This article examines current legal and regulatory issues of Islamic banking in Bangladesh. The most important issue in this context is the lack of a well‐defined regulatory and supervisory framework for Islamic banks for their effective functioning in line with the tenets of Shariah. Other major issues come from the absence of an interbank Islamic money market, following the same policy and guidelines for Islamic and conventional banking by the Bangladesh Bank, presence of a discriminatory legal reserve requirement for Islamic and conventional banking, prevalence of a restrictive environment in the capital market, and the lack of legal support and protection of Bangladesh Bank to avoid the associated risks of Islamic banks. For this purpose, it is suggested that Islamic banks in Bangladesh should have an independent banking act that controls, guides, and supervises their functions and provide legal support to the parties concerned. © 2007 Wiley Periodicals, Inc.

External Sharī‘ah Audit (ESA) is a control mechanism meant for formulating an objective view by an independent Sharī‘ah audit team about the obligation of Islamic banks' (IBs) management, personnel and other divisions towards Sharī‘ah compliance. This study principally aims to examine the relevancy of ESA and review committee in enhancing the level of Sharī‘ah compliance quality and accountability of IBs in Bangladesh. The study examines data from 17 respondents obtained via semi‐structured interviews and secondary sources in library. This study establishes that Sharī‘ah officers of IBs in Bangladesh are unable to perform audit functions properly which indicates the limitations of current Sharī‘ah audit functions. The study discovers the need for an independent ESA for proper auditing of IBs' operations in Bangladesh with a view to Sharī‘ah compliance. Thus, an ESA and review committee is imperative to enhance the quality of Sharī‘ah compliance and ensure accountability of all divisions within IBs. This audit is to be provided either by Bangladesh Bank (BB), the central bank of the country or a third party such as Islamic chartered accountants' firms or Sharī‘ah audit firms. The study would contribute to existing literature on the importance of ESA and its conditions in Bangladesh. The study also provides some instructions for global Islamic banking practice on the issues examined. The study contributes to agency, stakeholder and legitimacy theory via highlighting the inability of Sharī‘ah auditors to perform their function independently and efficiently.

Islāmic banking is growing at double digit rate annually. Bangladesh is the third largest Islāmic country in the world in terms of Muslim population. The Islāmic finance industry is growing in Bangladesh as well as its challenges and critiques. It is interesting research question to explore the demand for Islāmic banking in the presence of a strong conventional banking culture in a developing country like Bangladesh. This study is primarily concerned with the theory of Islāmic banking and its practice in Bangladesh. It examines: (a) the Sharī'ah principles for operation of Islāmic banking in Bangladesh, (b) the genesis of Islāmic banking in Bangladesh, (c) the factors which have led to the emergence of Islāmic banking as well as the growth, development and future of Islāmic banking in Bangladesh, and (d) the deposit and investment mechanisms of Islāmic and conventional banking in Bangladesh. The results show that both the bankers and bank customers have confusing notions about Islāmic banking practices, partly due to lack of proper knowledge about the fundamentals of Islāmic finance and also due to Islāmic banks' over-reliance on short-term trade financing. The findings also indicate that although Islāmic banks in Bangladesh are competing successfully with their conventional counterparts in an environment where no independent guidelines or Act exist for them, the products and services they provide often seem to resemble with those provided by conventional banking. We suggest that regulatory authorities of Bangladesh should provide a well-defined and explicit legal and regulatory framework that, being consistent with Islāmic Sharī'ah, should be realistic and flexible enough to meet internationally recognized prudential and supervisory requirements.

Purpose The key purpose of this study is to make awareness for faithful Muslims who are interested to invest in Islamic capital markets so as to enable them making right decision while considering investment in Sukuk over conventional interest-bearing bonds. Design/methodology/approach This study reviews past literature to analyse contemporary Sukuk risks and discusses several mechanisms to mitigate those risks. Findings The study shows that Sukuk can be good alternatives to conventional bonds. Sukuk structures need to be further developed to fulfil the Sharīʿah compliance requirements. Research limitations/implications This study is exploratory in nature, and as such, it seeks to identify the risks related to Sukuk issuance. Given this limitation, it did not provide empirical evidences relating to any specific category of Sukuk risks. Practical implications An in-depth knowledge of Sukuk risks would help both academicians and investors understand the potential problems related to Sukuk structures and take precautions in the early stage to prevent causes of being defaulted or bankrupt. Originality/value The risks related to Sukuk have been explored in all potential roots. This study has offered some significant techniques to prevent the relevant risks for investors’ benefits. Information being provided throughout this study is expected to serve potential investors in Sukuk as a guide to make right decisions and enable them to minimise the risk to secure healthy returns on their investments.

This article examines the occurrence and legal implications of 'fatwā shopping' in the Islamic finance industry and the need to put the proper legal mechanisms in place to regulate the phenomenon. It provides a case study of the existing legal restrictions in some jurisdictions with a centralised Sharī'ah Supervisory Board at the national level such as in Malaysia. As a preliminary review of the implications of 'fatwā shopping' in the industry, this study examines the consequential problems, current perceptions and prospects of such practice. The study finds that instances of 'fatwā shopping' are common in cross-border Islamic finance transactions such as cross-border sukūk transactions where there is less regulation.