




































Indian Journal of Finance and Banking 

 Vol. 5, No. 1; 2021 

                                       ISSN 2574-6081   E-ISSN 2574-609X 

Published by CRIBFB, USA 

 

38 

ISSUES AND CHALLENGES OF FINANCIAL MANAGEMENT 

PRACTICES IN ISLAMIC FINANCIAL INSTITUTIONS: 

EMPIRICAL EVIDENCE FROM BANGLADESH 

 
 

Serajul Islam 

Associate Professor 

 Department of Business Administration 

International Islamic University Chittagong, Chittagong, Bangladesh  

E-mail: serajulislamiiuc@gmail.com 
 

 

Dr. Abdullahil Mamun 

Associate Professor 

Department of Business Administration 

International Islamic University Chittagong, Chittagong, Bangladesh  

Research Fellow, YTB, Turkey 

E-mail: ahm.economics@gmail.com 

 

K. M. Anwarul Islam 

Associate Professor 

Department of Business Administration 

The Millennium University, Dhaka, Bangladesh 

PhD Candidate 

University of Selangor, Malaysia (USM) 

E-mail: ai419bankingdu@gmail.com 
 

 

Dr. Mohammad Rahim Uddin 

Assistant Professor 

 Department of Business Administration 

International Islamic University Chittagong, Chittagong, Bangladesh  

E-mail: mructg@gmail.com 
 

 

Tania Sultana 

Lecturer 

 Department of Business Administration 

International Islamic University Chittagong, Chittagong, Bangladesh  

E-mail: taniasultanaiiuc@gmail.com 

 

 

ABSTRACT 

Studies suggest several issues and challenges of financial management practices in Islamic 

banks and insurance companies and Islamic non-bank financial institutions (INBFIs) in 

Bangladesh. The purpose of the research is to examine the issues and challenges of Islamic 



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Financial Management (IFM) from an empirical perspective. The study relies on a structured 

questionnaire survey in prominent Islamic financial institutions (IFIs) of Bangladesh for 

achieving its objective. After confirming data reliability based on Cronbach's alpha, the study 

proceeds to analyse by applying descriptive statistics and principal component factor analysis 

using correlation, Kaiser-Meyer-Olkin (KMO) and Bartlett's Test and VARIMAX Rotation. The 

study finds that there is no separate regulatory framework to supervise and monitor IFIs in 

Bangladesh rather the central bank regulates the Islamic financial system based on the existing 

laws and regulations of the conventional financial system. The findings of this study suggest that 

the government should establish a separate regulatory body for monitoring the IFI’s functions so 

that they can perform their activities smoothly in the congenial environment in Bangladesh. 

 

Keywords: Islamic Finance, Shariah Compliance, Bangladesh. 

 

JEL Classification Codes: G10, G21, G23. 

 

INTRODUCTION 

The Islamic Financial Management (IFM) is the application of Shariah (Islamic law) to 

banking, insurance, and non-bank financial institutions (Khan, 2007). Sharing risk and reward 

between borrowers and lenders is the main principle of Islamic Finance (Divanna, 2009). Hence, 

the pursuance of Shariah principles in banking and insurance practices is expected to promote 

justice and equity confirming efficiency in resource allocation and income distribution and 

guarding the debt creation through direct borrowing and lending. Moreover, the Islamic banking 

system includes a strict framework of sharing risk by the financier for the financial system 

(Ahmed, 2010). As the banking system is changing with time, the Islamic financial system is 

also introducing innovative ideas to come across the changing desires of customers and 

businesses (Aziz, 2006). 

While the advocates of Islamic Banking and Finance (IBF) claim its superiority because 

of the fairness in the distribution of risk and return, the opponents criticise the system and its 

products to be riskier relative to its conventional counterpart. Providing justice and honesty to 

both the parties in all financial transactions is the aim of IBF (Abu-Tapanjeh, 2009). In contrast, 

Fiennes (2007) pointed out that Islamic banks have features similar to conventional banks that 

include, market risk, investment risk, and business risks. The high riskiness of Islamic banking 

products and services is confirmed by the findings of Sundararajan and Errico (2002). Khan and 

Ahmed (2001) find that risks borne by Islamic banks are similar to conventional banks in nature 

due to a picky arrangement of their financial statements though they have different principles.  

Ather (2007) highlighted some of the crucial issues faced by the IBF industry and IFM in 

particular. These issues are mainly associated with managerial activities, planning, organizing, 

motivation, controlling, and legal issues from an Islamic perspective. IBF faces challenges 

concerning institutional and operational aspects (Iqbal, Ahmad, & Khan, 1998).  But no 

empirical research has been performed addressing the issues and challenges the authors‟ pointed 

out for the case of Bangladesh. Since the Islamic financial industry of Bangladesh is growing 

markedly, the empirical investigation on the issues and challenges of IFM practices faced by 

Islamic banks, Islamic insurance companies and INBFIs in Bangladesh is the demand of time to 

help policymakers to take policies inappropriate directions. The study is an effort to this end. 

Moreover, management practices of IFIs in Bangladesh are abstruse among the commons and the 

study is an attempt to clarify their misconceptions. 



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40 

LITERATURE REVIEW 

Financial Management, in general, refers to the managerial activity which is concerned with 

planning and controlling the firm‟s financial resources (Pandey & Ongpipattanakul, 2015). Many 

factors like financial attitude, parental financial socialization, and financial literacy have a 

significant and positive relationship with prudent financial management practices (Bakar & 

Bakar, 2020). It is concerned with the duties of the financial managers in the firm. It focuses on 

capital budgeting, capital structure, and working capital management for maximizing its value.  

In contrast to the conventional management practices, the definition of IFM significantly 

varies with the former. However, for a better understanding of IFM from the Shariah perspective, 

it is indeed necessary to have an idea of what is IBF and how they operate their business. 

Divanna (2009) defined Islamic finance as the application of Shariah in banking. Parties, the 

banking institutions, and their client share profit and loss in Islamic finance. Moreover, Islamic 

law does not allow transactions based on interest (Riba) as it is an unjust means of financing 

from an Islamic perspective. Mohammed (2005) mentioned that Shariah neither allows interest-

based business nor the making money nor cheers from the barter system of transaction. Islamic 

finance encourages all to share the profit or loss of the investment. Islam requires both the 

financier and the entrepreneur to equitably share the profit as well as the loss to fulfill the 

condition of justice. Hence, under Islamic finance, no one can gain profit without taking the risk. 

That is why strict discipline is maintained for assessing the risks and monitoring the funds using 

effectively by the fund users.  The fund provider and borrower both the parties are concerned 

about assessing and reducing risks. 

Islamic banks engage in banking activities based on the various Islamic financial 

contracts available. Mudarabah mode is used to mobilize funds in the deposit transactions (Qard 

Al Hasan). Kahf and Khan (1992) pointed out that the rate of return cannot be fixed under 

Islamic finance. So, Mudarabah is a financing mode and Musharakah is an investment mode. 

Salman and Nawaz (2018) argued that there is no huge difference between a banking system 

from an Islamic perspective and a conventional banking system in terms of banking services. 

Bakkeri & Ali (2020) examine the impact of internal and external factors on the 

profitability of 30 Islamic banks operating in the Middle East and North Africa over a period 

from 2005 till 2018 applying the OLS Panel data analysis technique and identify that quality of 

management has significance control on the banks‟ profitability. 

Aziz (2006) argued that IFM is playing a vital role to meet the requirements of businesses 

in the changing arena. It is a new internationally integrated system for satisfying the current 

needs of clients in the age of globalization and liberalization. Financial management is also 

serving in a competitive modern age and a changing environment. Treating the profit-sharing 

investment schemes in a way consistent with financial stability is one of the most important 

regulatory challenges faced by IFIs (Kammer, et al., 2015; Mamun, et al., 2017). 

Banning risk sharing, Islamic finance is very efficient and effective in handling the global 

financial crisis. In contrast to the debilitation of major financial institutions in the USA and 

Europe following the global financial crisis, IFIs were able to repel shocks owing to the 

distinctive Islamic financial framework (Haseeb, 2018). As Hasan (2015) argued, the cause of 

the global financial crisis in 2007-2008 was due to the reliance on an interest-based traditional 

financial system that completely relies on the transfer of risks. However, Islamic finance replaces 

the convention practices by prohibiting interest and promoting risk-sharing, and thereby ensures 

a financial system that is fair, firm and free from crisis. 



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41 

DATA AND METHODOLOGY 

Data and Sample 

The study has conducted a questionnaire survey using a direct interview method at the capital 

city Dhaka and Chittagong, the commercial capital of Bangladesh, respectively. The study relies 

on the direct interview method to reduce the non-response rate and to help to derive conclusions 

regarding respondents‟ inference and attitudes. The study has covered some selected 

organizations practicing IFM in Bangladesh. The sample contains eight full-fledged Islamic 

banks, six takaful (Islamic insurance) companies, and two INBFIs to conduct the study. To 

determine the sample size, a similar approach to Islam (2005) is followed in this study. The 

questionnaire survey of the study conducted an initial target of 500 samples; however, the study 

observed that only 380 samples can be used after the statistical screening.  The overall 

achievement of collecting survey data was 76% and this is considered relatively fair in the field 

(Ahmed, 2009). So we consider the dataset being sufficient to have a representative sample that 

would allow the study to form policy prescriptions based on the findings. 

Because of the limited resources, all the branches of the sample were not included in the 

survey. Based on the convention, it was agreed to survey only 2 branches from each of the 

sample banks, insurance companies, and INBFIs. While choosing the branch, several other 

criteria were also taken into consideration, such as their size (large, medium, and small) based on 

the number of employees, customers, operating income, etc.  

Purposive sampling was chosen to interview the sample respondents. Purposive sampling 

logically pretend to be responsive to the population using expert knowledge in a non-random 

manner that represents a cross-section of the population (Lavrakas, 2008)  

A list of clients has been collected from all selected branches through the bank 

administration. Then, two clients from each selected branch are picked following a simple 

random sampling method. The stated method has been chosen because each member of a 

population has the same chance of being included in the sample and where all possible samples 

of a given size have the same chance of selection as directed by West (2016). 

From each of the branch, a branch manager and a senior level officer surveyed data have 

been used in the study. So, in total, 65 for specific Islamic banking (14 top officials and 51 

investors), 40 for Takaful (10 top officials and 30 investors), 20 for Islamic Capital market 

(officials), and 255 for overall IFM practices in Bangladesh. Out of 255 samples, top officials are 

64, other officers 80, investors (clients) 64, and academicians 47. However, to respect the 

respondents and maintain unanimity, their identities are not revealed in the study. 

 

Instrument Design 

Based on the literature review, a questionnaire was prepared in consultation with a few selected 

finance and management professors of different universities, prominent academicians, 

researchers and bankers. After getting the advice and suggestions from the experts, the 

questionnaire was finalized. To identify the key issues and challenges for IFM practices in 

Bangladesh, the structured questionnaire was developed based on a five-point Likert scale 

ranging from 1(poor) to 5(excellent). The relevance and validity of the questionnaire are tested 

by performing a pilot survey before its final use. The study maintained strict confidentiality of 

the respondents and proper procedures are followed to collect the data. 

The questionnaire has two parts, part-A, and part-B. Part-A consists of basic 

demographic variables, such as identity, position, name of the organization, job experience, 

educational qualification, professional education, Islamic finance training or experience, and age 



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of the respondents. Part-B includes 29 questions regarding practices of IFM, compliance with 

different laws, rules, regulations, and standards and challenges of practicing IFM, and 

suggestions for overcoming the challenges. Notably, the study uses three different types of 

questionnaires targeting different industries. For example, for Islamic banks and insurance 

companies, the study uses two different sets of questionnaires as the operational dynamic varies 

between the banks and insurance. Then, the study also prepares an overall questionnaire for the 

remaining respondent categories. 

 

Statistical Techniques 
Cronbach's alpha has been used to measure the data reliability. Cronbach's alpha is related to the 

variation accounted with the score of the underlying construct. Cronbach's alpha value that 

ranges between 0 to 1 describes the reliability (Hatcher, 1994). Alfa value 0.7 or more is highly 

acceptable but lower thresholds are also sometimes acceptable depending on the nature of data 

and population (Nunnaly, 1978). 

Apart from that, correlation matrix, principal component analysis (PCA) using Kaiser-

Meyer-Olkin (KMO) Bartlett's Test and VARIMAX Rotation have applied to analyse the data. It 

focuses to simplify the diver‟s connection from the existing commonplace of experimental 

variables by finding general magnitudes or aspects that connect jointly the dissimilar variables 

and thus presents approaching into the fundamental configurations of the facts (Dillon & 

Goldstein, 1984). The Important dual uses of factor analysis are facts lessening and core 

elucidation. Though there are different versions/types of factor analyses available, in this 

research, „PCVRM‟ (Principle Components VARIMAX  Rotated Method) used in this study for 

identifying the factors that influence cost planning, cost controlling, cost efficiency and 

constraints to cost management practices of sample banks of Bangladesh. Since the techniques 

used in the study are well established in the literature, their discussion is not further extended in 

the analysis. Finally, regression technique has been used to rank the factors based on the scores 

derived.  

 

DATA ANALYSIS AND DISCUSSION 

Demographic Design 

The age of the respondents in the study varied from 25 years to above 55 years. Maximum 

(28.68%) of the respondents having the age of 30-35 years, 17.89% of them fall in the age range 

of 40-45 years, 15.26% of them in the age category of 25-30 years and 14.74% of them are in the 

age of 45-50 years. Further, only 7.37% of the respondents having an age of more than 50 years. 

More specifically 39.77% of the top officials are in the age of 40-45 years; 34.04% of the 

academicians are in the age of 30-35 years; 32% of the other officials and 40% of the investors 

are in the age of 30-35 years. 

 

Reliability Testing 

The results of the study show that the Cronbach's Alpha coefficient is 0.69 and Cronbach's Alpha 

based on standardized items coefficient is 0.78. Hence, the primary data have been used by the 

researcher in the study is found to be reliable and consistent based on the conventional threshold. 

This study has projected the „Zero-Order Correlation Matrix‟ of 28items. From the 

perusal of the zero-order correlation matrix, it is found that some items have relatively strong 

correlations among them which are the main basis or justification to create a group or factor. In 

this study, it is found that some variables have emerged as the most significant factors which 



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43 

ultimately from different orthogonal factors. 

 

Challenges of Islamic Banks 

This section of the study presents the result of an opinion survey of 65 respondents from Islamic 

banks‟ personnel and clients to identify the issues and challenges faced by the Islamic banks in 

Bangladesh. Factors having the mean value greater than 4 are the most challenging factors; 

followed by factors having a value greater than 3.5 but less than 4 are the moderate challenging 

factors and factors for which the mean value falls short of 3.5 are the less challenging factors. 

Among the 28 challenging factors, 11 are the most challenging, 16 found as moderate 

challenging and only 1 is less challenging factors (table 1). The study found that the disparity in 

theory and practice especially in the case of risk-sharing instruments is the most challenging 

factor and Islamic financial markets offer a wide array of instruments with varying structures of 

maturity and opportunities for portfolio diversification and risk management is the less 

challenging factors. 

The KMO measure shows that the sampling adequacy is 0.486 and Bartlett‟s test 

sphericity result is significant at 1% therefore, shows that the 28 challenging factors hold a 

minimum standard (eigenvalues greater than 1) to proceed for PCA. The result means that the 

whole variance accumulated to by the most challenging factor is 74.35% (11 factors) and 

seventeen factors explain the rest of the variance which includes sixteen moderate challenging 

factors and one less challenging factor. 

Among the most challenging factors, the disparity in theory and practice especially in the 

case of risk-sharing instruments alone explains 16.31% of the variation. Moreover, for the 

moderate challenging factors the highest variation 3.37% belongs to the shortage of legal support 

of the Central bank in Bangladesh and sixteen moderate challenging factors to explain 25.32% of 

the total variation. Additionally, the less challenging factor, Islamic financial markets tender a 

large range of mechanisms with changeable compositions of maturity and chances for group 

diversification and management of risk explains 0.33% of the variation. 

 

Table 1. Challenges of Islamic Banks in Bangladesh (n=65) 

 

Most Challenging Factors  Mean Std. Dev 

The disparity in theory and practice especially in the case of risk-sharing 

instruments 

4.2000 .81394 

Scarcity of qualified Shari‟a scholars in different sectors 4.1538 .83349 

Small assets and capital size 4.1385 5.13529 

Lack of Islamic interbank market  4.1231 .76050 

Lack of Unified Shariah Rulings 4.1077 .77304 

No Course on Islamic finance and banking in the education system 4.0923 .82392 

Lack of debt and derivative markets 4.0462 .95902 

Lack of appropriate legal framework and supportive policies 4.0308 .82858 

Economic decelerate and political condition  4.0308 .93490 

Diversity of the opinions of the Shariah scholars on various products 4.0154 .73935 

The central bank has no sufficient Shariah experts to control the functions of 

IFIs 

4.0154 .97616 

Moderate Challenging Factors Mean Std. Dev 

Shortage of legal support of the Central bank in Bangladesh 3.9846 .92690 



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Providing predetermined return structures (Ijarah, Murabahah, etc.) rather 

than profit-sharing scheme 

3.9692 1.03031 

Insufficient risk measures and diversification is the problem for Islamic 

Financial Market 

3.9687 .87230 

Lack of Specialized Islamic Banks and NBFIs 3.9538 .90882 

Lack of well-functioning secondary markets and liquidity-enhancing and 

risk-sharing products 

3.9077 .97984 

Lack of Apex Training Institute for the Islamic Banks 3.8923 .83147 

With increased globalization, integration and linkages have become critical 

to the success of any capital market 

3.8615 1.01361 

Lack of modern banking services  3.8308 1.03937 

No active enterprise-level risk management 3.7692 .98058 

Lack of Shariah-based money market  3.7385 1.06473 

Lack of financial engineering and innovations 3.7231 .92715 

Lack of an effective supervisory framework 3.7077 1.02657 

New Banking Regulations 3.6769 .83118 

Absence of internationally recognized legal, regulatory, and supervisory 

framework for Islamic banking and financial management 

There is yet no internationally generally accepted legal, regulatory, and 

supervisory framework dealing with Islamic banking and financial 

management 

3.6615 1.01976 

Lack of congenial  environment and strong non-banking financial supports 3.6308 .99325 

Insufficient investment for infrastructure development of the Islamic capital 

market 

3.6190 1.00689 

Less Challenging Factors Mean Std. Dev 

Lack of standard Islamic financial  instruments  3.3077 .93413 

Source: Author‟ Calculation 

 

Issues and Challenges of Islamic Insurance Companies 

This section of the study presents the result of an opinion that aims to find out the issues and 

challenges faced by the takaful industry in Bangladesh. Factors‟ having the value of the mean of 

greater than 4 is the most challenging factors; followed by factors having a mean of greater than 

3.5 but less than 4 are the moderate challenging factors and factors having a mean of lower than 

3.5 are the less challenging factors. Out of 19 challenging factors, 5 factors are the most 

challenging, 10 of them are moderate challenging and the rest of them (4) are less challenging 

factors (Table 2). 

  Table 2. Challenges of Islamic Insurance Companies (n=80) 

Most Challenging Factors Mean Std. Deviation 

Technological backwardness 4.25 0.99 

Shortage of suitable assets 4.18 0.96 

Too much stress on profit distribution 4.04 0.98 

Low income of the people 4.03 3.66 

Lack of standardization in the industry that is due to Shariah 4.02 0.91 



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interpretations 

Moderate Challenging Factors Mean Std. Deviation 

Lack of product diversification 3.87 2.28 

Issue around retakaful 3.75 1.23 

Misguided by insurance official 3.75 1.01 

Lack of separate regulatory body 3.74 1.01 

High service cost 3.70 1.11 

Lack of attractive offerings 3.57 1.15 

Lack of quality controlling process 3.52 1.30 

Diverging regulatory approaches and the lack of centralized 

regulations 

3.36 1.28 

Riba 3.34 1.33 

Lack of government patronizing 3.32 1.38 

Less Challenging Factors Mean Std. Deviation 

Lack of marketing research 3.07 1.44 

Lack of efficient management 3.04 1.31 

Political instability 2.97 1.40 

Lack of trustworthiness 2.79 1.47 

Source: Authors‟ calculation 

 

PCA of Challenges of Islamic Insurance Companies 

PCA has been applied to analyse the challenges of Islamic Insurance Companies. The result of 

the analysis discovers that KMO (Kaiser-Meyer-Olkin) and Bartlett's test measurement result of 

challenges of Takaful industry in Bangladesh. The acceptance KMO value should be larger than 

0.5. Field (2000); and Pallant (2013) argued that the value should be 0.60 or above. The KMO 

measure shows that the sampling adequacy is 0.711 and Bartlett‟s test sphericity result is 

significant at 1% therefore, shows that the 19 challenging factors hold a minimum standard to 

proceed for PCA (Table 3). 

There are five most significant issues (technological backwardness, shortage of suitable 

assets, Too much stress on profit distribution, low income of the people and short of 

standardization), ten significant issues (lack of product diversification, issue around retakaful, 

misguided by insurance official, lack of separate regulatory body, high service cost, lack of 

attractive offerings, lack of quality controlling process, deviating dogmatic approaches and short 

of centralized rules, riba and lack of government patronizing) and four less significant issues (lack 

of marketing research, lack of efficient management, political instability and lack of 

trustworthiness). Moreover, table 10 shows that the highest variation is 5.42% for moderate 

challenging factors by the lack of product diversification and the total variation explained by the 

ten moderate challenging factors is 39.37%. Additionally, among the less challenging factors, the 

highest variation is 2.45% that goes to lack of marketing research and the total variation explained 

by the four moderate challenging factors is 8.84%. 



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Table 3. Total Variance Explained for Challenges of Islamic Insurance Companies 

Challenging 

Factors 

Eigenvalues Challenging 

Factors 

Eigenvalues 

Total % of 

Variance 

Cumulative 

% 

Total % of 

Variance 

Cumulative 

% 

1 3.10 16.31 16.31 11 0.69 3.61 78.82 

2 2.42 12.73 29.04 12 0.64 3.36 82.17 

3 1.83 9.61 38.65 13 0.60 3.15 85.33 

4 1.42 7.46 46.10 14 0.58 3.03 88.36 

5 1.08 5.70 51.80 15 0.53 2.81 91.17 

6 1.03 5.42 57.22 16 0.47 2.45 93.61 

7 0.95 5.00 62.22 17 0.46 2.44 96.05 

8 0.91 4.81 67.03 18 0.41 2.13 98.18 

9 0.84 4.42 71.45 19 0.35 1.82 100.00 

10 0.72 3.76 75.21     

Source: Authors‟ calculation 

i. Technological Backwardness 

Islamic insurance companies in Bangladesh are using traditional methods for insurance policies 

whereas some of the conventional insurance companies are following modern systems as 

computerized systems in their operations (Khan et al., 2016),. The clients of Islamic insurance 

companies are deprived of the convenient use of e-insurance, online business, internet, and 

computerized system. As a result, the customers are vague in some facts such as payment of 

premium, claim settlement and balance of policy holder‟s account. Bashir and Mail (2011) 

mentioned that Islamic insurance companies need to be technologically sound and updated in 

providing their services. This study found that technological backwardness is one of the most 

significant issues for Islamic insurance companies in Bangladesh. 

 

ii. Lack of Shariah-based assets 

Lack of Shariah-based assets hampers the fastest growth of the Islamic financial market. The lack 

of suitable Shariah-compliant, limited range of Shariah-compliant, asset-liability management, 

and the cost of maintaining Shariah-compliant are some of the challenges for the Islamic 

insurance companies (Jaffer et al., 2010). In this study, 85% of the respondents mentioned there is 

a lack of Shariah-compliant assets. It is also one of the most significant issues for the Islamic 

insurance industry. 

 

iii. Too much stress on profit distribution 

The profit motive is the main concern of the conventional insurance companies; they provide 

generally more profit to the clients than the Islamic insurance companies. It presses too much 

stress on profit distribution that hampers the social corporate responsibilities (CSR) activities. It 

is one of the major issues of Islamic insurance companies (Maghrebi & Mirakhor, 2015).  

 

iv. Low income of the people 

Bangladesh low-income country and many people live in extreme poverty (Hossain, 2014). Poor 

people of Bangladesh are working hard to earn their livelihood and are marginalized with to the 

expenditure with the income. Thus, their propensity to save is very small. It is often difficult for 

them to save some money for future needs (Sheheli, 2012). Therefore, the overall poor economic 



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condition is creating an obstacle to flourishing the Islamic insurance business in Bangladesh. 

 

v. Shortage of standardization from an Islamic perspective 

Despite the Islamic insurance expanding rapidly, there are still some issues currently being 

debated among Shariah scholars and Muslim jurists (Maghrebi & Mirakhor, 2015; Fauzi et al., 

2016). The contradictions of Shariah explanations can be viewed in the aspects: wa‟d (promise), 

underwriting surplus, choice of takaful models, sources of capital, the type of risk deemed 

acceptable in Takaful, Wakala fees and the cost of capital (Isa et al., 2017; Akhter, 2010). In this 

study, 70% of respondents have argued that it has a negative impact on the smooth operation of 

the takaful industry. 

 

vi. Riba 

Although the takaful practices are free from the elements of Riba in Bangladesh, their activities 

and products are limited to a few numbers of investors and a narrow area (Sarwar, 2016). 

According to Htay and Salman (2013); Saleh (2016); and Sarwar (2016), the takaful practices are 

evolved around the elements of Mudarabah, Tabarru and other Shariah justified elements. In this 

study, some of the respondents raised their voices that it is difficult to convince general investors 

and clients that they are interest-free a like the traditional insurance system. Partly it is true 

because the money that a client pays is similar to the premium being charged in the conventional 

insurance industry. 

 

vii. Issues surrounding Retakaful 

There is a lack of capacity within the takaful industry for reinsurance. Therefore, a certain 

proportion of risk is placed with the international reinsurance companies that operate on a 

conventional basis (Rahman, Ahmad & Buang, 2011). The study found that some of the 

respondents admitted that it is a great problem for the industry. 

 

viii. Lengthy procedure in Claim’s settlement 

According to Khan et al. (2016), the claim settlement in Bangladesh is a lengthy and time-

consuming procedure. In this study, many respondents agreed that the lengthy procedure in claim 

settlement hampers the goodwill of the industry. 

 

ix. Shortage of skilled personnel  

Skilled human resources are one of the major keys to gain success. Many countries where 

financial management is administered by Islamic Shariah are getting success by utilizing skilled 

personnel. The leading insurance companies in KSA emerged as the leader of the market in terms 

of managerial efficiency, and could be benchmarked by other companies operated in the market 

(Naushad, Faridi, & Faisal, 2020). One of the major challenges faced by the Islamic insurance 

companies in Bangladesh and many other countries is the lack of knowledgeable and qualified 

personnel. Most of the companies typically employ human resources having a conventional 

educational background with traditional experiences. These personnel usually try to implement 

their conventional insurance experiences to the Islamic insurance companies that occasionally 

hamper the smooth takaful operations (Khan et al., 2016; Ochieng, 2013). This has been certified 

from the findings of the study that qualified personnel are scarce in takaful industry in 

Bangladesh. 



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x. Lack of Regulatory and Legal Framework 

Traditional insurance companies in Bangladesh are suffering from many customer faces hidden 

charges, extra fees, account hacked (Rahman, 2018). Shariah-based insurance companies also 

suffering here either on the same ground as traditional companies or from the different grounds. 

Since there is no standardization of the takaful authoritarian system globally, only the Shariah 

board of respective Islamic insurance companies guides all the activities by maintaining its 

regulatory constraints (Jaffer et al., 2010). In Bangladesh, there is no specific legal framework for 

the takaful industry as highlighted in the earlier chapters. Islamic insurance operates under a 

conventional legal framework (Sarwar, 2016). This study also found that some of the respondents 

acknowledge that lack of regulatory and legal framework is a major obstacle for the takaful 

industry in Bangladesh. 

 

ANALYSIS OF FACTORS OF CHALLENGES OF IFM PRACTICES 

The Factor-I explains 25.33% variations of the set. It includes the following items; difficulties in 

attracting investors (DAI), weak regulation for capital budgeting (WRFCB), dual operation 

(DO), the influence of risk-free rate (IRFR), shortage of experts in IFM (SE), lack of Sukuk 

market (LSM), consideration of whole market risk (CWMR), no benefit of tax shield (NBTS), 

opportunity cost (OC), WACC and PBP (Table 4). 

Factor II explains 36.24% variations in the variables. The variables are: not following 

IFM (NFIFM), dependence on debt-based financing (DDF), partial using of financing 

instruments (PUFI), avoiding Musharka financing (AMF), lack of innovation (LI), absence of 

Islamic Derivatives Market (AIDM), unclear terms and conditions (UTC) and absence of 

clarification (AC) (Table 4).  

Factor III explains 23.42% variations in the variables. The variables are: lack of liquidity 

instruments (LLI), regulatory framework (RF), supervisory framework (SF), economic and 

political instability (EPI), insufficient risk measures and diversification (IRMD), crowding effect 

(CE), call money market (CMM), lack of secondary market (LSM) and accounting standard (AS) 

(Table 4). 

Table 4. Factors Challenges IFM Practices 

Factors I – Capital Budgeting Challenges  

ID Variables Factor 

Loading 

HCC In calculating the cost of capital for capital budgeting risk-free rate 

influences Islamic Capital Budgeting 

0.971 

OC Opportunity cost influences the capital budgeting decision of IFM. 0.961 

DAI IFI faced more difficulties in attracting lenders and borrowers than interest-

based institutions. 

0.921 

SE Due to the shortage of Islamic Finance Expert, capital budgeting techniques 

are not fully adopted in IFM. 

0.977 

WRFCB As IFI is regulated by the conventional authority there are no specific laws 

and regulations for Islamic Capital Budgeting. 

0.966 

DO Due to dual operation with the conventional capital market, IFIs get the 

narrow scope for capital budgeting. 

0.963 

WACC In calculating WACC, IFM prefers CAPM rather than DCF. 0.822 



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CWMR In calculating WACC for Islamic Capital Budgeting, IFM considers whole 

market risk including conventional market. 

0.956 

PBP Most of the Islamic Firms follow PBP for evaluating the capital budget 

decision. 

0.958 

IRFR In calculating the cost of capital for capital budgeting, risk-free rate 

influences Islamic Capital Budgeting. 

0.938 

NBTS Most of the Islamic Firms avoid debt financing in capital budgeting which 

doesn‟t help them to avoid tax. 

0.738 

LSM Due to the lack of the Sukuk market, debt-based financing is narrowly 

followed by IFM. 

0.494 

 Variance accounted for  25.33% 

Factor II – Capital Structure Challenges  

ID Variables Factors 

Loading 

NFIFM Most of the institutions follow conventional methods for IFM. 0.967 

DDF In the capital structure of IFM, most of the firms prefer debt-based financing 

rather than equity based. 

0.612 

PUFI In fundraising Islamic Finance Institutions mostly rely on Mudarabah mode 

rather than Musharakah. 

0.704 

AMF IFI avoid Musaharakah mode for financing due to distrusted people  0.086 

LI Product innovation in Islamic Finance is narrowly adopted. 0.043 

AIDM The Absence of Islamic Derivatives Market IFI cannot reduce risk in 

financing. 

0.289 

UTC The procedure stream of the product is undefined and the parties are 

unidentified. 

0.971 

AC There are unclear profit distribution and untraced fund‟s flow on some of the 

new products 

0.961 

 Variance accounted for  36.24% 

Factors III – Working Capital Management Challenges  

ID Variables Factors 

Loading 

LLI There is a lack of Shariah knowledge among the product developers  0.921 

RF Insufficient risk measures and diversification is the problem for Islamic 

Financing Decision. 

0.977 

SF Lack of effective and efficient Islamic secondary markets  0.967 

EPI Lack of effective supervisory framework influences working capital 

management. 

0.966 

IRMD Economic decelerate and Political conditions influence working capital 

management. 

0.963 

CMM Due to the lack of full pledge Islamic Call Money Market, short-term 

borrowings are not properly utilized. 

0.822 

CE Most of the Islamic firms rely on IFI for short-term borrowing which creates 

a crowding effect. 

0.956 

AS Standard Islamic Accounting methods are not accurately defined to measure 

working capital management. 

0.958 



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50 

 Lack of Shariah Complaint emergency liquidity instruments. 0.938 

 Variance accounted for  23.42% 

Source: Authors‟ calculation 

 

Overall Challenges of IFM in Bangladesh 

To provide the overall answer to the IFM practices of IFI in Bangladesh, the study used the 

opinions of 255 sample professionals on 5-point Likert VRFA (“VARIMAX  Rotated Factor 

Analytical”) technique was employed to group the selected variables based on their intrinsic 

connections and lastly grading the group based on their values. The study has identified the 

variables undertaken for the study as most significant to less significant based on their mean 

score of opinions taken of 5-point Likert Scale. The challenges influencing the IFM based on 

weighted scores are shown in Table 5.Challenges having more than 3.9 mean values have been 

identified as the most significant challenges and the challenges having a mean value ranges from 

3.5 to 3.9 are significant challenges. The mean value of less than 3.5 is considered as less 

significant challenges. Based on Table 9, eight challenges having a mean score of more than 3.9 

are identified as the most significant. Three are capital budgeting related, two are capital 

structure and three are working capital management related challenge.  

Table 5. Descriptive Statistics of the Challenges Influencing the IFM (n=255) 

Variables Mean Std. Dev 

In calculating the cost of finance, Islamic Capital Budgeting uses KRFI instead 

of KRF. Therefore, the cost of capital is higher than the conventional capital 

budgeting which limits the investment avenues 

4.17 1.05 

Lack of Shariah Complaint emergency liquidity instruments 4.17 1.05 

IFI faces more difficulties in attracting investors (lenders and borrowers) than 

interest-based institutions. 

4.15 0.96 

Regulators do not always have the capacity (or willingness) to ensure Shariah 

compliance, which undermines consistency of approaches within and across 

borders. 

4.15 0.96 

Lack of specific laws and regulations for Islamic Capital Budgeting 3.98 0.91 

Lack of effective supervisory framework influences working capital 

management. 

3.98 0.91 

Due to dual operation with the conventional capital market, IFIs get a narrow 

scope for capital budgeting. 

3.97 0.98 

Economic decelerate and political condition influence working capital 

management. 

3.97 0.98 

In fundraising Islamic Finance Institutions mostly rely on Mudarabah mode 

rather than Musharakah. 

3.85 3.35 

The Absence of Islamic Derivatives Market IFI cannot reduce risk in 

financing. 

3.84 2.30 

In calculating the cost of capital for capital budgeting risk-free rate influences 

in Islamic Capital Budgeting. 

3.80 1.27 

The procedure stream of the product is undefined and the parties are 

unidentified. 

3.80 1.27 

Due to the shortage of Islamic Finance Experts, capital budgeting techniques 3.64 1.02 



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51 

are not fully adopted in IFM. 

Insufficient risk measures and diversification is the problem for Islamic 

Financing Decision. 

3.64 1.02 

Lack of Sukuk market debt-based financing is narrowly followed by IFM. 3.56 1.01 

In calculating WACC for Islamic Capital Budgeting, IFM considers whole 

market risk including conventional market. 

3.54 1.13 

Most of the Islamic firms rely on IFI for short-term borrowing which creates a 

crowding effect. 

3.54 1.13 

In the capital structure of IFM, most of the firms prefer debt-based financing 

rather equity-based. 

3.53 1.15 

Most of the Islamic Firms avoid debt financing in capital budgeting which 

doesn‟t help them to avoid tax. 

3.49 1.23 

Product innovation in Islamic Finance is narrowly adopted. 3.31 1.33 

Opportunity cost influences the capital budgeting decision of IFM. 3.25 1.27 

There are unclear profit distribution and untraced fund‟s flow on some of the 

new products 

3.25 1.27 

In calculating WACC IFM prefers CAPM rather DCF. 3.17 1.28 

Due to the lack of full pledge of Islamic Call Money Market, short-term 

borrowings are not properly utilized. 

3.17 1.28 

Most of the institutions follow conventional methods for IFM. 3.10 1.35 

Lack of effective and efficient Islamic secondary markets 3.10 1.35 

Due to uncertainty about getting proper information, Islamic Finance avoids 

the Musaharakah mode of financing. 

2.86 2.29 

Most of the Islamic Firms follow PBP for evaluating the capital budget 

decisions. 

2.48 1.39 

Standard Islamic Accounting methods are not accurately defined to measure 

working capital management. 

2.48 1.39 

Source: Authors‟ calculation 

 

CONCLUSION 

In the aftermath of the global financial crisis, the government and the Bangladesh bank have 

actively supported Islamic finance. But the guidelines for the IBF need to be upgraded for their 

smooth functioning. Thus, the study helps to design a more comprehensive and consistent legal 

and regulatory framework for the Islamic financial services industry in Bangladesh. This will 

support the analysts and decision-makers to outline some contours of a roadmap for further 

development of the Islamic finance industry in Bangladesh. 

In short, it is evident that there is no separate regulatory framework to supervise and 

monitor IFI in Bangladesh, rather the central bank (Bangladesh Bank) regulates the Islamic 

financial system based on the existing conventional financial system laws and regulations. 

Besides, Bangladesh bank provides some guidelines to establish a Shariah council for the Islamic 

financial system. Hence, the lack of a legal and regulatory framework has stifled the IBF 

industry in Bangladesh. 

The study analyses financial management practices in IFIs of Bangladesh and found 

some conclusions based on findings. Although the financial management practices in IFIs of 

Bangladesh are endowed, there are several factors the hamper the normal activities of the 

industry.  Therefore, it is very essential for the respective practitioners and policymakers for 



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52 

giving their wholehearted concentration on facing the challenges. In this connection, at first, the 

government should establish a separate regulatory body for monitoring the IFI‟s functions so that 

they can perform their activities smoothly in a congenial environment in Bangladesh.  

 

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