Practical analysis for investment professionals
18 February 2015

Is the Islamic Finance Industry a Success or Failure?

Since 1975, when the first Islamic commercial bank was established in Dubai, Islamic finance has come a long way. It has grown rapidly in recent decades and its global assets are now estimated to be around US $1.5 trillion across the banking sector, capital markets, and takafulor Islamic insurance.

Given the available track record, how do informed observers characterize the development of this most prominent form of faith-based finance? And what criteria do they use? Let’s look at some of these opinions. (If you are new to Islamic finance and want a clear but brief introduction, read pages 1–12 of Islamic Finance: Ethics, Concepts, Practice, a literature review published by CFA Institute Research Foundation.)

One Industry, Many Opinions  

One of the foremost critics of the industry, Mahmoud Amin El-Gamal, a professor of economics at Rice University in the United States, considers modern Islamic finance to be “Shari’a arbitrage” wherein what is prohibited in conventional finance becomes permissible when deemed “Shari’a compliant” despite having similar, if not the same, economic substance. Duke University economist Timur Kuran claims that Islamic banking is “based on an operational principle [of profit and loss sharing] that is simply unfeasible.”

Professor Mehmet Asutay, from the University of Durham in the United Kingdom, is more concerned with the “social failure” of Islamic finance. He says that Islamic finance does not share the aspirations or the foundational claims of Islamic moral economy.

The London-based writer Tarek El Diwany is critical of Islamic finance for not relying on risk-sharing financing in practice, arguing that “If Islamic banking adopts a genuinely Islamic paradigm it can offer a solution to a world hungry for alternatives. If it does not, it will enjoy a brief life as a get-rich-quick bandwagon and then disappear into the relics of financial history.”

Although sympathetic to its ideas, economist Volker Nienhaus, while comparing Islamic finance and responsible investing, opines that “Islamic finance as it is practiced today is not so well received by the average Muslim.” But Nienhaus sees potential for it in some areas, such as expanding access to finance, and wants it to do more to integrate environmental, social, and governance (ESG) issues.

Tufts University professor Ibrahim Warde takes a wider historical and political-economy perspective and believes that “Islamic finance is still in its early stages of development and is still beset by tensions and problems.”

Assessments by practitioners and journalists are more sanguine. Attorney Oliver Agha states that blaming Islamic finance for the credibility challenges associated with its adherents is not fair. He believes that if Islamic finance is to be genuinely implemented, however, it must return to its spiritual roots.

Islamic finance, according to the Italian journalist and political analyst Loretta Napoleoni, “represents the sole global economic force that conceptually challenges rogue economics,” and it does not allow investment in pornography, prostitution, narcotics, tobacco, or gambling — areas which Napoleoni thinks have flourished in a free market, globalized economy.

Camilla Hall, a correspondent for the Financial Times, appreciates Islamic finance’s growth. She says that “no one could have foreseen that sharia-compliant banking could grow into the US$1.1tn global industry that it has become today.”

There are many others who are still bullish on the prospects of the industry. For instance, the investor Mark Mobius thinks that opportunities in Islamic finance “are great,” and The Economist reports that “despite strong recent growth for Islamic financial products, there still is room for further expansion.”

If the practice of Islamic finance is met with skepticism, its underlying principles can appeal to a broad cross section of opinion-makers. In 2009, Bloomberg quoted the Vatican’s official newspaper, L’Osservatore Romano, as saying, “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service.”

Commenting on the foundations of Islamic finance, economist Willem Buiter maintains that “if too much debt and too little capital are (part of) the problem, then the conversion of debt into equity is (part of) the solution.” In arguing against excessive debt and in favor of equity, Harvard economist Kenneth Rogoff suggests that “perhaps scholars who argue that Islamic financial systems’ prohibition of interest generates massive inefficiencies ought to be looking at these systems for positive ideas that Western policymakers might adopt.”

Gillian Tett of the Financial Times notes that Islamic finance’s “core principles — if not all the practice — are fascinating. After all, the idea of tethering our financial system more closely to the ‘real’ economy and tangible, productive enterprises seems distinctly appealing these days. Likewise, building a system around equity, not debt, with less financial candyfloss.”

My Opinion 

While no claim is made that the above is a comprehensive set of opinions on Islamic finance, looking at these different views, it seems that those who consider Islamic finance a success story often refer to its higher-than-expected growth in the past as well as its prospects for further growth. Those who consider it a failure point to its tendency to favor legal form over economic substance and the lack of substantive differentiation from conventional finance — to which it was supposed to offer an alternative. More importantly, some of these observers make a distinction between the principles and practices of Islamic finance. While its practices often invoke sharp critiques, it seems that the underlying principles tend to strike a sympathetic chord.

So far Islamic finance has probably been more successful in offering an alternative perspective on finance than in providing a substantively different way of financing. The emphasis of its theory on social consciousness, risk-sharing, redistribution of wealth and opportunity, and making finance the servant and not the master of the real economy are what many observers want to hear. But Islamic finance has found it hard to put theory into practice. Why? The list of reasons ranges from history, law, politics, regulation, taxation, consumer behavior, and beyond. But an important reason is that Islamic finance is generally made to fit into a system designed for conventional finance, and in the process of making concessions, it seems to lose what its critics regard as its substance.

The Final Word on Islamic Finance

Has the final verdict on Islamic finance been rendered? Probably not. The Islamic finance industry and its literature as of 2015 are materially different in breadth and depth from where they were in the early 1970s or, for that matter, in the early 1990s. The industry continues to evolve, and there is no reason why, in the next two decades, the field won’t evolve considerably more from where it stands today. In the wake of the global financial crisis, the ideas underpinning Islamic finance might appeal to those who aspire for a relatively restrained financial system and are concerned about the broader impact of the finance industry on society.

In November 2014, CFA Institute Research Foundation published a literature review, Islamic Finance: Ethics, Concepts, Practice. This literature review is available to everyone without any fee or registration.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Usman Hayat, CFA

Usman Hayat, CFA, writes about sustainable, responsible, and impact investing and Islamic finance. He is the lead author of "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals;" the literature review, "Islamic Finance: Ethics, Concepts, Practice;" and the research report "Sustainable, Responsible, and Impact Investing and Islamic Finance: Similarities and Differences." He is interested in online learning and has directed three e-courses for CFA Institute: "ESG-100," "Islamic Finance Quiz," and "Residual Income Equity Valuation." The other topics he writes about are macroeconomics and behavioral finance. He has experience working in securities regulation and as an independent consultant. His qualifications include the CFA charter, the FRM designation, an MBA, and an MA in development economics. He has served as a content director at CFA Institute. He is a former executive director at the Securities and Exchange Commission of Pakistan (SECP) and former CEO of the Audit Oversight Board (Pakistan). His personal interests include reading and hiking.

23 thoughts on “Is the Islamic Finance Industry a Success or Failure?”

  1. David Botbol says:

    The prohibition of interest payment is in the Thora.
    Interest = Agar natar, which means in Aramaic “time value”.

    The sages of the Mishna and Guemara have designed proper solutions which has been around for 3,000 years. They are described in the Talmud Tractate “Baba Metzia”

    With time it became know as “GMACH” which stands for “Gmilut Hassadim” (doing good). The principle of risk sharing are there fully at play and interest are indeed prohibited.

    Banks in the Modern State of Israel also lend money under a financially kosher contract which is called “eter iska”.

    This contract is build in the following way :
    1 – Half of the loan is pure loan with no interest.
    The bank deposits money with the lender and takes guaranty against it. The Bank expects to be repaid in full and takes no interest.

    2 – The other HALF is full risk sharing.
    However, in order not to be involved in the day to day activities of the borrower, the parties agree that there will be a predetermined amount of money paid out of the profits.
    This profit is expressed in percentage.

    1. David Botbol

      Thank you for visiting our blog and posting this comment.

      I appreciate your reference to “risk sharing.” This is a term which is also strongly associated with Islamic finance given the prohibition of riba.


  2. Malcolm Ward says:

    To argue that Islamic finance is a failure because Islamic bank products mirror those of conventional banks is facile. A bank loan is a bank loan; a car loan is a car loan; a credit card is a credit card etc. Customers want certain products from their banks. Does anyone seriously believe that Islamic banks should turn their backs on these customers, all in the name of being different? The real failure of Islamic finance is the failure to agree common, universally accepted standards of Shari’a compliance. Until the industry does so, Islamic finance will remain a niche product and unable to offer an ethical alternative to conventional finance.

    1. Malcolm Ward

      Thank you for reading the blog and sharing your views.

      I think some of the critics you are referring to would point out lack of risk sharing in the concerned financing arrangements. This is the risk associated with ownership of an asset or outcome of a business enterprise.

      We have covered the point of view of the critics of the industry and the defense offered by the industry, along with the issue of global sharia standards, in the literature review mentioned in the article.



    2. Juan Caballero says:

      The whole notion of applying sharia to any aspect of life is flawed and based on a misunderstanding of human nature: that all law has to have a divine origin in the Quran and the Ahadith. Man is a rational animal and reason has to govern the everyday aspects of life and not a top down system based on a dubious revelation by Allah in the 7th century. The notion that human reason is not capable of making laws and adapting them to the changing circumstances o the ages is not only false but also excessively cumbersome as the effort at deriving laws from the Quran and the Ahadith and analogy, is just an excessive waste of time and effort, as it is not possible to imagine that the creators of sharia in the 8th and 9the centuries were able to foresee all the complexities of modern finance.

  3. Nasiru Rikiji says:

    The above piece of work aroused one’s interest in Islamic Finance. So thank you.

    1. Nasiru Rikiji

      Thanks for the kind feedback.



  4. Thanks for sharing the article Usman and for providing the range of opinions on the subject of sharia finance. Fortunately, there is a global body of sharia scholars that have provided guidelines for trade that are accepted among all schools of faith in Islam. Their guidelines are now online:

    I am a Regional Manager with Sharia Portfolio – a sharia compliant investment advisory firm. Our goal is to help Muslims achieve their financial goals the halal way. I’d be happy to share additional information. Our website is

    Below are some links that might interest you:
    · Our firm was interviewed by CNBC. Feel free to read the article that was published here:
    · Al-Jazeera recently spotlighted us on our Halal investment services on: Real Money with Ali Velshi
    This article is about advisers helping Muslims invest with faith

  5. Thank you Usman for your thoughts and for presenting the different perspectives on the topic of Islamic Finance. Fortunately, there is AAOIFI a global body of sharia fianance scholars that have published their guidelines online. These are thought of as being universally accepted among most schools of thought in Islam and this is a good step in the right direction. This also means that there can be viable alternatives to the conventional products.
    I am a Regional Manager with Sharia Portfolio – a sharia compliant investment advisory firm. Our goal is to help Muslims achieve their financial goals the halal way. I’d be happy to share additional information or schedule a free consultation for you with one of our senior advisors. Our website is

    Below are some links that might interest you:
    · Our firm was interviewed by CNBC. Feel free to read the article that was published here:
    · Al-Jazeera recently spotlighted us on our Halal investment services on: Real Money with Ali Velshi
    This article is about advisers helping Muslims invest with faith

  6. Aliredha Walji

    Thank you for sharing your views and the providing these links.

    In the detailed literature review, you will find that we have covered some of the issues raised by you here.



  7. Jerald says:

    None of this is meaningful. The only real question is the efficiency of the strategy. Does it allow free flow of capital? Will the parties be equally satisfied, and can investors make money? That question remains.

    1. Jerald,

      Thanks for reading the article. The questions you raise regarding efficiency and profitability are addresses in empirical studies, which we have covered in the literature review mentioned in the article.



  8. Mohammad Nazim Uddin says:

    Thank you Mr Usman for your post. Pleasure of reading a write up written from a neutral perspective. One of the key hindrance in studying Islamic Finance, being a Muslim, is that of agreeing to something before even fully understanding it, at least to me! Otherwise one can say logic-belief encounters! May Allah guide us all.

    Zajakallahu Khairan.

  9. Mohammad Nazim Uddin

    Thank you for visiting our blog and your kind comment on the article.
    Yes, there are a range of perspectives on Islamic finance and one should remain open to different perspectives.



  10. Imranullah Khan says:

    Nicely the range of opinions are compiled, thanks for the efforts Usman.

    1. Imranullah Khan

      Thank you for visiting our blog and your positive feedback.



  11. Bob Hannah, CFA says:

    I became interested in Islamic finance after reading the CFA Institute’s Primer (2009) and was happy to see the successor monograph – Islamic Finance: Ethics, Concepts, Practice (2014).

    I see Islamic finance as a conceptual failure, but then I am a confirmed Islamic finance sceptic. I would advance the following arguments:

    • Mahmoud El-Gamal’s assertion that Islamic finance has abandoned its original ethical content and placed excessive emphasis on legal form is quite convincing (See his Islamic Finance: Law, Economics, and Practice, 2006) . The devotion of considerable energies to the creation of sharia compliant copies of existing interest based financial instruments is inefficient and costly to the users of these instruments. I personally met an issuer of sukuk who said that many (non-Muslim) investors bought them simply because they paid higher yields than otherwise similar bonds. The issuer seemed to view the pressure to issue sukuk as an annoyance.

    • The CFA Institute Research Foundation’s Islamic Finance: Ethics, Concepts, Practice is a balanced and thorough literature review. It perhaps wisely (!) does not attempt a translation of the forbidden riba because of the confusion surrounding its real meaning. Is it interest? usury? excessive interest? exploitation of debtors? predetermined profit? We must conclude that there is confusion around one of the central tenets of Islamic finance – the meaning of riba. The fatwah of Sheikh Tantawi, of Al Azhar University in Cairo in favour of some forms of bank interest as predetermined profit (p. 27 of the CFA review) – although perhaps politically motivated – created much turmoil, debate pro and con, and rebuke within the Islamic community. Tantawi’s institution is reputed to be a respected centre of Islamic scholarship, and to my understanding, as a leader of Sunni scholarship, he had espoused his views for some time before. The fact that there is such controversy calls into question the claims by Islamic scholars of the existence of a consensus that all interest is riba. It would appear to be wishful thinking on their part, if not intellectual dishonesty.

    • In my admittedly limited search for Islamic advocates of the ban on interest, I read some of Justice Usmani’s judgment on interest (Pakistan). To my dismay, a central part of the argument there (see the judgment’s sections 135 and further) is the Aristotelian notion, shared by many classical philosophers and the other Abrahamic faiths, that money is unproductive. Consequently it should not earn a return. The insight of modern market based economics and finance – which is missed by those scholars – is this: while money is not a fertile farm, a manufacturing plant, or a computer program, it is fungible with all of these and all other market traded commodities, services and spot and forward financial instruments with holding period returns. Market arbitrage will price out these relationships and establish a time value for money.

    • To those of us schooled in western based finance and economics, agents’ time preference and the time value of money will demand compensation through market arbitrage, whether through interest or through Islamic deferred mark-up structures. Islamic finance advocates have not been able to address successfully the intellectual contradiction between this market tendency and a ban on interest. Part of their confusion results from a tendency to mix normative (moral) and positive (analytical) deduction.

    • Risk sharing on the surface sounds like a good idea. However, if honestly and rigorously applied to banking, it would lead to a gross asset-liability risk mismatch, or it would turn banks into venture capital companies, with bank runs when they fail! Thankfully, Islamic bankers have enough sense not to engage in true risk sharing, and instead use the Islamic copies of conventional mortgages and loans.

    While a conceptual failure, Islamic finance is clearly expanding at a good rate, and global financial markets and firms see opportunities to satisfy the preferences of Islamic investors and borrowers. In that sense it could be deemed successful.
    Islamic finance does have something to say about issues such as excessive financial leverage, the capitalization of banks, risk management, and financial market ethics. Instead of erecting a parallel financial system, Muslims’ energies would be better directed towards engaging with regulators and legislators to communicate their views on these issues.

    Bob Hannah, CFA
    Gatineau, Canada

  12. Bob Hannah, CFA

    Thank you for visiting our blog and leaving this detailed comment. I very much appreciate that you have read both our monograph as well as the literature review on Islamic finance.

    Islamic finance ideas and practice attract a wide range of views, from strong praise to criticism, and I can understand your perspective.

    The debate around Islamic finance is not quite settled yet. I think the experience of the global financial crisis has materially influenced the thinking in both conventional and Islamic finance and brought more clarity to the ideas underlying Islamic finance.



  13. Farid Karkaby says:

    In addressing the question whether Islamic Finance is a success or a failure, Usman explains that some have hailed the success of the industry based on its growth and international expansion, while others consider it a failure based on the divergence of its practice from the theory as illustrated by the emulation of conventional finance at the expense of the core principles of Islamic Finance.

    The article triggers an extension to the initial question: Is the growth of Islamic Finance (flagship of its success) sustainable despite the industry’s tendency to emulate conventional finance at the expense of its core principles of risk-sharing (flagship of the failure argument)?

    Dr. Elgari -a prominent Sharia scholar and holder of a PhD in Economics from the University of California- states that the increasing predominance of debt-like financial products, which are similar to conventional products as opposed to the Islamic Finance risk-sharing products, causes a higher risk profile for Islamic Banks.

    The suggestion that there is a linkage between the riskiness of Islamic banks and their drifting towards conventional banking products can be contemplated in the context of another linkage: Ernst and Young asserts that, as businesses grow, “investors and other stakeholders will want assurance that their risks facing the business are understood and under control”. In simpler terms: Growth and Risk management go hand in hand, Risk management and the choice of products and the business model go hand in hand.

    These complex yet common-sense relationships resound well in the words of Ibrahim Wardé –a Tufts University professor who teaches Islamic Banking and Finance amongst other courses- “a binary approach cannot capture the diversity and nuances of Islamic finance … and would be misleading”. This leads us to examine what others say on Growth and Risk Management at Islamic Banks:

     In an IMF working paper, Inwon Song and Carel Oosthuizen state that, given their widespread expansion and in order to preserve their own soundness and prevent undesirable effects on the financial system, Islamic banks require the adoption of a prudential and supervisory risk management framework consistent with the global framework.

     Professor Simon Archer of the University of Reading’s ICMA Centre, whose expertise includes financial reporting, capital adequacy, risk management and corporate governance of both conventional and Islamic financial institutions, states that the rapid expansion brings the need for the adaptation of effective risk management policies and procedures in line with the international Basel standards.

     Tariqullah Khan, Professor of Islamic Finance at HKU and previously Division Chief at the research center of the Islamic Development Bank, stated that “the survival of Islamic banks depends on how well bankers, regulators, and Sharia scholars understand the inherent risks” and manage them.

     (The first line of the CFA’s Institute “Practical Guide to Risk Management”, by Coleman, states that: “Managing risk is at the core of managing any financial organization”.)

    While Islamic finance represents only a small fraction of the global financial system, its interface with it and its substantial weight in some countries (Islamic Banking assets represent approximately 20% of the total banking system in the UAE) suggest that: the success of Islamic banking:

     should be equally of interest to those keen on its compliance with the substance of Sharia and to those just keen on preserving a healthy global financial system

     is dependent on the composition of the balance sheet of Islamic banks – that is their choice of products and product profiles-

     is determined by how well risk is identified, measured, monitored and reported.


    In a “Risk Analysis for Islamic Banks” published by the World Bank, Hennie van Greening and Zamir Iqbal add that “the task of the risk manager is to manage the different types of risk at acceptable levels”. They describe risks and challenges specific to Islamic Banking; lack of hedging instruments, scarcity of high quality liquid assets, reduced ability to discount assets, return risk and displaced commercial risk, inability to get compensation for delayed payments, to mention only a few.

    It is worth mentioning, in the context of the form-versus-substance debate, that there are commercial and financial risks embedded in Islamic finance contracts -such as widely used leasing contracts- whose terms cannot be side-stepped when adapting these products to mirror their conventional finance equivalents. It is not clear whether these “residual” risks are acknowledged and measured across banks and jurisdictions.

    It would be unwise to generalize whether Islamic bankers assess risks efficiently or whether supervisory authorities appreciate and monitor adequately the reporting of these risks across jurisdictions; still, certain core observations can be drawn from the literature cited:

     Islamic finance is growing at an unprecedented rate and is expanding in terms of assets, geographies and number of clients.

     The success and prudential management of Islamic banks affect local and global financial systems.

     There is a direct relationship between the form-versus-substance debate, or the simulation of conventional banking products, and adequate risk management of Islamic Banks.

     Risk management and balance sheet management at Islamic banks may be more complex and may be intimidating but is not necessarily more complicated than at conventional banks; the same applies to its supervision.

    A methodical identification of risks embedded in Islamic banking transactions gains in clarity when conducted based on the intrinsic profiles of the products and in isolation of the conventional products they emulate; its quality is also non-dependent on the challenges brought by disparate accounting models, jurisprudence and other constraints.

    A methodical measurement of risks incurred is not only essential but a requirement in a regulatory environment where the amount of risk incurred determines the amount of capital a bank is required to hold for the safety of its depositors.

    Risk identification, risk measurement and a comprehensive reporting of risks would most likely reinforce the credibility of Islamic Finance, contribute to the sustainable growth and success of an industry which has produced notable achievements, and may dilute the form-versus-substance debate.

    Farid Karkaby teaches Islamic Finance at the Paris-Sorbonne University in Abu Dhabi and is a doctoral research associate at the Henley Business School; he is a Risk and Balance-sheet Management practitioner and advisor to Islamic Banks. He can be reached on [email protected] (and happy to provide this commentary with links to the references quoted in the blog).

  14. Farid Karkaby

    Thank for such a detailed and thoughtful comment.

    I agree that risk management is a critical issue in Islamic finance practice, and perhaps more needs to be done here to develop the body of knowledge and practice.

    You’ve mentioned that you are doctoral candidate and you are teaching Islamic finance. I look forward to your contribution to the topic of risk management in Islamic finance.



  15. Ayoub Qadri says:

    Excellent analysis. JazakumAllah khair.

  16. The Islamic finance industry has been in operation for more than half a century and has purported to fill an ethical gap in the mainstream by avoiding interest and exploitation. The weakness of arguments of those who think that Islamic finance is similar to tradition finance is that they built their arguments on general observations and a one-sided perception of an industry that has deliberately sought change through evolution rather than revolution.There is no substantive restructuring which is beyond the capacity of the Islamic finance industry. Islamic finance makes incremental changes and provide for a “halal” products, albeit one that falls short of the Islamic ideal.

    Bashar H. Malkawi

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