Islamic finance refers to a system of banking and financial activities that comply with Islamic law or "Shariah" as it is termed. Unlike conventional finance, which primarily operates on interest-based mechanisms, Islamic finance is based on ethical principles taken from the Quran and example of the Prophet Muhammad (peace be upon him). It prohibits the uses of interest (riba), excessive uncertainty (gharar), speculation and gambling (maysir) and promotes ethical investing.
Islamic finance is not solely focused on profit maximisation and promotes the values of justice, transparency, and social welfare. It seeks to ensure that financial transactions are backed by real assets and risk is shared equitably between parties. This approach encourages a more stable and inclusive financial system aligning profit with purpose.
Islamic finance operates through a range of alternative instruments that replace interest with trade, partnership, and rental-based mechanisms. Some of the most common include:
Murabaha (Cost-Plus Financing): The bank buys an asset and sells it to the client at a marked-up price, with payments made over time. The markup replaces interest and must be disclosed upfront.
Mudarabah (Profit-Sharing Partnership): One party provides capital while the other provides expertise. Profits are shared according to a pre-agreed ratio, while losses are borne by the capital provider.
Musharakah (Joint Venture): All partners contribute capital and share profits and losses based on their investment proportions.
Ijara (Leasing): Similar to conventional leasing, the bank buys an asset and leases it to the client. Ownership remains with the bank, but the client benefits from its use.
Sukuk (Islamic Bonds): These are Shariah-compliant investment certificates that represent ownership in a tangible asset or business venture, rather than debt.
Each of these instruments ensures that financial activity is linked to the real economy and avoids speculative behaviour.
Islamic finance products can be used by both Muslims and non-Muslims. There is a growing Islamic finance industry and Islamic banking and finance is expected to grow 11.6% to $13.89 billion in 2029 from $8.94 billion in 2025. There are significant Islamic finance hubs across the Middle East and South East Asia with expansion in to Europe, Africa, and North America. In the UK for example, there are several Islamic banks and institutions offering innovative Islamic products and services.
The growing interest stems from the sector’s focus on responsible investing, risk-sharing, and financial inclusion—principles that appeal to a broad range of consumers and investors. Islamic finance can be considered a viable alternative for those seeking to blend of faith, finance, and fairness or simply seeking ethical and principle based investments.
In order to continue to grow, the industry will continue to need to adapt and evolve to meet the demands of a rapidly changing and dynamic global economy.