What is Islamic finance?
Islamic finance is a way of managing money and conducting business while adhering to the moral principles of Islam, known as Shariah. These principles govern saving, investing, and borrowing, and prohibit practices such as charging interest (riba), engaging in excessive uncertainty (gharar), and investing in harmful sectors like alcohol, tobacco, and gambling.
At its core, Islamic finance is built on the belief that money should not have intrinsic value - it is merely a medium of exchange. This means you cannot simply make money from money. Instead, transactions should be tied to tangible assets, and wherever possible, profit and risk should be shared. Importantly, Islamic finance is not exclusive to Muslims - anyone can (and does) use these products and services.
How does it work?
Islamic finance uses a range of products and structures designed to comply with Shariah principles:
- Banking: Shariah-compliant current accounts do not pay interest. Deposits are treated as interest-free loans (qard), and profits are shared through contracts such as wakalah (agency) or murabahah (cost-plus financing).
- Home finance: Instead of traditional mortgages, banks use:
- Murabahah: The bank buys the property and sells it to the customer at a profit, payable in instalments.
- Musharakah: A partnership where the bank and customer jointly own the property, and the customer gradually buys out the bank’s share.
- Ijara: The bank buys the property and leases it to the customer with the rental payments acting as instalments towards a final sale to the customer.
- Investment: Funds avoid harmful sectors and often use profit-sharing models. Common instruments include Mudarabah (profit-sharing), and Sukuk (Islamic bonds).
How prevalent is it in the UK?
The UK is the western world’s leading hub for Islamic finance, supported by a level playing field created by government policy, regulators, and tax authorities. Key highlights:
- Islamic finance sector: valued in excess of GBP6 billion with figures set to double in the coming years.
- Islamic banking assets and funds: USD 11.4 billion at end-2024, up 38% year-on-year, and over USD 12.5 billion in assets under management, mostly invested in equities.
- London Stock Exchange (LSE): The largest global venue for hard-currency sukuk listings, with a 40% market share.
- Over 50 Islamic fintech firms, including a digital Islamic bank.
Why is it becoming more relevant?
Several factors are driving the increasing relevance of Islamic finance:
- Demographic shifts & ethical demand: A growing Muslim population and rising interest in ethical finance align with Islamic principles.
- Geographic shifts: driven by greater returns and asset variety, Islamic finance investment is moving away from the traditional London centric assets into the UK regions.
- Government initiatives: Plans for Shariah-compliant student loans and reforms to remove barriers to Islamic finance provision.
- Cross-border investment: GCC investors are major stakeholders in the UK Islamic finance sector, increasing exposure to Shariah-compliant structures in insolvency and restructuring cases.
- Complexity in insolvency: Islamic finance deals often involve asset-backed and partnership-based arrangements, requiring different approaches to recovery and restructuring.
- ESG alignment: Islamic finance resonates with the broader trend toward environmental, social, and governance (ESG) investing.
The bottom line
For accountants and insolvency practitioners, understanding Islamic finance is no longer optional - it’s becoming a practical necessity. Whether advising on restructuring, cross-border transactions, or ethical investment strategies, familiarity with these principles is becoming ever more vital in a rapidly evolving market.
