The Future of Islamic Finance

Many lessons have been learned by the global financial system at the aftermath of the Global Health Crisis (GHC), which could last till the financial crisis occurred in 2008–2009 (global financial crisis [GFC]). As such, the system started facing the deep-rooted questions about regulatory reforms. Amidst a perilous situation, Islamic finance (IF) had demonstrated clear evidence of strong muscles into something that countries appreciate as the tool for money intermediation. It constitutes a brief introduction to the way Islamic Financial System or IFS (1) came forth in the past and (2) continues nowadays. The paper starts with the stating the maqasid al-Shari'ah (goals of the Shari'ah), which are the fundamental objectives of the legal system in Islam. Then, it highlights the key concepts, unique features, and modes of financing that are unique within the IFS. The integration of Islamic financial institutions (IFIs) into the global economy is covered and IF as well as global financial dynamics at large discussed with the closing comments mirroring IF complexity on the background of global economy. This segment alone has posted very significant gain of almost US$3 trillion, which is projected to rise further to US$6.7 trillion by 2027 – a clear indication of its outreach and accessibility to all.

The following chapter provides a summary of the global financial crisis (GFC) and how it impacted the global financial markets generally, emphasizing the Islamic finance industry (IFI) in particular. The GFC has been a catalyst for the supporters of the Islamic economic and finance principles. Minsky's claim (2008) that stability is the root of instability was gaining more and more supporters after the GFC, provoking more and more criticism of the conventional finance paradigm. Such shift elevated Islamic financial system as a potential alternative. Looking at the failures and lessons learned from the GFC in tandem with the relatively sound state of the Islamic financial industry implies a reexamination of this paradigm and proposal of the one based on Islamic economics and finance principles. Grounded in socioeconomic justice, introducing equality, responsibility, transparency, honesty, and morality, this paradigm can be successful if appropriately implemented. Nevertheless, a current bifurcation exists between the wings of Islamic economics and finance theory and their practical application. To tackle the current issues, innovative thinking has to be applied especially in Islamic economics and finance. Mimicking the conventional financing's methods and incorporating them through Shari'atization process gives rise to the risks of the traditional system's assimilation and system's breakdown. Therefore, building a framework and offering a tangible course of action is unavoidable for the management of the complexities and the risks involved.

To fully comprehend the significance of Islam in Islamic Finance, it is imperative to delve deeper into the ontology, epistemology and axiology of Islamic principles. Ontology is concerned with the foundation of reality, whilst epistemology covers the learning process. Then, axiology talks about the subject's values, norms and principles. This chapter covers the ontology of the Knowledge from an Islamic perspective, which, epistemologically speaking, is believed to be eternal, unchanging and universal by the believer. Therefore, having a profound understanding of the ontology and epistemology of the source and the Knowledge, the discussion continues the axiology of Islamic finance principles, which is paramount to understanding the role of Islam in modern financial systems.

Ontology is concerned with the foundational building blocks that become the governing rules, i.e. the relationships between the Almighty and His creations. It is crucial to acknowledge the eternality of the Creator, as He is not in comparison to His creation. The epistemology of Islam placed Al-Qur'an as the Book and Muhammad (Peace Be Upon Him – PBUH) and the Messenger of Allah (swt) as the Archetypal model. The Book is the Meta framework that serves as the ultimate authority. Muhammad (PBUH) led and taught his generation how to run a state, organize public affairs and restore justice in law and rulings. It is his sayings and behaviours that Muslims refer to ethics and good behaviour (akhlaqul karimah) as the axiology of Islam. These are fundamentals before embarking to the adaptability of Islamic finance principles into policy.

Islamic economic ideology has exerted a profound influence on the evolution of the open market, particularly in the domains of individual property rights, unobstructed commerce, and restrained governmental interference. The Islamic doctrine pertaining to individual property rights underscores the entitlement of individuals to possess and exercise dominion over their possessions, and this fundamental doctrine has played a pivotal role in shaping the unrestrained market. Islamic economic philosophy also champions free trade, affording individuals the freedom to exchange commodities and services devoid of governmental constraints. This doctrine has contributed to the creation of a more efficient and prosperous economic milieu. Ultimately, Islamic economic thought propagates the concept of delimited governmental involvement in economic affairs. This principle affords enterprises the latitude to undertake risks, while empowering entrepreneurs to establish novel companies, both of which are integral to economic expansion. The undeniable contributions of Islamic economic thought to the maturation of the open market are incontestable. These principles have been instrumental in the establishment of a more efficient, flourishing, and vibrant economic landscape. As our world becomes progressively intertwined, it remains imperative to retain the insights gleaned from Islamic economic thought and persist in the pursuit of an equitable and free market system.

The announcement of the SDGs in 2015 marked a dramatic shift in global development, culminating in an age of international cooperation where the international community bands together to tackle the world's most pressing challenges. This chapter discusses the peculiar connection between Islamic financing and the SDGs and focuses on the possible harmony between these two sectors. It emphasizes the need for significant financial resources to advance sustainable development. Researchers argue it is crucial to bring digital technologies together with Islamic finance to reach sustainable economic growth through innovations like artificial intelligence (AI), blockchain, and fintech. In addition, the chapter explains core principles of Islamic finance that conform to Shari'ah, which will eradicate poverty and promote conscientious consumption. Islamic finance opens the opportunity for financially and socially excluded groups, poverty reduction, and environmental sustainability through programs like renewable energy projects. However, SDG integration with Islamic finance still poses some challenges, namely, Shari'ah scholars' understanding of the SDGs, regulatory and operational difficulties, the necessity for innovation, and measuring nonfinancial benefits. Through case studies, the authors provide pragmatic insights into successful integration processes as well as practical lessons for the concerned parties. The chapter ends by making policy recommendations grounded on active support by governments, compulsory educational initiatives, new interesting Islamic finance products, and shared efforts (or undertakings) among various stakeholders. In short, this chapter positions Islamic finance as a potent catalyst for SDGs, furnishing a sustainable economic and social development framework while acknowledging and addressing challenges on the integration journey.

The low-income groups in developing nations need microcredits to support their family needs. As banks avoid providing microcredits due to high costs, microfinance institutions are the last resort for this segment of society. The cost of borrowing for the borrowers is indeed high. However, these microfinance institutions play a significant role in financial inclusion. In Muslim countries where financial inclusion takes a hit as a portion of society does not want to indulge in usury transactions, Islamic microfinance institutions play a vital role. In this chapter, the focus is on the Islamic microfinance institutions and their role in achieving the objectives of Shari'ah (maqasid al-Shari'ah) along with the fulfillment of goal of financial inclusion. A case study of Akhuwat Foundation found that the institution offers different interest-free microcredit products along with free healthcare and clothing to the needy segment of society. In this way, not only that the financial inclusion is achieved but also the objectives of Shari'ah are fulfilled. The study provides key facts to the academia and microfinance industry in achieving financial inclusion and fulfilling maqasid al-Shari'ah altogether, in which the banking sector is lacking.

Increasing humanitarian disasters and the need for financial support – specifically within the Organization of Islamic Cooperation (OIC) countries – has forced global humanitarian agencies to consider alternative funding sources. The victims of disaster and those disadvantaged that remain below the poverty line in much of the OIC countries remain concerned about the source of the funding they receive, based on their beliefs. Furthermore, institutions responsible for managing the funding for Sustainable Development Goals (SDGs) targets in their respective countries have also been considering alternative funding. The World Bank and the Islamic Development Bank (IsDB) suggest that the Islamic social finance is largely untapped, with significant potentials for more effective collection and distribution of compulsory alms called zakah and endowments known as waqf within the OIC countries. This chapter assesses the current challenges and opportunities for the Islamic social finance and covers some of the successful cases of the Islamic social finance deployment. The authors review approaches where world-renowned institutions have applied interest-free loans for poverty reduction, banking products for agricultural social financing, the utilization of cross-border social funding for socio-economic development and property management using social finance principles. The authors also assess capital market instruments integrated with the Islamic social finance for managing SDG funding gaps.

This chapter is about the role Islamic finance has been able to stay on the track of facing social–economical predicaments and on the way to sustainable development with the involvement of social prosperity. When trying to investigate the convergence between social finance and Islamic standards, what is argued is that a need for observing financial operations in the same way as prodevelopment theories arise. It is considered that in a holistic approach, which assumed a social justice as the basic ethic of the Islamic financial system, the final result tends to be more appropriate. One of the main elements that makes Islamic banking stand up in a high grade is maqasid al-Shari'ah due to its responsibility to assess social performance and apply new updated technologies for sustainable growth based on Sustainable Development Goals (SDGs). In addition to that, the situation is critically observed and the gap between ambitions functions and the reality in Islamic banking and finance is also pointed out to find some reconciliation between aspirations and facts. While its ancient foundations did point to the prospect of Islamic banking to serve as a major contributor to the social and economic development, the industry players of today have now been preoccupied with the profit-making objectives and financial performance rather than social banking. This chapter focuses on the role of Islamic finance as a breakthrough force and shows the way that this influence could shape the discussions of financial systems, so that economics follow, and ethical principles and become factors for the national economy to grow more robustness.

In this chapter, the author look at the symbiotic relationship between Islamic banking and sustainability and how it affects environmental, social, and governance (ESG) practices. It explains the tenets of sustainable Islamic banking by looking at the relationship between banks and ESG and climate-related factors. This study examines corporate finance mechanisms via commercial Islamic banking, highlighting noninterest-based loans with a focus on sustainability, social responsibility, and the environment as cutting-edge financial instruments. Among the topics examined are green corporate deposits, syndicated financing, project finance, and sustainable trade finance, as well as instruments like sustainable shipping letters of credit.

As part of its aim to boost responsible financial practices and ethical investments, the chapter highlights how sustainability principles can be integrated into Islamic banking. The contribution of Islamic banking to corporate financing offers a range of environmentally friendly and sustainable financial products that are in line with moral values as determined by the Shari'ah. This covers consequences linked to sustainability as well as effects on the environment and society. This study goes into the field of investment banking and demonstrates how moral and responsible investment choices can be made by applying the principles of Islamic finance.

The chapter concludes by emphasizing the crucial role Islamic banking plays in maintaining financial stability and resilience. It presents arguments that Islamic banking can be a catalyst for positive change, by aligning financial practices with ethical principles so that global banking becomes more sustainable and responsible.

Agriculture is one of the oldest socio-economic activities. It involves growing valuable plants and animals for human existence. Sustainable agriculture should be understood in light of the global sustainable development movement, which emphasizes balancing environment, society and economics. With the ongoing effects of the COVID-19 pandemic and the recent war between Russia and Ukraine, sustainable agriculture can help eliminate food insecurity caused by food shortages and agricultural sector disruptions. Recently, investors, practitioners, academicians, researchers, regulators and financiers are increasingly interested in using Islamic financing products and qualified Shari'ah-compliance contracts to promote sustainable agriculture. Many Organization of Islamic Cooperation (OIC) states still rely on agriculture for socioeconomic growth. These countries are major contributors to Islamic financial growth. This study assesses Islamic finance’s role in promoting sustainable agriculture in selected OIC countries. The researchers use qualitative methods and meta-analysis data to determine the constraints and benefits of implementing Islamic financial products for sustainable agriculture. This study suggests that OIC state governments should promote sustainable agriculture. OIC member states have different achievements relating to their sustainable agriculture. Based on socio-economic factors, agriculture policies or plans, leadership and political will, Islamic finance products and Shari'ah-compliance contracts are found underutilized in meeting sustainable agriculture and sector stakeholders’ needs. A solid Islamic financial framework for sustainable agriculture, good governance and improved agriculture policy are needed.

After the financial crisis of 2007–2008, the financial service industry realized that the world’s worst financial catastrophe had been caused by an age of easy money and lax monitoring. This realization led to pressure on regulators to overhaul the financial system during the Great Depression. Banks were required to make sure they implemented a variety of endogenous risk-minimization mechanisms and assume accountability for verifying the stability of the financial scheme. Innovative financial technology (FinTech) solutions arose in this more regulated environment to address – or, as one would argue, avoid – risks that arose during the financial crisis. The goal of this chapter is to examine the possible challenges and opportunities of incorporating FinTech into Islamic finance. Four services are provided by Islamic FinTech: finance, payments, advisory, and compliance. The traditional financial system is being recolonized by Islamic FinTech. FinTech adoption in Islamic finance could lead to greater financial inclusion, the solution to emergencies like COVID-19, and the achievement of Sustainable Development Goals (SDGs) for a sustainable national economy. However, there could be obstacles associated with this acceptance in the form of risk, investment, and regulatory issues. In order for FinTech companies to be innovative and address social issues that conventional financial institutions fail to address, authorities must provide a market whereby these companies can thrive without having to be acquired by major banks or focus their innovation solely on meeting the demands of these banks. Furthermore, they need to be explicit about the regulations' applicability to FinTech companies, especially with regard to how to strike a balance between being a technology company and a financial institution.

The chapter is devoted to the in-depth analysis of the compliance between the Shari’ah rules and digital currency within the context of Islamic finance. The emergent trend of digital currencies, especially virtual based as in the case of Bitcoin, has raised questions on the issue of their compatibility with ethical and legal moral rights. The paper covers core issues like Shari’ah implementation, the utilization of tangible assets, crypto as a medium of exchange and some obstacles in merging crypto into Islamic banking. Besides that, the paper outlines workable solutions for overcoming these difficulties, including the introduction of Shari’ah-compliant cryptocurrencies, the development of a regulatory framework and the need for enlightenment and collaboration. Furthermore, the manuscript will exhibit some Islamic-centric digital currencies, e.g. the Islamic Coin and OneGram, to illustrate that a successful integration into Islamic finance is possible. Furthermore, future estimations consider the implications of central bank digital currencies (CBDCs) in Islamic finance which brings up both opportunities and challenges. The conclusion calls for ongoing research and innovation spanning traditional as well as digital (cryptocurrencies) in order to achieve Shari’ah harmonization and eventual evolution of the Islamic finance sector.

Digital transformation has made enormous changes in the banking domain, where financial technology (fintech) is the salient driving force inside it. For Islamic banking, artificial intelligence (AI) is one of the most innovative technologies that has shifted banks into the entire virtual environment. In this context, the main objectives of this chapter are to discuss the current application of AI in the Islamic banking industry, to identify the challenges faced by the banks in adapting AI while ensuring Shari’ah compliant in their operations, and to shed light on the future of banking and how it will influence Islamic banks in this digital era. This chapter also provides several examples of the application of several Shari’ah robo-advisors used by Islamic banks. Robo advisors are mainly an advanced AI tool involved in investment and portfolio management. The unique value of AI for Islamic banks lies within its own-Shari’ah AI framework that is used to fulfill Shari’ah-related matters, which requires active collaboration between Shari’ah scholars, regulatory bodies, and Islamic banks. Despite all the challenges, AI holds immense potential for Islamic banking to improve efficiency, accessibility, and risk management. Finally, the chapter paves the way for further discussion on building a responsible and innovative Islamic financial system in the era of AI.

In this chapter, the integration of diverse discussions from preceding chapters converges into a comprehensive exploration of four pivotal challenges facing Islamic finance both presently and in the future. The chapter systematically addresses these challenges, commencing with a focused analysis on augmenting the role of Islamic finance in fostering financial inclusion. It scrutinizes innovative strategies to broaden access to financial services. Moving forward, the narrative navigates the intricate intersection of Islamic finance and sustainability, unraveling the potential synergy between these two domains and their collective contribution to Sustainable Development Goals (SDGs). The exploration extends to the realm of digitalization, probing how modern technologies such as artificial intelligence and blockchain can serve as catalysts for the progression of Islamic finance. Finally, the chapter delves into the imperative of harmonizing the Islamic financial industry (IFI), tackling challenges and proposing solutions to enhance uniformity and coherence in practices. These nuanced discussions not only address contemporary challenges but also underscore their critical role in achieving the SDGs and aligning with the targets of the Paris Agreement by 2030, providing valuable insights for scholars, practitioners, and policymakers in the field of Islamic finance.

This chapter delves into the complex yet fascinating arena of Islamic finance, looking at its historical foundations and dealing with today’s complexities. There is a huge struggle in Islamic economics in meeting the contemporary needs while practising moderate framework, observing the difference between strictly abiding by the rules and achieving the ethical goals beyond the profit. It urges for a value-driven approach within institutions and the implementation of the zakat, sadaqah and waqf systems to fill the Sustainable Development Goal (SDG) financing gap. Seizing the opportunities, the chapter promotes the necessity of Islamic fiqh experts with current Shari’ah body of knowledge in considering the ethical and legal aspects alongside fintech. This is essentially to ensure that the implementation of Islamic finance enables the sustainable economic development. Looking toward the Industry 5.0, it expects a combination of artificial intelligence (AI) with Islamic finance and identifies Islamic social finance as a powerful socially-driven tool. In the end, the chapter lays out Islamic finance as the powerful tool to work together to achieve an ethical, equitable, and sustainable financial system.