Islamic Social Finance in Bangladesh: Challenges and Opportunities of the Institutional and Regulatory Landscape

Abstract From the end of World War Two, the core methodology of law and development projects has been to transplant the best legal institutions of Western capitalism to poor and emerging economies. In many post-colonial contemporary Muslim-majority countries, such programs have not adequately engaged with local legal systems, cultures and traditions. Contrary to the restrictive modernist approach to law and development, and inspired by the Sharia, there are numerous Islamic social finance mechanisms that can be utilised for poverty alleviation and their existence is evident across Bangladesh. These cover the full spectrum of philanthropic to financing, investments and insurance built upon Sharia norms and principles. Unfortunately, the true potential of Islamic social finance is considerably constrained by the weak regulatory and policy environment. Islamic social finance does not feature in national development plans, is regulated through a patchwork framework, and operates at a negligible scale. This paper provides a detailed analysis of the existing regulatory and institutional landscape of Zakah (obligatory almsgiving), awqaf (perpetual endowments), Islamic microfinance and microtakaful (microinsurance) in Bangladesh and examines the potential and challenges for Islamic social finance to reduce poverty. Thereafter, several pertinent policy and institutional recommendations are provided to effectively modernise and advance the effectiveness of Islamic social finance institutions. The methodology employed is a mixed approach incorporating literature review, legal analysis of laws and regulation and contextual analysis and field interviews among industry stakeholders. Ultimately, while private investment and initiatives are always able to support the Islamic social finance sector, this paper focuses on the extent to which the regulatory and policy environment is a crucial enabler for widespread and sustained development impact.