Islamic Finance
Sustainability and Challenges

The renewed interest and hype surrounding Islamic finance are unprecedented. Since these coincide with Western financial institutions’ commercial interest in attracting flows generated from oil revenues and savings, there is a degree of skepticism, both inside and outside Muslim jurisdictions, regarding the sustainability of the Islamic finance industry. There are also echoed concerns about whether the industry will survive competition from the global financial world, which is nurtured by a conventional system backed by strong legal, policy, regulatory, and institutional frameworks. This essay reflects on the growth and trends in Islamic finance—including the sector’s size, dimensions, and prospects—now evolving from a regional to a global scale and making an impact on private capital flows.

Islamic finance is a reality and is on the way to being institutionalized, albeit at different levels in different countries. The Western world is now selectively and cautiously positioning itself to invest in this system. There are promising signs that Islamic finance trends are sustainable. Islamic finance is entrenched in a well-conceived Islamic economic system whose mysteries are being unfolded by renewed academic interest in the subject. Though undeniably faith driven, the Islamic finance system has great potential to meet the financial gaps and requirements of development and society at large, and, as such, demand for Islamic finance promises to be robust even beyond religious grounds.

Islamic finance must be recognized as a parallel system that will augment, and be augmented by, a deeper knowledge and experience of the conventional financial system. As such, the industry’s long-term growth and sustainability depend on: (1) how Islamic finance interfaces with and benefits from complementing and supplementing the conventional system, and (2) how Islamic finance adapts and conforms to international regulations and supervision while remaining aligned with the technicalities and nuances of Islamic financial instruments and their associated risks. Properly exploiting the unique features of Islamic finance with appropriate adaptability, and without compromising principles of sharia (Islamic law), will be critical to the growth and promising future of the Islamic finance industry.

Touching on some of these debates, the essay begins by addressing trends in Islamic finance, then turns to lay the case for the sustainability of Islamic finance, and concludes with a discussion of some key prospects and challenges facing the industry that the Islamic financial community is now seeking to address.

Growth and Trends in Islamic Finance

Spread across 70 countries, Islamic finance has grown…