What is Islamic financing?

Islamic financing (also known as Shariah-compliant financing) is a set of financial products and services designed to adhere to Islamic law (Shariah) principles. The key feature of Islamic financing is the promotion of ethical and socially responsible investments. In addition, it avoids interest-based transactions, speculations, and excessive risk-taking.

Compared to conventional financing, Islamic financing emphasises: 

• Profit and Risk Sharing: Borrowers and lenders share both profits and potential losses, fostering more collaborative financial relationships.

• Asset-Based Transactions: Financing is often tied to tangible assets, potentially promoting responsible borrowing and reducing reliance on debt.

Some common examples of Islamic financing may include versions of common investment and financial instruments like invoice financing, business term financing, and micro financing, adapted to comply with Shariah principles.  

While Islamic financing offers plenty of benefits, it is also important to acknowledge potential limitations. Some Islamic financing options might have stricter terms or require additional paperwork compared to conventional alternatives. Furthermore, the availability of products might be limited in certain regions, potentially requiring consultation with specialised providers.