Inside Islamic Finance: Principles, Market, and Global Regulation
- MD Finance Team
- 4 days ago
- 3 min read
Below, we introduce the core financial instruments of Islamic finance, provide an overview of the Islamic fintech sector, and explore its regulatory landscape.
Muslims comprise 24% of the world’s population – nearly 1.8B people. Islamic finance, a faith-aligned financial system rooted in Shariah (Islamic law), is becoming an integral part of the global financial services. This model emphasizes fairness, ethical investing, and social justice.
In 2023, global Shariah-compliant finance assets reached approximately $4.9T, marking a double-digit YoY growth of 11%. Industry forecasts project this figure to rise to around $7.5T by 2028.
Key Pillars of Islamic Finance
Islamic finance prohibits interest (riba), investments in illicit (haram) activities, and avoids excessive uncertainty (gharar). Instead, it emphasizes ethical, asset-backed, and risk-sharing models.
Shariah-compliant financial products include three main types of contracts:
Murabaha (cost-plus financing): This contract refers to the sale of goods on a pre-agreed profit markup, where the seller discloses to the buyer both the purchase cost and the profit margin. This structure avoids interest, as the profit is embedded in the agreed-upon price rather than being charged separately.
Ijarah (leasing): Under Ijarah, the bank purchases and leases an asset to a customer for an agreed rental fee. Ownership remains with the lessor (bank), but usage is granted to the lessee. These contracts may include an option for the customer to buy the asset for a pre-agreed price (an Ijarah wa Iqtina contract).
Mudarabah (profit-sharing partnership): In this case, one party provides capital (rab al-mal), while the other offers labor or management (mudarib). Profits are shared per a pre-agreed ratio, while losses are borne solely by the capital provider – unless caused by the manager's negligence.
The Fintech Landscape: Growing Size and Trends
Islamic fintech is not only growing but also becoming profitable. The sector recorded $161B in transaction volume in 2023/24 and is projected to reach $306B by 2028, growing at a CAGR of 13.6%, compared to the global fintech industry’s CAGR of 11.0%. Key markets include Saudi Arabia, Iran, Malaysia, the UAE, Indonesia, and Turkey.
The BNPL segment, for example, is led by two prominent players: Tabby and Tamara. Tabby reported Q1 revenues of $85.2M (+38% YoY) and a net profit of $17.4M – a 553% increase – driven mainly by merchant commission growth, which now accounts for 90% of its revenue. Tamara, meanwhile, moved from a $16.6M loss in Q1 2024 to a $6.9M profit in Q1 2025.
Revenues surged 40% YoY to $57.6M, again mostly from merchant commissions. Both companies recently secured major funding rounds: Tabby raised $160M in 2025, and Tamara raised $340M in 2023.
A combination of demographic shifts, regulatory reforms, and technological innovation is fueling the Islamic fintech sector. The key trends include:
Scaling AI Applications
Enhanced ML models and AI agents are powering personalized banking, automating basic Shariah compliance, and supporting data-driven advisory services, bridging the gap between ethical finance and fintech innovation.
Tokenization and Digital Assets
From digital Sukuk to stablecoins, the tokenization of real-world assets is set to democratize Islamic finance. This trend is exemplified by Kapital DX’s tokenized Shariah-compliant offerings for healthcare projects in Malaysia, with potential expansion into other sectors.
Global Regulatory Harmonization
As countries like Iran and Pakistan refine cryptocurrency and CBDC regulations, a standardized framework for digital Islamic finance could emerge, reducing friction in cross-border transactions and fostering a more integrated, ethical global financial ecosystem.
Understanding Regulation Models
From country to country, the number of authorities, their jurisdictional roles, and their functions vary. However, despite these differences, the following archetypal models can be identified:
Centralized vs. Decentralized Shariah Supervision
Many countries, including Malaysia, the UAE, and Pakistan, have established national Shariah boards to harmonize rulings across financial institutions. In other jurisdictions, such as the UK, each institution may form its own Shariah advisory board under general regulatory oversight.
Dual Financial Systems
In most jurisdictions (except Iran and Sudan), Islamic finance coexists with conventional banking. At the international level, two supervisory bodies support standardization: the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Malaysian Islamic Financial Services Board (IFSB). Both bodies collaborate with the International Monetary Fund and World Bank.
Legal Frameworks: Dedicated vs. Integrated Models
Dedicated models: Malaysia’s Islamic Financial Services Act 2013 and Indonesia’s Act No. 21/2008 are examples of fully tailored legal frameworks.
Integrated models: Countries like the UK, Singapore, and the US supervise Islamic institutions under existing financial laws, with adjustments for tax neutrality and regulatory fairness.
Islamic finance is an expanding part of the financial ecosystem, rooted in ethical principles and driven by demographic and technological advancements.
Read the full report for an in-depth analysis of key market players, partnerships and recent funding rounds.
