At moments of institutional fatigue, reform proposals often gravitate toward design-new instruments, new segments, new labels. The growing interest in developing an Islamic capital market in Bangladesh reflects this tendency. It is presented as a timely innovation to deepen markets, attract foreign capital, and mobilise idle savings. The argument is appealing. Diagnosis, however, requires closer scrutiny.
The issue is not the absence of Islamic instruments. It is the absence of trust. For over a decade, Bangladesh's capital market has been shaped by manipulation, insider trading, and recurrent episodes of systemic abuse. These are not isolated failures; they are embedded features of market operation that manifest as shallow market depth, chronic speculative trading, and weak listing incentives for high-quality firms. When markets are perceived as rigged, rational investors do not participate, they withdraw. What remains is not capital allocation but speculation, not investment but opportunism.
In such an environment, introducing new instruments-Islamic or otherwise-does not address the root problem; it adds layers to a structurally compromised system. Advanced trading platforms and modern Shariah-compliant instruments are institutionally neutral-their integrity depends entirely on the governance foundation they sit upon. Discipline cannot be assumed to emerge automatically from design; it is strictly a function of enforcement. The repeated boom-and-bust cycles-where sharp rises fuelled by insider activity are followed by devastating collapses-have left a lasting scar on investor confidence, driving both retail and institutional capital to the sidelines. A more compelling explanation for idle capital is that it does not trust the system into which it is being invited.
Across the Muslim world, Islamic capital markets have developed with varying degrees of success. Countries such as Malaysia and Saudi Arabia have built active Sukuk markets and Shariah-compliant equity segments. Yet their experience underscores a critical point: these markets function not because they are labelled Islamic, but because they operate within relatively stronger regulatory and institutional frameworks. Where governance is credible, financial architecture can perform. Where institutions are weak, labelling cannot compensate. Capital markets are not 'plug-and-play' systems; without institutional credibility, no design, however sophisticated, that can function.
Investors-domestic or foreign, faith-based or secular-ask the same questions: Who enforces the rules? Who protects minority shareholders? What happens when manipulation occurs? If the answers remain unchanged, the label itself carries little weight. In economic terms, reform must operate as a credible signal-one that is costly to maintain-not as a label, which is cheap talk. For a Shariah designation to carry meaning, it must be anchored in hard institutional constraints: independent audits, insulation from political influence, and enforceable transparency. More importantly, the opportunity cost of corruption must be made prohibitive. Unless the expected penalties for manipulation and insider trading fundamentally outweigh the gains, integrity cannot be priced back into the system.
The risk of fragmentation also deserves attention. Without a unified regulatory consensus, differing interpretations of Shariah compliance can open the door to interpretive arbitrage, where actors exploit inconsistencies in definitions and oversight to bypass transparency requirements. In such an environment, ethical principles risk being reduced to a procedural mask for conventional vulnerabilities. This is no longer a theoretical risk; the catastrophic unravelling of Bangladesh's Islamic banking sector following the 2024 political shift stands as an undeniable case in point. The systematic extraction of hundreds of billions of taka from major Shariah-compliant institutions by politically connected conglomerates-leaving multiple banks effectively insolvent and surviving on emergency liquidity-exposed a harsh reality: a faith-based label offers zero protection against institutional looting when regulators look the other way.
At present, Islamic banking accounted for a substantial share of the country's banking industry. At the end of March 2026, Islamic banking sector represents 23.62 per cent share in terms of deposits in the country's total banking industry while it accounted for 29.09 percent share in terms of investments, according to Bangladesh Bank. Nevertheless, the gross comprise of principle and governance has made the Islamic banking a vulnerable one.
Now, extending this same compromised label to the capital market without deep, structural governance overhauls risks replicating these exact vulnerabilities on a broader scale, turning what should be a robust ethical framework into a shelter for the very systemic distortions it claims to reject.
This is not a critique of Islamic finance as a concept. Its principles-risk-sharing, asset-backing, and ethical screening-are intellectually coherent and economically meaningful. The challenge lies in implementation within weak institutional environments. Without enforcement and accountability, even the most principled frameworks can be reduced to form without substance. The notion that a segmented or 'clean' Islamic market can be insulated from systemic distortions warrants caution. Financial systems are interconnected; distortions are rarely contained within compartments. Without systemic reform, a new segment is likely to inherit the same governance failures it seeks to avoid.
There is also a conceptual point worth clarifying. Islam does not prohibit markets; it prohibits specific practices-interest-based lending, excessive uncertainty, and exploitation. The challenge, therefore, is not the existence of a conventional capital market, but the persistence of these practices within it. Reform aimed at addressing such distortions across the entire system may prove more effective than creating parallel compartments defined by labels.
While it is often suggested that an Islamic capital market could attract diaspora and foreign investment, in practice capital follows confidence, not labels. Investors evaluate governance standards and regulatory credibility. A persistent deficit of trust imposes a macroeconomic cost: capital seeks safer jurisdictions, and the resulting 'trust premium' manifests as capital flight and increased costs for sovereign borrowing. What appears as a market failure thus becomes a broader constraint on national economic resilience against global shocks.
What, then, would restore confidence? The answer is institutional. Effective enforcement, transparent disclosures, protection of minority investors, and credible penalties for violations are the foundations of any functional market. Without these, structural innovation is cosmetic. More fundamentally, the transition from a debt-dependent system to an ownership-based one requires a minimum institutional threshold: unified legal standards to prevent arbitrage, protection for whistleblowers, and a regulator empowered to act independently of vested interests. Until the bid-ask spread of trust narrows through such reforms, even well-designed financial innovation will struggle to attract durable capital.
Bangladesh does not suffer from a shortage of financial ideas. It suffers from a deficit of trust. Until that deficit is addressed, new labels will not bring new capital; they will merely rename old risks. In the end, markets do not price labels. They price credibility. And credibility, once lost, cannot be rebranded; it must be rebuilt.
Dr Abdullah A Dewan, Professor Emeritus of Economics at Eastern Michigan University, USA, formerly a Physicist and Nuclear Engineer, BAEC. aadeone@gmail.com. Asjadul Kibria is an economic journalist. asjadulk@gmail.com
