Dhaka, May 8 -- It has been quite some time since I started researching the structural shortcomings in Islamic banking in Bangladesh. In 1999, I authored one of the first comprehensive analyses of how Islamic banking operated in Bangladesh, and I recommended that the BB establish interest-free money market products. Twenty-five years later, the BB is announcing that it will begin operating an Islamic inter-bank money market by June 30. My immediate response was finally, and my second thought was: not like this.

The BB's announcement recognises a serious constraint on Islamic banking. Because the call-money market, which is used by conventional banks to lend short-term, uses interest-based arrangements prohibited by Shariah, Islamic banks...