Islamic finance

Islamic finance is governed by Sharia, which prohibits riba (interest), gharar (excessive uncertainty), and investment in haram (forbidden) sectors such as alcohol, gambling, and pork. Instead, it promotes profit-and-loss sharing and asset-backed transactions. Common instruments include murabaha (cost-plus sale), ijara (leasing), musharaka (joint venture), and mudaraba (profit-sharing partnership). Sukuk, often called Islamic bonds, represent ownership in tangible assets or projects rather than debt obligations. These principles aim to foster social justice and economic fairness.

Modern Islamic finance emerged in the mid-20th century, with pioneering experiments in Egypt and Malaysia. The first Islamic bank, Mit Ghamr, was established in Egypt in 1963. The Islamic Development Bank was founded in 1975, and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established in 1991 to standardize practices. The industry expanded rapidly after the 2008 financial crisis, as its risk-sharing ethos attracted attention. Today, Islamic finance operates alongside conventional systems in many countries, including non-Muslim-majority nations like the UK and Singapore.

Islamic finance is most prominent in the Gulf Cooperation Council (GCC) countries, Malaysia, and Iran, which together hold the majority of global assets. Malaysia leads in sukuk issuance, while Saudi Arabia and the UAE host major Islamic banks. Regulatory frameworks vary: some countries have dedicated Sharia boards, while others integrate Islamic finance into existing financial law. The Islamic Financial Services Board (IFSB) issues prudential standards, and AAOIFI provides accounting and governance guidelines. However, harmonization remains a challenge, as scholars differ on the permissibility of certain products.

Beyond banking, Islamic finance extends to microfinance, takaful (Islamic insurance), and even cryptocurrency debates. The industry has faced criticism for 'Sharia arbitrage'—structuring products that mimic conventional finance while technically complying with Islamic law. Notable niche applications include Islamic crowdfunding and waqf-based financing for social projects. The global Islamic fintech sector is growing, with startups offering Sharia-compliant robo-advisors. In 2021, the first Islamic bank in the UK, Al Rayan Bank, was acquired by a Qatari group, highlighting cross-border consolidation.

Riba

Interest or usury, strictly prohibited in Islamic finance.

Gharar

Excessive uncertainty or ambiguity in contracts.

Murabaha

Cost-plus financing where the bank buys an asset and sells it at a markup.

Ijara

Leasing arrangement where the bank retains ownership and leases the asset.

Musharaka

Joint venture where parties share profits and losses.

Mudaraba

Profit-sharing partnership where one party provides capital and the other expertise.

Sukuk

Islamic financial certificates representing ownership in assets or projects.

Takaful

Islamic insurance based on mutual cooperation and donation.