In a world driven by economic dynamism and financial innovation, Islamic finance stands out as a unique and increasingly influential system that focus on real trade and economic activity while barring interest-based dealing, speculation, artificial financial instruments and toxic assets like conventional derivatives.

Islamic finance rooted in the Islamic commercial law and supported by a strong ethical foundation emphasises fair conduct, risk sharing and asset-backed transactions. According to the Islamic Finance Development Report 2023, the global Islamic finance industry continued the growth momentum with assets crossing $4.5 trillion and the number of Islamic financial institutions increasing to 1,871. The annual growth rate is hovering around 11%.

With this impressive performance, Islamic finance is no longer a niche market but a significant player in the global financial landscape.

Islamic finance footmark is now visible in over 120 countries either in the form of Islamic banking, fund management, takaful, Sukuk or Islamic fintech. In terms of governance, at least 55 global jurisdictions have one Islamic finance law or regulations to facilitate the industry while 20 countries have central Shariah governance boards. In terms of global sustainability efforts, the ESG Sukuk outstanding as per IFD report of 2023 has surpassed $24 billion while ESG-related funds are managing over $6 billion.

In order to enhance the sustainability impact of Islamic finance, 42 countries have issued sustainability guidelines. The quantum of CSR funds disbursed by Islamic financial institutions has crossed $1.5 billion.

Understanding the value proposition of Islamic finance and promoting the ethical way of handling financial affairs unveils a pathway to financial inclusion, ethical prosperity and sustainable growth.

At its core, Islamic finance operates on principles based on the Islamic commercial law, which prohibits certain activities such as interest-based transactions, uncertainty in commercial contracts, speculation and gambling.

Interestingly, Islamic finance shares the ban on interest-based dealing with other major religions including Christianity and Judaism.

Islamic finance as an alternative to conventional financial practices promotes risk sharing, asset-backed trade transactions and equity-based modes based on sharing of profits and losses.

Furthermore, it fosters a system of ethical screening of anti-social and harmful businesses, which requires Islamic finance institutions to stay away from businesses dealing in alcohol, gambling, tobacco, weapon industry and adult entertainment. The ethical framework fosters stability, transparency and social responsibility, aligning with broader societal values.

One of the key pillars of Islamic finance is the concept of equity partnership and profit and loss-sharing contracts (like Musharakah), which is largely used on the deposit side.

Unlike conventional finance, where lenders are guaranteed fixed returns regardless of the outcome, Islamic finance encourages shared risk and reward. This not only promotes fairness but also aligns the interests of investors with the success of underlying projects or ventures.

Furthermore, Islamic finance emphasises asset-backed trade-based financing (Murabaha – a cost-plus sale transaction), where transactions involves sale of tangible assets such as real estate, commodities or equipment. This provides greater security for both parties involved and reduces the potential for speculative behaviour.

Islamic finance also encourages institutions to take ownership stake in real assets, plant and machinery and promotes rental-based contract (Islamic leasing), where ownership risk is borne by the Islamic financial institution while the customer pays rentals for the utilisation of the asset. This mode is also very popular for financing infrastructure projects and project financing deals.

Principles of Islamic finance extend beyond individual transactions to encompass broader economic objectives. The domain of Islamic finance also includes Islamic social finance, an integral area of Islamic finance that not only broadens the reach to almost all Muslims but also has the potential to contribute at the global level towards sustainable growth and economic development of society.

Islamic social finance is a multifaceted approach that focuses on principles of justice, equity, social responsibility and community welfare. It aims to address socio-economic inequalities, promote sustainable development and foster community cohesion.

Islamic social finance instruments primarily include Zakat (obligatory alms giving), Sadaqah (voluntary charity), Waqf (endowment and trusts) and Qard al-Hasan (benevolent interest-free loans) while the innovative development in the area now also covers Islamic microfinance, social Sukuk, socially responsible investment (SRI) and Islamic crowd-funding and ethical investments.

Moreover, Islamic finance promotes ethical conduct and responsible financing practices. The prohibition of interest discourages excessive debt accumulation and encourages prudent financial management. This reduces the likelihood of financial crisis and promotes long-term economic stability.

In an increasingly interconnected world, Islamic finance offers opportunities for financial inclusion, cross-border collaboration and investment.

With a growing Muslim population and increasing demand for Shariah-compliant financial products, Islamic finance has expanded beyond traditional Islamic markets to attract interest from investors worldwide. This globalisation of Islamic finance not only diversifies investment portfolios but also promotes cultural understanding and cooperation.

The writer is the Director of IBA Centre for Excellence in Islamic Finance


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