Four decades on: How Islamic banking became mainstream

Over the past four decades, one of the fastest-growing segments in Bangladesh's banking sector has been Shariah-based or Islamic banking. Built on the principle of interest-free finance, this sector has now become an important part of the country's financial system.

Islamic banking has achieved notable growth across all indicators—deposit mobilisation, investment distribution, branch expansion, and customer base. According to central bank data, more than one-quarter of the country's total bank deposits are now held within the Islamic banking system.

The journey of Islamic banking in Bangladesh began in 1983 with the establishment of Islami Bank Bangladesh Limited. It emerged not only as the first of its kind in Bangladesh but also as the first full-fledged Shariah-based commercial bank in South and Southeast Asia.

The bank was founded with the participation of local entrepreneurs as well as several financial institutions from the Middle East. Its primary objective was to operate banking activities based on profit-and-loss sharing instead of interest, in accordance with Islamic Shariah principles. In its very first year, the bank's deposits exceeded Tk14 crore, marking a significant beginning for a new type of financial initiative at the time.

The concept of Islamic banking originated from the demand for interest-free financial transactions within Muslim societies. In a Muslim-majority country like Bangladesh, this idea quickly gained popularity. Over time, several other banks were established following this model.

Emergence of new Islamic banks

From the 1990s onward, Islamic banking expanded rapidly. Banks such as Al-Arafah Islami Bank and Social Islami Bank began Shariah-based operations. Later, many conventional banks also introduced Islamic banking branches or windows.

At present, there are 10 full-fledged Islamic banks in Bangladesh. In addition, many conventional banks are offering these services through Islamic banking branches and windows. According to Bangladesh Bank data, by the end of 2022, more than 1,650 branches were operating under Islamic banking services.

Moreover, several institutions that initially started as conventional banks later converted into full-fledged Islamic banks, further accelerating the sector's expansion.

Strong position in deposits and investment

One of the greatest strengths of Islamic banking in Bangladesh is its rapid growth in deposit mobilisation. According to Bangladesh Bank data, total deposits in Islamic banks stood at around Tk 740 billion in 2011. By 2022, this had risen to approximately Tk 4.10 trillion.

More recent data shows that by mid-2025, deposits in Islamic banks had reached around Tk 4.52 trillion.

At the same time, their participation in investment or financing has also increased significantly. At the beginning of 2024, nearly 28% of the country's total bank loans and investments were distributed through the Islamic banking system.

This demonstrates that over four decades, Islamic banking has evolved from an alternative system into a strong and integral stream within Bangladesh's banking sector.

Why customer popularity is increasing

Kamal Uddin Jasim, Additional Managing Director of Islami Bank Bangladesh Limited, said that several factors have contributed to the popularity of Islamic banking. "First, the concept of interest-free transactions has gained acceptance among many customers from a religious perspective. Second, financing based on profit-and-loss sharing is often perceived as more ethical and risk-adjusted."

He added that Islamic banks have comparatively invested more in the rural economy, small entrepreneurs, and social development projects, which has helped build customer trust.

"The core strength of Islamic banking lies in its connection to the real economy—investments are typically linked to tangible goods, businesses, or production."

Islamic banking generally operates through several key contractual modes, including Mudaraba, Musharaka, Bai-Muajjal, and Bai-Salam. For deposit mobilisation, Mudaraba and Wadiah principles are commonly used.

Under this system, instead of interest, the bank shares a portion of business profits with customers, creating a partnership-based relationship between depositors and the bank.

Personal recollections and early experiences

Reflecting on the early history and experiences, former Managing Director of Islami Bank and Chairman of First Security Islami Bank, Mohammad Abdul Mannan, highlighted various real-life experiences from the early days of Islamic banking in Bangladesh in his book "Islami Banking-e Gorar Kotha" (The Beginnings of Islamic Banking).

In the book, he describes the efforts to introduce interest-free banking in the early 1980s, the socio-economic context of the time, and the struggles of the founding entrepreneurs.

According to his account, Bangladesh's banking system after independence was entirely interest-based. However, interest in an interest-free financial system grew among many people in the Muslim-majority population. A group of entrepreneurs, economists, and Islamic thinkers then took the initiative to establish an alternative banking model. This effort led to the founding of Islami Bank Bangladesh Limited in 1983, the first full-fledged Shariah-based commercial bank in South and Southeast Asia.

Mannan notes that in the beginning, there was considerable doubt and scepticism about the concept of Islamic banking. Many believed that banking without interest could not succeed in practice. Nevertheless, the founders worked to build an effective banking structure based on Islamic economic principles—especially profit-and-loss sharing.

The book further mentions that although operations began with limited capital and only a few branches, customer confidence grew rapidly. Through deposit mobilisation, financing of small entrepreneurs, and engagement in the rural economy, the bank gradually expanded.

According to the author, the fundamental strength of Islamic banking lies in its emphasis on ethical finance and investment in the real sector. He believes this is why Islamic banking quickly became a significant stream within the country's banking sector.

New realities and future prospects

Islamic banking is no longer confined to full-fledged Islamic banks alone. Many conventional banks are now introducing Islamic banking windows or branches, further expanding the market.

Experts believe that the importance of Islamic banking in Bangladesh's financial sector will continue to grow, as a large portion of the population remains interested in interest-free banking systems.

However, analysts also stress the need to strengthen governance, transparency, and Shariah supervision.

Four decades of achievement

Over more than four decades, Islamic banking has become a key pillar of Bangladesh's financial system. Growth in deposits, investments, branch networks, and customer base has been substantial.

What began in 1983 with a single bank has now expanded into a vast network involving multiple banks, thousands of branches, and financial activities worth several trillion taka.

Overall, it can be said that Islamic banking is no longer just an alternative model—it has become a strong and enduring component of Bangladesh's financial system.