A financial system is a moral artefact. It encodes, in its contracts and its incentives, a society's answer to a single question: on what terms may capital earn? Islam answers that question with unusual clarity — gain must accompany risk, and money may not breed money across time. Bangladesh, a 175-million-person Muslim-majority economy, already runs the largest demand-led Islamic banking sector in South Asia. The question this paper addresses is no longer whether the country can build a riba-free framework, but how it should sequence the transition without breaking the economy it is trying to purify.

This is a policy paper, not a sermon. It treats the fiqh and the finance to the same standard of evidence. It builds on the diagnosis of the Bangladesh Economy Series — the non-performing-loan crisis, the fiscal compact, export diversification, and the banking-reform blueprint — and asks a further question those papers deferred: if Bangladesh is rebuilding its credit engine anyway, on what principles should the rebuilt engine run? The answer offered here is a phased conversion to Islamic finance, concentrated on three pillars: the banking sector, business modality, and the capital market.

The entire architecture rests on a single Qur'anic clause that severs trade from interest. It does not condemn profit; it condemns a specific structure of gain:

In a sale, a real good changes hands and the seller bears risk until delivery. In ribaRibaUnlawful "increase": any risk-free, predetermined return on a loan of money or a fungible good. The Qur'an's core prohibition (2:275–279). See Glossary., money begets money across time with no risk borne by the lender. The distinction is ontological, not merely economic: risk-sharing is lawful gain; the risk-free time-value of money is not. The Qur'an reinforces the rule with language reserved for almost no other commercial sin — a warning of "war from Allah and His Messenger" against those who persist (2:279) — while affirming that a creditor is entitled to the return of principal alone, ruʾūsu amwālikum, "the capital sums of your wealth."

The Sunnah classifies what the Qur'an names: riba al-nasīʾah (the riba of delay — modern interest) and riba al-faḍl (excess in a like-for-like exchange). And the prohibition reaches the whole apparatus of a transaction: the Prophet ﷺ "cursed the one who consumes riba, the one who pays it, the one who records it, and its two witnesses — they are all alike" (Ṣaḥīḥ Muslim 1598). Notably, the same logic appears in Jewish law: the Talmud (Bava Metzia 75b) holds the scribe and witnesses to an interest-bearing bond equally culpable, and the Hebrew tarbit/marbit ("increase") is the exact Semitic cognate of the Arabic ribā. The Abrahamic consensus against usury is old and deep; Islam alone preserved it as a categorical, universal ban — which is precisely why a distinct Islamic financial industry exists at all.

This hadith is the textual basis of riba al-faḍl and the reason jurists spent centuries debating exactly what it generalises to. The four Sunni schools agree on the six named commodities but disagree on the underlying legal cause (ʿillah) that extends the ruling to anything else — a technical dispute with very practical consequences, addressed in Section 07.

Three operating principles follow, and they govern every recommendation in this paper: gain must accompany liability (al-ghunm bi-l-ghurmal-ghunm bi-l-ghurm"Entitlement to gain comes with liability for loss." The maxim underwriting profit-and-loss sharing over fixed, risk-free return.); excessive uncertainty (ghararGhararExcessive ambiguity about a contract's subject, price, or outcome — e.g. selling an unspecified catch, or an object one may not be able to deliver.) and gambling (maysirMaysirGambling — gain that depends purely on chance, with no productive contribution by either party.) void a contract; and the underlying activity must be lawful (ḥalālḤalālPermissible under Shariah; its opposite is ḥarām, forbidden.).

Bangladesh does not begin from zero. Islamic banking arrived in 1983 and grew from the demand side; today it is a structurally significant share of the system. But the sector has just passed through its worst crisis, and the legal scaffolding beneath it remains dangerously thin. An honest blueprint must start with both facts.

The footprint is real and rising in absolute terms, yet its share of deposits drifted down through the stress period (from 23.6% in May 2024 to 22.4% in May 2025 before recovering at year-end) as conventional banks outpaced it. The single brightest instrument is the sovereign sukukSukukAsset-backed "Islamic bond": a certificate of proportional ownership in a real asset or venture, returning profit from that asset rather than interest on a loan. programme: the Bangladesh Government Investment Sukuk (BGIS) launched in 2020 with a maiden BDT 8,000 crore (~US$944m) ijārahIjārahAn Islamic lease: the financier retains ownership of an asset and earns rental income for its use, rather than interest on its price. issuance and has reached a sixth issuance — a seven-year ijārah sukuk yielding 10.50%, oversubscribed 4.17 times — funding real roads, bridges, and safe-water projects.

And then the warning. Between 2022 and 2025 five major Shariah banks — allegedly captured by a single industrial group — were hollowed out by related-party lending. Excess liquidity collapsed 77% in a single quarter; Bangladesh Bank merged the five into a new entity, Sammilito Islami Bank PLC, and ruled that their depositors would receive no profit for 2024–2025. The lesson is the spine of this entire paper:

Underneath sits the structural defect a conversion must fix first: Bangladesh has no dedicated Islamic Banking Act. The sector runs on the general Banking Companies Act 1991 and a single circular — BRPD No. 15 of 2009. Until 2025 there was no Shariah department inside the central bank at all; supervision was effectively outsourced to a private body (the Central Shariah Board for Islamic Banks of Bangladesh) with no statutory authority, while each bank's own board issued its own fatwas. The one genuine reform of the cycle — the creation of an Islamic Banking Regulations and Policy Department inside Bangladesh Bank in 2025 — is the foundation the blueprint builds upon.

Forced, overnight conversion is neither wise nor Islamic — the Qur'an itself legislated riba's prohibition in stages, and the Prophetic precedent favours gradual reform over rupture. The blueprint below spans roughly a decade, in five phases. Each phase advances all three pillars in parallel, because a banking conversion without a capital market to absorb liquidity, or a business sector still organised around interest, would collapse back on itself. Read the master table first; the pillar sections that follow (04–06) detail each column.

The sequencing logic mirrors the banking-reform paper's first principle — legal framework first, transparency second, capital adequacy third, expansion fourth — adapted to a Shariah transition. The non-negotiable is order: governance and liquidity infrastructure must precede migration. Skip them, and conversion produces exactly the fragility that destroyed the five banks in 2024.

Banking is the load-bearing pillar: it holds the deposits, runs the payments system, and sets the price of credit. Its conversion is the hardest because conventional banking's two survival organs — the interbank interest market and the central-bank lender of last resort — are both built on riba and must be rebuilt in Shariah-compliant form before migration can safely accelerate.

One reform deserves emphasis because it is the technical heart of the matter. Islamic banks chronically hold idle excess cash (earning little) yet are fragile in a run (no liquid backstop) — the exact trap Bangladesh fell into. The cure is a sovereign sukuk yield curve deep enough to serve as HQLA under Basel III, plus a riba-free interbank market. Without it, every other banking reform is built on sand.

A bank can be relabelled in a year; a business culture cannot. The deepest conversion is in how Bangladeshi enterprises raise and deploy capital. The theology's preference is unambiguous — risk-sharing partnership (mushārakahMushārakahA joint-venture partnership: two or more parties contribute capital and share profit by agreed ratio and loss in proportion to capital., muḍārabahMuḍārabahA profit-sharing partnership: one party supplies capital, the other labour and expertise; profit is shared by agreed ratio, financial loss is borne by the capital provider alone.) over debt-like markup (murābaḥahMurābaḥahA cost-plus sale: the financier buys an asset and resells it to the client at a disclosed mark-up, payable in instalments — Islamic finance's most common but most debt-like instrument.). Yet here lies the industry's central compromise, which Bangladesh must consciously avoid reproducing: the "murabaha syndrome."

Across the Muslim world, Islamic banks overwhelmingly use murābaḥah and ijārah — fixed-return, debt-like instruments that are legally compliant but reproduce the risk profile of the interest economy they were meant to replace. The real prize of conversion is not relabelling loans as markups; it is shifting the economy's centre of gravity toward genuine profit-and-loss partnership.

Concretely, the business-modality pillar means five things: (1) SME and startup finance delivered through muḍārabah and diminishing mushārakah rather than collateralised debt — using the digital transaction data Bangladesh already has (bKash, Nagad) as the basis for profit-sharing underwriting; (2) trade finance built on salamSalamA forward sale: full payment now for goods delivered later at an agreed price — the reverse of conventional credit, useful for financing farmers and manufacturers upfront. (advance purchase) and istisnāʿIstisnāʿA manufacturing/construction contract: payment (in instalments or lump sum) for a good built to specification, common in project and infrastructure finance. (manufacturing finance), Bangladesh's natural strength as an export economy; (3) corporate balance sheets tilted from interest-bearing debt toward sukuk and equity; (4) a formal social-finance layer integrating zakatZakatThe obligatory annual wealth tax (~2.5% of qualifying assets) redistributed to specified categories of recipients — Islam's mandatory floor of social finance. and waqfWaqfAn inalienable charitable endowment: an asset is locked in perpetuity and its income directed to a stated purpose — the classical Islamic vehicle for funding public goods. as productive capital, not just charity; and (5) the deliberate avoidance of synthetic work-arounds like organised tawarruq that satisfy the form while betraying the substance.

Here the common assumption is wrong, and the correction matters for policy. The stock market is not forbidden in Islam. A common share is a proportional ownership stake in a real enterprise; the holder shares in profit and loss and bears the firm's risk. That is mushārakah — the very partnership the theology prefers above all debt instruments. Equity ownership is therefore, in principle, the most halal financial activity of all, more clearly lawful than the murābaḥah that dominates Islamic banking. The stock market is not the problem; specific practices within it are.

What makes a share non-compliant is a two-stage screen, codified in AAOIFIAAOIFIThe Accounting and Auditing Organization for Islamic Financial Institutions (Bahrain) — the industry's leading Shariah-standard-setter, whose rulings carry authority comparable to a fiqh council for finance. Shariah Standard No. 21: a business screen (the core activity must be halal) and a financial screen (the firm must not be drowned in interest). Bangladesh already has the instrument — the DSEX Shariah Index (DSES), built on S&P Dow Jones methodology with independent screening. The blueprint's task is to deepen and mandate it, while removing the riba-based and speculative practices that surround it.

The capital-market pillar therefore advances on two fronts at once — add the compliant architecture and remove the forbidden practices:

The deeper point for regulators: the Islamic "alternative" to the speculative market is not a different venue but a different intention. The Dhaka Stock Exchange does not need to be abolished; it needs to be re-weighted toward genuine ownership and drained of the leverage and gambling that the Sharia treats as maysir.

A paper aimed only at economists would stop at Section 06. But a conversion blueprint that wants the scrutiny of religious scholars, not just financial ones, has to show its jurisprudential work — including the parts of it that are genuinely contested. Four questions matter most.

Is the consensus on bank interest actually unanimous? Effectively, yes — though the discipline has had to say so explicitly, more than once, because a minority tried to argue otherwise. In May 1965, the Islamic Research Academy at al-Azhar convened its Second Conference in Cairo: some 150 scholars representing 35 Muslim-majority countries deliberated for days and then resolved, unanimously, that "interest on all types of loans is a prohibited riba" — with no exception for state banks, development loans, or "necessity." The OIC's own International Islamic Fiqh Academy has reaffirmed the same position in subsequent decades. Set against this near-total juristic consensus (ijmāʿIjmāʿScholarly consensus — one of the four classical sources of Islamic law alongside the Qur'an, Sunnah, and qiyās.) is a modernist minority, most associated with the Pakistani scholar Fazlur Rahman, who argued that the Qur'an's target was the exploitative, compounding usury of pre-Islamic Arabia specifically — debt that crushed the needy — and that a modern bank's fixed, disclosed, regulated interest rate is a different economic animal that Islam never addressed. This paper does not adjudicate that debate; it notes, honestly, that it exists. But it builds on the consensus position, for two reasons that should satisfy a financial reader as much as a religious one: first, it is the position every classical madhhab, every state Fiqh academy, and Bangladesh's own regulatory architecture (BRPD, the 2025 IBRPD) already operates on; second, the modernist argument has never produced an agreed alternative threshold for "how much interest, on what terms, becomes exploitative" — precisely the kind of ambiguity (gharar at the level of doctrine itself) that Islamic law exists to remove from contracts.

Why do scholars sometimes disagree about the same product? Because the ribawī-six hadith in Section 01 names six commodities but does not name the legal reasoning (ʿillahʿIllahThe effective legal cause a jurist identifies behind a ruling, used to extend that ruling by analogy (qiyās) to new, unnamed cases.) that lets jurists extend its ruling to anything else — and the four Sunni madhhabsMadhhabA school of Islamic legal methodology. The four Sunni schools — Ḥanafī, Mālikī, Shāfiʿī, Ḥanbalī — share the same sources but differ on method and, at the margins, on rulings. genuinely differ on it. The Ḥanafīs and Ḥanbalīs generalise by weight-or-measure (anything sold by weight or volume is potentially ribawī); the Shāfiʿīs restrict gold and silver's ribawī status to their role as currency (thamaniyyah) rather than as metals; the Mālikīs take a hybrid position closer to the Shāfiʿī view for the monetary pair. This is not scholastic trivia — it is exactly why a credit card, a gold-backed ETF, or a stablecoin can receive a "compliant" fatwa from one board and a "non-compliant" fatwa from another operating in good faith, using the same sources. It is also the precise justification, stated plainly, for this paper's insistence in Sections 01 and 04 that Bangladesh's proposed Centralised Shariah Supervisory Board must adopt one explicit methodology rather than let each bank's board quietly select whichever illah produces the answer its balance sheet wants. Fatwa-shopping is not a governance failure at the edges of Islamic banking; left unaddressed, it is the mechanism through which the entire system loses its integrity.

Has the industry ever policed itself? Yes — and the episode is worth naming because it is the strongest evidence that "Islamic finance" is not a rubber stamp. In November 2007, Justice Muhammad Taqi Usmani — chairman of AAOIFI's own Shariah board, and the single most influential living scholar in the industry — published a paper arguing that roughly 85% of sukuk then in the market, structured as mushārakah or muḍārabah with a purchase undertaking guaranteeing 100% of principal regardless of the venture's performance, were not genuinely Shariah-compliant at all: they were bonds wearing an Arabic name, because a guaranteed buy-back at par eliminates the very risk-sharing that makes the structure lawful. The statement detonated across the global sukuk market. AAOIFI's Shariah board convened in Bahrain in February 2008 and issued a landmark clarification: tradable sukuk must represent real, disposable ownership in tangible assets, usufructs, or services — not a disguised loan with a floor under it. Global sukuk issuance shifted materially toward genuine asset-backed structures in the years that followed. The lesson for Bangladesh is direct: Bangladesh's own BGIS ijārah sukuk — real ownership in roads, bridges, and water infrastructure, not a purchase-undertaking workaround — is already on the correct side of a line the industry's most senior scholar was willing to draw against its own market. A central Shariah board with genuine independence is not a bureaucratic nicety; it is the only thing standing between a sukuk and a bond in costume.

Does Islam deny that money has any time value at all? No — and this is the point financial experts most often get wrong about the theology, and religious scholars most often need to state more precisely. Murābaḥah's mark-up and ijārah's rental both correlate with tenor; nobody claims otherwise, and no school of fiqh forbids pricing a longer commitment more than a shorter one. What is forbidden is treating the mere passage of time as a sufficient and risk-free basis for a return, detached from any real asset, service, or shared risk. The maqāṣid al-SharīʿahMaqāṣid al-SharīʿahThe higher objectives of Islamic law — here, preservation of wealth and prevention of exploitation — used to explain the wisdom behind a specific ruling, not to override it. framework, developed classically and systematised by scholars such as Ibn ʿĀshūr, supplies the "why": the law locates legitimate return in productive risk-bearing — a real asset changing hands, a real venture succeeding or failing — rather than in capital's mere existence over time. That is a moral claim about where value comes from, not an economic claim that time is worthless. Financial experts can debate whether that allocation of risk is efficient; religious scholars are the ones equipped to say whether it is faithful to the source texts. This paper's position is that on the four questions above, the mainstream juristic consensus and sound financial engineering point in the same direction — which is precisely why Sections 03–06 build the blueprint on it.

Bangladesh is not the first to attempt this. Four trajectories bracket the realistic options — and each carries a warning as well as a lesson.

The common thread is the same institutional sequencing the banking-reform paper identified: legal framework first, infrastructure second, migration third. Malaysia succeeded by building the plumbing before forcing the flow. Pakistan's judicial deadline is a reminder that statute outpacing infrastructure invites cosmetic compliance. Bangladesh's advantage is that it can choose the Malaysian sequence deliberately — and it has the Indonesian template for the consolidation it has already begun.

A credible blueprint names its own risks. Four deserve to be on the table.

Form over substance. The gravest danger is a conversion that satisfies the letter and betrays the spirit — murābaḥah that is interest by another name, tawarruq that synthesises a loan, sukuk that are bonds in costume. The central Shariah board exists precisely to police this line, and its independence is the whole game.

Transition cost. Re-papering contracts, retraining staff, and building parallel infrastructure is expensive and slow. This is why the blueprint is gradual and why tax neutrality (so Islamic contracts are not penalised by double stamp duty or VAT on the underlying asset sale) is a Phase-0 priority.

Monetary policy. A riba-free central bank cannot use the conventional policy rate as its primary lever. Bangladesh would need to develop profit-rate benchmarks and sukuk-based open-market operations — a genuine technical frontier, not a solved problem.

Governance, again. The 2024 crisis proved that the Islamic label is no protection against looting. If conversion is not accompanied by the banking-reform agenda — asset-quality reviews, real resolution powers, prosecution of defaulters — it will simply give the next round of capture a more pious vocabulary.

The edge in Islamic finance hides in plain sight, in a single clause that severs trade from interest. The theology is coherent and demanding: it asks capital to bear real risk and forbids the risk-free shortcut. And the evidence from Bangladesh is unambiguous — the sector's failures have been failures of governance, not of doctrine. The country did not suffer because it followed Shariah; it suffered where a missing law and a captured set of banks let Shariah be evaded.

That is why conversion is not, first, a theological project. It is an institutional one. Build the law, the central Shariah board, the sukuk yield curve, and the riba-free interbank market — and the substance of an Islamic financial system follows. Skip them, and you get the form without the substance: the worst of both worlds. Bangladesh has already begun, with the IBRPD, the sukuk programme, and the Sammilito consolidation. The blueprint here simply orders the remaining work and points it at three pillars at once.

The choice at Phase 4 — dual-system parity or full conversion — can wait a decade. The foundational work cannot. Whether Bangladesh ends at 50% like Malaysia or at 100% like its own aspirations, the same first steps are required, and they are required now. The law is settled; the verse has been clear for fourteen centuries. The operating system is what remains to be written — and Bangladesh, having just been forced to look honestly at its banks, is better placed to write it than at any point in its history.