The Role of Islamic Finance in Economic Stability and Social Justice

The Role of Islamic Finance in Economic Stability and Social Justice

One of the most distinguishing times for the U.S. Islamic home financing industry began in February 2007. The Federal Home Loan Mortgage Corporation (Freddie Mac) sent out a press release announcing that it would no longer buy the most risky subprime mortgages and mortgage backed securities. Two months after the announcement, a leading subprime mortgage lender filed for Chapter 11 bankruptcy protection. Three months after that bankruptcy filing, nationwide financing entities warned of “difficult conditions” ahead.

Manifestations of such difficult conditions appeared on the horizon of the financial market when once well-established mortgage companies suddenly began to file for Chapter 11. Similar circumstances reached the U.K. as the Bank of England cleared an authorization to provide liquidity support to Northern Rock, the country’s fifth largest mortgage lender. Five months later, Treasury of the United Kingdom became the owner of Northern Rock.

Up until that point, the gravity of these “difficult conditions” was not fully understood by most of the populace. Late in 2008, the Federal Reserve Bank of New York was authorized to lend $85 billion to the AIG. This was the beginning of the most serious recession in the United States since the Great Depression. What followed was a chain reaction that led to an unprecedented global financial crisis, as the world suffered from rising unemployment, rampant foreclosures, and severe skepticism of financial instruments.

This led to a renewed spotlight on an unfamiliar market segment that appeared comparatively more stable and, more importantly, far more ethical: the Islamic financing sector. From the financial centers in Malaysia to the Middle East, spanning across over seventy countries, Islamic finance in the U.S. increased from $5 billion in the 1980s to $1 trillion in 2010. This phenomenal growth caught the attention of global investors who were seeking to safeguard their investments through more ethical and reliable financial instruments.

When financial sector workers realized that these Shariah-compliant instruments avoided many of the worst effects of the global financial crisis, it became an attractive investment vehicle to support a more diverse portfolio. The Shariah-compliant financial sector has avoided investment in predatory lending businesses and overly leveraged financial instruments due to the strict ethical nature of the Shariah governance system.

News and media outlets started to cover this ancient yet unfamiliar industry in hopes of learning from the mistakes of the conventional banking sector.

The concept of the modern Islamic financial services industry is rooted in the principles of Islamic legal jurisprudence that deals with financial transactions, a branch of Islamic jurisprudence called Fiqh Al Muamalat. Fiqh Al Muamalat is a framework under Islamic Law that charts the conduct of Muslims in commercial or Economic endeavors. Islamic finance products and rulings are based on specific injunctions from the Quran that prohibit certain features of financial transaction models and related Economic activities.

The Quran forbids interest, also called usury or riba. The underlying reasoning is that Islam considers lending to be a charitable act to help another member of the society in his/her time of need – therefore, profiting from someone’s hardship is strictly forbidden.

In the conventional banking system, when interest is charged on a loan, the risk of that transaction is transferred to the borrower while the lender gains profit from the interest-based transaction. There is no consideration for the hardships endured by the borrower in the event they undergo any loss from the transaction.

By its nature, Shariah law prohibits unethical financial practices. It also promotes wealth distribution among all people to reduce poverty and inequity. This is manifested in the prohibitions of activities such as excessive speculation, gambling, and investing in products that are harmful for society as deemed by Islamic law (alcohol, pornography, etc).

The structure of Islamic financial products and services, especially its prohibition in speculative transactions, has helped the industry escape most of the adverse effects of the global financial crisis. The governance model of Islamic financial institutions has been praised as an ethical alternative by institutions such as the International Monetary Fund and the World Bank.

Economic experts have suggested that Islamic financial principles can be leveraged to promote financial inclusion that uplift the quality of life in developing nations. Islamic financial principles can also contribute to financial stability and Economic development around the world.


Islamic Finance

Islamic finance, also known as Sharia-compliant finance or ethical finance, is a financial system that operates in accordance with Islamic principles and law (Sharia). It is a rapidly growing sector within the global financial industry and has gained significant attention and prominence over the past few decades.

At the heart of Islamic finance is the adherence to the principles of fairness, justice, and avoidance of interest (riba) and speculation (gharar). These principles are derived from the Quran, the holy book of Islam, and the Hadith, which are the teachings and practices of the Prophet Muhammad. The objective of Islamic finance is to promote economic and social development while ensuring ethical and responsible financial practices.

One of the key features of Islamic finance is the prohibition of interest. In Islamic law, the charging and receiving of interest are considered exploitative and unjust. Instead, Islamic finance promotes profit-sharing arrangements and risk-sharing partnerships. These include various financial contracts such as mudarabah (profit-sharing), musharakah (joint venture), and ijara (leasing). These contracts ensure that both the risks and rewards are shared between the parties involved, creating a more equitable and ethical financial system.

Another important principle in Islamic finance is the avoidance of speculation and excessive uncertainty. Islamic finance encourages tangible asset-backed transactions and prohibits speculative activities. This means that investments should be made in real economic activities that generate value and benefit society. Islamic finance also promotes ethical investments and prohibits investments in industries or activities that are considered harmful or socially detrimental, such as gambling, alcohol, or pork-related products.

To ensure compliance with Islamic principles, Islamic financial institutions operate under the supervision of Sharia boards or councils. These boards consist of Islamic scholars and experts who provide guidance and oversight to ensure that financial products and services comply with Sharia principles. They review and approve financial contracts, investments, and business practices to ensure their adherence to Islamic law.

Islamic finance has witnessed significant growth and expansion over the past few decades. Today, it is not limited to Muslim-majority countries but has become a global industry with Islamic financial institutions operating in various parts of the world. The industry offers a wide range of financial products and services, including Islamic banking, Islamic insurance (Takaful), Islamic bonds (Sukuk), Islamic mutual funds, and Islamic microfinance.

Islamic finance has attracted interest from both Muslims and non-Muslims for several reasons. Firstly, its emphasis on ethical and responsible financial practices resonates with individuals and institutions seeking alternatives to conventional finance. Secondly, its focus on real economic activities and tangible assets provides stability and resilience, making it attractive to investors. Lastly, Islamic finance offers financial inclusion by catering to the needs of individuals and businesses who wish to comply with Sharia principles.

However, Islamic finance also faces challenges and complexities. The interpretation and application of Sharia principles can vary among scholars and jurisdictions, leading to differences in practices and standards. The lack of standardization and harmonization poses challenges for cross-border transactions and global integration. Additionally, the scarcity of qualified Sharia scholars and professionals restricts the industry’s growth potential.

In conclusion, Islamic finance represents a unique and ethical approach to finance, guided by the principles of fairness, justice, and responsibility. It offers an alternative financial system that promotes economic development while adhering to Islamic principles. With its global reach and increasing popularity, Islamic finance continues to contribute to the diversification and expansion of the global financial landscape.


Economic Stability and Social Justice: Striving for a Balanced Society


Economic stability and social justice are two interconnected pillars that form the foundation of a well-functioning and balanced society. While economic stability ensures the smooth functioning of the financial system and the overall well-being of individuals, social justice seeks to eliminate disparities, promote equality, and create a fair and inclusive society for all.

This article explores the significance of economic stability and social justice and highlights their intrinsic relationship, emphasizing the importance of addressing both aspects to foster a prosperous and harmonious society.


The Interplay between Economic Stability and Social Justice:

Economic stability is essential for sustainable development and progress in any society. It encompasses factors such as low inflation, steady economic growth, low unemployment rates, and financial system resilience. Stable economies provide opportunities for individuals to secure employment, earn a living wage, and access essential goods and services. Furthermore, economic stability promotes investment, innovation, and entrepreneurship, driving economic growth and prosperity.

However, economic stability alone is insufficient to ensure the well-being and happiness of all members of society. Social justice complements economic stability by addressing inequalities, discrimination, and marginalization that may arise from economic disparities. It focuses on creating an equitable society where everyone has equal opportunities, access to resources, and the right to participate in decision-making processes.

Economic stability and social justice are mutually reinforcing. A stable economy provides the necessary resources and means to support social justice initiatives, while social justice ensures that the benefits of economic stability are shared equitably among all segments of society. Without social justice, economic stability can lead to an accumulation of wealth in the hands of a few, widening the gap between the rich and the poor and undermining social cohesion.


Promoting Economic Stability and Social Justice:

  1. Income Inequality and Poverty Alleviation: Addressing income inequality and poverty is crucial for social justice. Implementing progressive taxation policies, ensuring a living wage, providing social safety nets, and investing in education and skills training can help reduce inequality and alleviate poverty, creating a more just society.
  2. Access to Education and Healthcare: Education and healthcare are fundamental rights that should be accessible to all. Investing in quality education and healthcare systems ensures equal opportunities for individuals, regardless of their socioeconomic background, fostering social justice and enabling economic mobility.
  3. Fair Labor Practices: Promoting fair labor practices, including minimum wage laws, safe working conditions, and protection of workers’ rights, helps prevent exploitation and ensures that workers receive just compensation for their efforts. This contributes to economic stability by enhancing worker productivity and well-being.
  4. Financial Regulation and Consumer Protection: Maintaining a robust regulatory framework in the financial sector is crucial for economic stability. Effective regulation protects consumers, prevents market manipulation, and ensures the integrity of financial institutions, fostering public trust and confidence in the economy.
  5. Social Inclusion and Diversity: Embracing diversity and promoting social inclusion are integral to social justice. By fostering an inclusive society that values and respects individuals from different backgrounds, societies can harness the full potential of all their members, leading to innovation, creativity, and economic growth.



Achieving economic stability and social justice is an ongoing endeavor that requires a comprehensive and integrated approach. While economic stability lays the groundwork for prosperity, social justice ensures that the benefits of economic stability are distributed equitably and that no one is left behind.

Governments, policymakers, businesses, and civil society organizations all have a role to play in fostering economic stability and social justice, working collaboratively to create a society where opportunities, resources, and rights are accessible to all. By striving for a balanced society that combines economic stability and social justice, we can create a more inclusive, resilient, and prosperous future for everyone.


Author: Mohammed A Bazzoun


For More Article

Liberty Magazine 

Economic Website

Liberty Magazine 


Follow us


Economic             The Magazine           Lebanon Magazine    

Leave a Reply

Scroll to Top