Challenges to the Performance of Islamic Banking and Equity-Based Financing Instruments: A Literature Review

Mudarabah and Musharakah are equity-based and completely Riba-free financing instruments that represent the fundamental principles of Islamic finance. As risk-sharing modes of financing, they contribute to the establishment of justice, fairness, and economic balance in accordance with the objectives of Islamic Shariah.
Despite their significance, these financing instruments are rarely utilized by Islamic banks and financial institutions in Bangladesh. The primary objective of this study is to investigate the challenges hindering the adoption and performance of Mudarabah and Musharakah financing in Bangladeshi Islamic financial institutions and to propose possible solutions to overcome these challenges.
This study is based on a comprehensive review of the existing literature, including contemporary and relevant scholarly works from around the world. A qualitative research methodology has been employed to achieve the study's objectives.
The findings reveal that Islamic banks and financial institutions show limited preference for Mudarabah and Musharakah financing due to several challenges, including moral hazard, agency problems, inadequate professional knowledge and expertise, regulatory constraints, limited financial inclusion, and weaknesses in governance frameworks.
To address these challenges, the study recommends the enactment of a comprehensive Islamic banking regulatory framework, the development of skilled professionals in Islamic finance, the establishment of a central Shariah supervisory board, the implementation of independent Shariah audits with public disclosure of audit findings, the adoption of fintech solutions, and the strengthening of governance, monitoring, and compliance mechanisms.
The effective implementation of these recommendations may enhance the credibility, efficiency, and Shariah compliance of Islamic banking and promote the wider application of Mudarabah and Musharakah financing in Bangladesh.

Mudaraba, IFIs, Islamic Banks, Riba.

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