ISLAMIC FINANCE IN THE LIGHT OF ETHICS AND PROFIT

by Yusuf Abdulwasiu

The growth of Islamic finance has garnered significant attention due to its unique integration of ethical principles with substantial financial expansion. As a relatively developing area of study, Islamic finance is anchored in Islamic ethics that guide financial transactions. This ethical foundation has enabled stakeholders, including shareholders, policyholders, and industry leaders, to achieve remarkable profits, demonstrating the sector’s sustainability within the global financial landscape.

The Islamic finance industry is often perceived by both Muslims and non-Muslims as being rooted in Shariah principles. Consequently, some mistakenly equate it with charitable organizations. However, this perception is misleading. Islamic finance is not a philanthropic endeavor but an industry driven by profit in the halal way.  Like any business, financial institutions within Islamic finance operate primarily for profit, even when other motivations, such as religious, political considerations, or a desire for recognition, are present.

Ethical Foundations of Islamic Finance

Islamic finance distinguishes itself ethically by fostering social welfare and ensuring financial fairness. A key principle is the strict prohibition of riba (interest), reflecting a commitment to maintaining ethical financial dealings. Additionally, Islamic finance promotes Zakat (charitable giving), aimed at reducing economic inequality.

Historian Rutger Bregman, speaking at the 2019 World Economic Forum in Davos, addressed economic justice: “I hear people talking the language of participation, justice, equality, and transparency, but then I mean, almost no one raises the real issue of tax avoidance, right? And of the rich not paying their fair share.” This statement highlights that true economic justice is only possible when wealthier individuals contribute fairly to society. This concept aligns with the Islamic economic principle of Zakat, which ensures financial redistribution to support social equity.

The concept of Zakat, mandated by Allah through the divine book , over 1,400 years ago, remains a vital tool in achieving socio-economic balance. Prominent scholar Sheikh Yusuf Al-Qaradawi in his Islamic economic view emphasizes that interest poses a serious danger to both economic justice and social harmony. He argues that the existence of interest disrupts societal balance by creating class divisions, where those who have access to capital without productive effort (consumers of interest) dominate, and those who are socially vulnerable and oppressed face financial marginalization.

The ethical financial principles of Islamic finance uphold a strict zero tolerance policy towards investments or transactions grounded in uncertainty and speculation, where one party gains at the expense of another. Prohibited practices include: trading without proper inspection (known as trade by touching), purchasing commodities that are simply tossed to the buyer (trade by throwing), and engaging in transactions where one party lacks full knowledge of the terms involved. Gambling transactions epitomize this uncertainty, as gamblers cannot predict the outcome of their wagers. Such situations often result in animosity and resentment among those affected. Instead, Islamic finance promotes risk-sharing. It is considered fair that if an individual is entitled to a share of the profits in a transaction, they should also be willing to absorb a portion of the losses. Ensuring that both profits and losses are distributed equitably among stakeholders. This win-win or lose-lose structure stands in contrast to conventional finance, where a lose-win dynamic often prevails.

General Growth of Islamic Finance

Islamic finance has experienced substantial global growth, currently valued at approximately $3.38 trillion. Dr. Bello Danbata, the former Secretary-General of the Islamic Finance Services Board (IFSB) Malaysia, noted at the 2024 Arewa Islamic Finance Summit in Kano State that the sector had been growing at 6% annually before the pandemic, which briefly slowed it to 4%. Despite this, Islamic finance continues to outpace conventional finance.

Islamic banking assets comprise 72% of the industry, while the Islamic capital market holds 29%. Takaful insurance remains below 1%. Regionally, the Gulf Cooperation Council (GCC) dominates with 52% of the total Islamic finance assets, followed by Sub-Saharan Africa at 29%, and the Middle East and North Africa (MENA) region at 12%. However, Sub-Saharan Africa holds only 0.7% of global Islamic finance assets. The Islamic Financial Development Report 2023 projects that total assets in Islamic finance will reach $6.67 trillion by 2027, underscoring its sustained upward trajectory.

Islamic Finance in the Profit Outlook

The Banking Sector

Islamic banking emerged in 1963 with the establishment of Mit Ghamr Savings Bank in Egypt, marking 62 years of development. Other key milestones include the launch of Dubai Islamic Bank, the world’s first fully-fledged Islamic commercial bank, and the establishment of the Islamic Development Bank in 1975.

Al Rajhi Bank, with assets exceeding $215 billion, is currently the largest Islamic bank worldwide, operating with over 600 branches across Saudi Arabia, Malaysia, Jordan, and Kuwait. In Nigeria, Islamic finance first appeared in 1999 when Habib Bank introduced an Islamic finance window. The full-fledged Jaiz Bank Plc was later licensed on January 6, 2012, starting with a balance sheet of ₦12 billion and growing to assets exceeding ₦600 billion as of Q1 2024 with around 45 branches in operation. Other key players in Nigeria include Taj Bank (2019), Lotus Bank (2022), and Alternative Bank (2023), reflecting the rapid expansion of Islamic finance in the region.

As we reflect on the evolution of Islamic banking, both globally and locally, it is evident that the industry has experienced remarkable growth in assets and shareholder value. This progress highlights Islamic finance’s increasing relevance in financial inclusion and its role in shaping the global financial landscape.

The Capital Markets

Islamic capital market development gained momentum around 2009. The Islamic capital market serves as a vital avenue for mobilizing long-term funds through Shariah-compliant instruments, connecting investors with individuals, institutions, and governments seeking ethical financing solutions. It operates through both the primary market where instruments like Initial Public Offerings (IPOs) are issued and the secondary market, which facilitates liquidity for existing structured products.

This market plays a critical role in economic development by bridging financing gaps, fostering financial inclusion, and supporting sustainable projects. Its profitability continues to grow, through its  diverse instruments and portfolio that includes Shariah-compliant stocks/equities, Islamic real estate investment ( REITs), private equity, and most popular  Sukuk (Islamic bonds).

According to Dow Jones Islamic Market Index, a notable trend in recent years is the shift from active to passive investing, especially via Exchange-Traded Funds (ETFs). By September 2023, the number of Islamic ETFs had grown to 29, with a combined AUM of $2.33 billion, up from 7 ETFs with $326 million in 2018. Indices like the S&P Global BMI Shariah and Dow Jones Islamic Market World Index gained 12.3% and 13.0%, respectively, within the first nine months of 2023, showing resilience and performance.

Globally, the Dow Jones Islamic Market Index, established in 1999, remains a pioneer in Shariah-compliant screening. On the local front, the Lotus Islamic Index in Nigeria has identified compliant stocks such as Dangote Cement, MTN Nigeria, BUA Foods, NASCON, and Jaiz Bank, all listed on the Nigerian Exchange Group (NGX), offering investors ethical exposure with consistent returns.

Unlike conventional stocks, which may involve speculative activities, Shariah-compliant investments are backed by real assets and avoid interest and excessive uncertainty. This grounding in tangible economic activity not only ensures ethical integrity but also contributes to market stability and long-term profitability.

By the end of 2024, total sukuk global issuance had reached $197.8 billion. In Nigeria, a major milestone occurred on September 27, 2017, when the federal government successfully issued its first sovereign sukuk, which recently matured after seven years. The issuance of ₦100 billion in sukuk which was over subscribed, has strengthened Nigeria’s debt management and supported national infrastructure projects.

Emphasis is placed on the tangible returns offered by these Islamic financial instruments, which allow investors to earn profits while adhering to moral and religious standards. This investment model has had a profound impact on the community, illustrated by the construction and rehabilitation of approximately 25 critical road infrastructures across the six geopolitical zones in Nigeria.

This scenario represents a mutually beneficial arrangement for all stakeholders while fulfilling Shariah intents. An additional ₦992 billion has been raised through five sovereign sukuk offerings. Other nations, such as Malaysia, Saudi Arabia, Bahrain, and Qatar, continue to lead in sukuk issuance, demonstrating the profitability and ethical advantages of Islamic capital markets.

The Takaful Insurance

Takaful insurance, though less widely adopted, has shown strong potential. Valued at $36.59 billion in 2024, the global Takaful market is expected to reach $75.23 billion by 2033, with an 8.2% annual growth rate. Nigeria, Africa’s most populous nation, has a growing insurance market worth approximately $2 billion, second only to South Africa’s $50 billion.

The distribution of surplus within the context of Takaful insurance represents a significant area of interest that merits critical examination. In contrast, conventional insurance models deprive policyholders of such benefits. Surplus distribution constitutes a return on the contributions made by policyholders, calculated after the deduction of claims, reserves, operational expenses, and other related costs.

Simply put, the surplus serves as a return provided to policyholders for their contributions, which are often allocated to various growth-oriented investments. At the conclusion of a policy term, this surplus is allocated to the policyholder’s account or shared between the policyholder and shareholders, contingent upon the specific terms and type of policy purchased. Conversely, in conventional insurance frameworks, any surplus is recognized as profit, accruing solely to the owners of the insurance companies commonly referred to as shareholders. 

The evolution of Takaful insurance within the sphere of Islamic finance is notably illustrated by recorded instances from various Takaful insurance companies in Nigeria. For instance, in 2024, Jaiz Takaful Insurance Company announced a surplus of ₦230 million for the financial year 2022, which was subsequently distributed among participants with little to no claims. Similarly, Noor Takaful reported a surplus distribution of approximately ₦208 million to policyholders in 2023 for the 2021 financial year, followed by additional distributions of ₦116.30 million in 2024 for the 2022 financial year, respectively.

These practices highlight the ethical and financial advantages of Islamic finance. Unlike conventional finance, which prioritizes corporate profit, Islamic finance fosters shared prosperity by ensuring that benefits extend to all stakeholders. This distinct approach to finance exemplifies how Islamic financial institutions integrate faith with economic success, achieving both spiritual and material rewards.

Authored by Yusuf Abdulwasiu, A Masters Student in Islamic Banking and Finance, International Institute of Islamic Banking and Finance (IIIBF), Bayero University, Kano, Nigeria

Email: Adulwasiuyusuf40@gmail.com

Linkedin: Linkedin.com/in/yusuf-abdulwasiu-9a4a371a5