. The easy path is to bend sukuk to fit the financial plumbing they already have: holding vehicles, transfers of existing assets, and buy-back clauses that make the instrument behave like a bond. The harder path is to use sukuk to finance genuinely new assets—roads, ports, power plants, schools—and let the instrument work as it’s meant to work. Governments often take the easy path. Bangladesh did too.
Convenience has a price. Asset-based sukuk can be issued only if there are public assets to repackage. They raise recurring questions about valuation and repurchase, require heavy legal paperwork, and cannot be issued often or in volumes large enough to build a market. They plug budget holes; they don’t create lasting financial infrastructure.
Financing new assets instead makes most of these problems fade. Such sukuk could use simple, standardised contracts without buy-back gimmicks, face fewer Shariah objections, come in many maturities, and scale up almost without limit because Bangladesh has no shortage of future development projects. One approach is a financing trick. The other builds what economists call a yield curve.
Why does a yield curve matter? Because Bangladesh still lacks the basic scaffolding of a capital market: a reliable set of “safe” rates across different time horizons that everything else can be priced against. The stock market remains small relative to GDP, and the corporate bond market barely exists. Without a benchmark, no one can sensibly price corporate loans, infrastructure projects, pensions, or long-term savings.
This is where the new nine-month sukuk is both encouraging and frustrating. A short tenor is welcome; the central bank notes that there was no nine-month government instrument before this. A full range of maturities is exactly what a yield curve requires. But a short-dated instrument built on the same old asset-based template is still a bond in disguise. The maturity is new; the blueprint is not.
A steady stream of simple, regular government sukuk across several maturities could supply the missing benchmark. It could deepen the capital market, stabilise the banking system, equip the central bank with Shariah-compliant tools, and channel idle household savings into productive use. A new-asset model could deliver all of it.
The encouraging news is that demand is unmistakably there. The sukuk auctions are routinely oversubscribed several times over, even when returns are below comparable conventional instruments. Islamic banks hold around a quarter of all banking assets and sit on idle liquidity they cannot park in interest-bearing securities. Appetite for Islamic pension products also far outstrips supply. The constraint is not money but the absence of an institution capable of turning that money into a market.
Building such an institution would be real reform. Instead of improvising each project with one-off sale-and-leaseback deals, Bangladesh should establish a permanent body—call it a sovereign finance corporation—funded by income-generating assets. Through that, the government could finance genuine economic activities using well-established Islamic contracts, issue sukuk of different maturities on a predictable calendar, and refresh the asset pool as new projects come online. Repeated issuance would create a dependable benchmark.
This would be harder than what the country does today. It would require each sukuk to be tied to clearly identified development spending in the budget, closer coordination between the finance ministry, the central bank, and implementing agencies, and a Shariah governance board with real statutory authority, independent of individual banks. The recently created Central Shariah Advisory Board at Bangladesh Bank could be a first step, but only if it has genuine independence and teeth.
Difficulty is no excuse for sticking with instruments that miss the point. The easy path allows every auction to be declared a success, and the bids will keep coming. But a pile of successful auctions does not make a market liquid, deep, or self-sustaining.
Bangladesh stands at a fork in the road. It can keep using sukuk to repackage ordinary borrowing in Islamic form, reducing it to another name for government debt. Or it can use sukuk as it’s meant to be used: as a tool to build the deep, broad, liquid capital market the country has lacked for half a century. The new short-term sukuk shows that there is appetite. The question is whether the country will finally build on the right blueprint.
Dr M Kabir Hassan is professor and Moffett chair in finance at the University of New Orleans in the US, recipient of the 2016 IsDB Prize in Islamic banking and finance, and a member of the AAOIFI Ethics and Governance Board.
Views expressed in this article are the author's own.
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