Shari’ah Finance: A Niche Wearing a Bigger Industry’s Clothes

The infographic contrasts Dar al-Ifta’ of Egypt’s case-by-case pragmatism with the systemic-replacement ambitions of Islamic finance proponents.  The contrast exposes exactly why the systemic project has failed on its own terms.  Global Islamic finance assets reached roughly US$5.98 trillion in 2024.  Global banking assets sit above US$180 trillion.  That places the distinct Islamic financial system at barely 3% of global banking assets, after fifty years of institution-building, billions in regulatory investment, and the enthusiastic backing of entire sovereign governments.  There is no demand at civilisational scale for wholesale replacement.  What exists is a niche product line, not a rival architecture.

Murabaha, the industry’s dominant financing structure, has historically priced its profit rate against the London Interbank Offered Rate, and continues pricing against successor benchmarks such as the Karachi Interbank Offered Rate today.  Academic reviews of the practice describe Islamic banks as attempting to replicate conventional instruments by making them more complicated, while standing exposed to the same underlying flaws as the conventional system they claim to replace.  Research by Shaikh in 2013 found that Islamic banks bear political risk, currency risk, default risk, and country risk in a manner indistinguishable from their conventional counterparts using the same benchmark.  A murabahah markup and an interest rate charged on the same loan, benchmarked against the same index, are not two economic realities.  They are the same number wearing a different Arabic label.

Even AAOIFI’s own standard-setting body concedes the point implicitly.  Its Financial Accounting Standard No. 2 governs how murabahah profit gets recognised over the credit period, a proportional allocation method.  That is an accounting convention, not an independently derived economic theory of the time value of money.  Current fiqh has no mechanism of its own for pricing deferred payment risk or hedging inflation, so the industry defaults, quietly and consistently, to the exact conventional interest rate indices its founding premise claims to reject.  Every hukm and every fatwa built on top of that default inherits the same unresolved gap underneath it.

The Scandal That Should Have Ended the Debate

In June 2017, Dana Gas PJSC, a UAE-listed energy company, unilaterally declared that its own US$700 million mudharabah swukuk had ceased to be shari’ah-compliant, and therefore claimed the certificates were unenforceable under UAE law.  The timing was not subtle.  The declaration arrived when Dana Gas faced a liquidity crunch and wanted to restructure the debt on more favourable terms.  Swukuk holders took the matter to the English High Court, which in November 2017 upheld the contractual obligations regardless of the shari’ah non-compliance claim, ruling in Dana Gas PJSC versus Dana Gas Sukuk Ltd & Ors that the payment obligations were governed by English law and enforceable as such.  A company effectively told the market that its own shari’ah board, the very body it had paid to certify the structure as compliant, had been wrong all along, conveniently at the exact moment that finding suited its balance sheet.  White & Case described the episode as a potentially destabilising development for the entire swukuk market and the Islamic finance industry as a whole.  The market’s own response confirmed the critique: swukuk issuers scrambled afterwards to insert clauses explicitly waiving any right to challenge the shari’ah compliance of their own instruments, an industry-wide admission that shari’ah compliance had functioned, in practice, as a negotiable legal position rather than a fixed religious commitment.

Why This Matters Beyond One Company’s Bad Faith

If shari’ah compliance were a genuine, load-bearing economic distinction rather than a labelling exercise, no issuer could plausibly argue its way out of a payment obligation by disputing that compliance after the fact.  The very possibility of the Dana Gas argument existing, and needing an English court to slap it down, confirms that the underlying instrument was never economically distinct from a conventional bond in the first place.  It was a conventional obligation, wrapped in a shari’ah-compliant structure, and the wrapping proved as removable as the wrapping on any other financial product once removing it became commercially convenient.

The Better Path Exists

Dar al-Ifta’s contextualised approach does not pretend an alternative economic system already exists.  It asks what shari’ah permits within the real economic conditions people actually live in, drawing on maqaswid ash-shari’ah rather than insisting on wholesale substitution.  That is evolutionary, not experimental, and it does not gamble ordinary people’s livelihoods on an ideal system with no proven demand, no independently derived economic theory of time value, and, as Dana Gas demonstrated in open court, no reliable commitment even from its own issuers when the commitment becomes inconvenient.

The proponents of shari’ah compliance have, in large part, dressed conventional financial instruments in Arabic terminology, benchmarked them against the same interest rate indices conventional finance uses, and charged clients more for the privilege, frequently for comparable or lower risk-adjusted returns than the conventional equivalent offers.  Something about attaching the word “religious” to a financial product appears to switch off the scrutiny that same product would face under any other label.  That is not piety.  It is marketing, and marketing deserves exactly the scepticism any other unverified sales claim receives, regardless of which language the label is printed in.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code