International Journal of Trend in Scientific Research and Development (IJTSRD)

Volume 10 Issue 1, Jan-Feb 2026 Available Online: [Link] e-ISSN: 2456 – 6470

Islamic Banking
Paul A. Adekunte1, Matthew N. O. Sadiku2, Janet O. Sadiku3
1
International Institute of Professional Security, Lagos, Nigeria
2
Roy G. Perry College of Engineering, Prairie View A&M University, Prairie View, TX, USA
3
Juliana King University, Houston, TX, USA

ABSTRACT How to cite this paper: Paul A.

Islamic banking is a financial system founded on the principles of Adekunte | Matthew N. O. Sadiku | Janet
Sharia (Islamic law), with emphasis on ethical conduct, social justice, O. Sadiku "Islamic Banking" Published
and the linkage of finance to real economic activity. Islamic banking in International
Journal of Trend in
unlike the conventional banking prohibits the payment or receipt of
Scientific Research
interest (riba), excessive uncertainty (gharar), and speculative and Development
activities (maisir), while promoting profit-and-loss sharing cum (ijtsrd), ISSN:
asset-backed transactions. Its core financing mechanisms such as 2456-6470,
Murabaha (cost-plus sale), Mudarabah (profit-sharing partnership), Volume-10 | Issue- IJTSRD100154
Musharakah (joint venture), and Ijarah (leasing) enable Islamic 1, February 2026,
banks to provide financial services that are both commercially viable pp.934-939, URL:
and compliant with religious principles. In order to maintain [Link]/papers/[Link]
compliance, governance is ensured through Sharia supervisory
boards, which oversee product design and operations. Regardless of Copyright © 2026 by author (s) and
International Journal of Trend in
the challenges related to standardization, liquidity management, and
Scientific Research and Development
regulatory harmonization, Islamic banking has continued to expand Journal. This is an
across both Muslim-majority and non-Muslim countries, offering an Open Access article
alternative model of finance that integrates economic efficiency with distributed under the
moral and social responsibility. This paper attempts to holistically terms of the Creative Commons
look at the challenges facing Islamic banking, solutions to them, and Attribution License (CC BY 4.0)
its benefits to humanity. ([Link]

KEYWORDS: Islamic banking, Sharia (Islamic law), Islamic

commercial jurisprudence (Fiqh al-Mu’amalat), social responsibility,
riba (usury or interest), zakat, equity and justice.

INTRODUCTION
As a financial system, Islamic banking operates in transactions likely to be against the public good.
accordance with Sharia (Islamic law) – emphasizing Furthermore, the Islamic financial system is not
ethical investment, fairness, and transactions tied to limited to banking but also covers insurance, capital
real economic activity, as shown in Figures 1 and 2. It formation, capital markets, and all types of financial
tends to avoid interest (riba), excessive uncertainty intermediation and suggests that moral and ethical
(gharar), and unethical business activities. This is aspects in the regulatory framework are also
Sharia-compliant financial system which adheres to necessary in addition to prudent and sound controls.
Sharia (Islamic law) and its practical application via The objectives (maqsid) of Islamic finance
Islamic economics [1]. Islamic finance as a modern transactions are as stated below:
institutional system emerged fully in the mid-20th  To be true to the Shari’ah principles of equity and
century and expanded globally, now overseeing a justice;
large and growing part of global finance – which is  Should be free from unjust enrichment;
aimed at fostering a just society. It is not much  Must be based on true consent of all parties;
different from the products and services in the  Must be an integral part of a real trade or
traditional financial system but its operations are economic activity such as a sale, lease,
essentially based on a certain set of moral and ethical manufacture or partnership [2].
principles that determined what is viewed as morally HISTORICAL BACKGROUND
‘right’ implying actions and transactions that promote
Islamic banking is deeply rooted in classical Islamic
public good, and ‘wrong’ implying actions and commercial jurisprudence (Fiqh al-Mu’amalat) which

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 International Journal of Trend in Scientific Research and Development @ [Link] eISSN: 2456-6470
developed during the early centuries of Islam and Due to this, Islamic financial principles were largely
provided detailed rules governing trade, contracts, confined to personal ethics and informal practices,
money, and financial ethics. Even though modern which led to no formal Islamic banking institutions
Islamic banking institutions are relatively recent, their operating during this period [7, 8].
underlying principles date bank more than fourteen 4. Revival of Islamic Banking (Mid-20th Century)
centuries. The modern revival of Islamic banking began in the
1. Early Islamic Period (7th-10th Century) 1940s-1960s, which was driven by:
Economic transactions during the time of Muhammad  Islamic economic thought,
and the early Islamic caliphates were governed by  Post-colonial identity movements,
Sharia principles with emphasis on justice, fairness,  Demand for financial systems aligned with
and social responsibility. Trade, partnerships, leasing, religious values.
and profit-sharing arrangements were widely Some of the key milestones for achieving this
practiced. Some of the common financial contracts include:
included:  Mit Ghamr Savings Bank (Egypt, 1963) – This
 Mudarabah (profit-sharing partnership), was widely regarded as the first modern Islamic
 Musharakah (joint venture), bank, founded by Ahmad El-Najjar.
 Murabaha (cost-plus sale),  Pilgrims Management and Fund Board (Tabung
 Qard Hasan (benevolent loan). Haji, Malaysia, 1963) – It enabled Muslims to
Money during this period was treated primarily as a save for Hajj without interest.
medium of exchange, not a commodity to generate  Dubai Islamic Bank (1975) – The first private,
profit through interest. The prohibition of riba (usury full-fledged Islamic commercial bank [9, 10].
or interest) was clearly established in the Qur’an and 5. Institutionalization and Global Expansion (1970s-
reinforced by Hadith literature [3,4], as shown in 1990s)
Figure 3. From the 1970s onward, Islamic banking became
2. Medieval Islamic Trade and Finance (10th-15th institutionalized with the establishment of:
Century)  Islamic Development Bank (IDB) in 1975,
Between the 10th and 15th centuries, Islamic  National Islamic banks in Sudan, Iran, and the
civilization developed sophisticated commercial and Gulf States,
financial practices that supported long-distance trade  Dual banking systems in Malaysia and other
across the Middle East, North Africa, Asia, and countries.
Europe. During this period, Sharia governance framework and
The following instruments were widely used and standardized contracts began to emerge [11, 12].
which later influenced European commercial banking 6. Contemporary Era (2000s-Present)
practices i. e., In the 21st century, Islamic banking has evolved into a
 Sakk (early form of cheque), global financial industry, operating in both Muslim-
 Hawala (informal value transfer system), majority and non-Muslim countries. Credibility and
 Trade credit and partnerships. harmonization have been enhanced via the
Despite this sophistication, financial activities establishment of international standard-setting bodies.
remained non-interest-based, relying on trade and Some of the key institutions include:
risk-sharing arrangements [5, 6].  AAOIFI (Accounting and Auditing Organization
for Islamic Financial Institutions),
3. Decline and Impact of Colonialism (16th-19th  IFSB (Islamic Financial Services Board),
Century)
The decline of Islamic empires coupled with the Islamic banking now encompasses retail banking,
expansion of European colonial powers, Western corporate finance, capital markets (sukuk), and risk
banking systems based on interest gradually replaced management (takaful) [13-15].
traditional Islamic financial practices in Muslim CORE PRINCIPLES OF ISLAMIC BANKING
regions. The core principles of Islamic banking are derived
from Sharia law, with emphasis on fairness,
Conventional banks were introduced to:
transparency, and social justice. Some of these key
 Facilitate colonial trade,
principles include [1, 2, 16-20]:
 Finance government activities,
 Prohibition of Riba (interest) – no interest or
 Integrate colonies into the global capitalist
usury is allowed; money isn’t used to generate
system.
more money through interest.

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 Risk-sharing (Profit-and-Loss Sharing) – parties ownership. Used for vehicles, equipment, and
share both profits and losses, hence promoting property [12, 13].
fairness and cooperation, as shown in Figure 4.
8. Qard Hasan (Benevolent loan) – This is interest-
 Tangible assets (Asset-Backed and Real free loan provided for welfare or short-term
Economic Activity) – Transactions must be needs. The borrower repays only the principal
backed by real assets, reducing speculation. [20, 23].
 Sharia Compliance and Supervision – Islamic 9. Zakat and Waqf-based financing – Islamic banks
banks under the guidance of Sharia law, with may manage or distribute zakat and waqf funds,
activities/operations reviewed or supervised by a as shown in Figure 6. This is to support poverty
Sharia Supervisory Board (SSB) composed of alleviation and social development [19, 24].
Islamic scholars.
10. Islamic Investment Funds – These are equity, real
 Gharar (excessive uncertainty) prohibition – estate, or commodity funds screened for Shari’ah
Minimizes excessive speculation or uncertainty in compliance [15, 19].
speculations.
11. Deposit Products:
 Maysir (gambling) prohibition – No gambling or A. Current accounts – operate on Qard basis;
speculative activities allowed. deposits are guaranteed but earn no return.
 Halal activities only – Financing must comply B. Savings and investment Accounts – Based on
with Islamic ethical standards. Mudarabah, while returns depend on actual
profits [17, 18].
 Money as a medium of exchange - not a
commodity or tradable asset that can generate BENEFITS
profit on its own. Some of the derivable benefits include the:
1. Promotion of social justice and fairness
 Ethical and Social Responsibility – Islamic 2. Encourages risk-sharing and cooperation
banking is to promote social justice, fairness, and 3. Supports real economic activity
moral conduct. Financing of activities that harm 4. Provides an alternative to conventional banking
society, such as alcohol, gambling, pornography,
and weapons of mass destruction is prohibited. CHALLENGES FACING ISLAMIC BANKING
Some of the challenges faced by Islamic banking
POPULAR ISLAMIC BANKING PRODUCTS include the following:
Some of the products of Islamic banking include [16, 1. Standardization of Sharia interpretation: Different
21, 22], as shown in Figure 5: interpretations of Sharia law can lead to
1. Murabaha: This is cost-plus financing, where the inconsistencies [25]
bank buys an asset and sells it to the customer at a
markup 2. Regulatory frameworks: Islamic banks often
operate in conventional regulatory environments,
2. Musharaka: This is partnership financing, where creating compliance issues [14]
the bank and customer share profits and losses.
3. Global integration: Integrating Islamic finance
3. Ijara: Leasing, where the bank leases an asset to into global markets requires harmonization [16,
the customer for a fee. 21, 26]
4. Sukuk: These are Islamic bonds, representing 4. Liquidity Management: There is also the
ownership in a tangible asset. Investors earn challenges of managing liquidity due to limited
returns from underlying assets, not interest. instruments [27]
5. Salam (forward purchase) – In this case, full 5. Product Innovation: Limited innovation in Sharia-
payment is made in advance for goods delivered compliant products can hinder competitiveness
in the future. It is common in agricultural [28]
financing [17, 20].
SOLUTIONS TO CHALLENGES IN ISLAMIC
6. Istisna (manufacturing contract) – It involves BANKING
financing for assets to be manufactured or Some of solutions facing Islamic banking are as
constructed. Used in infrastructure and industrial follows [1, 13]:
projects [12, 13]. 1. Standardization of Sharia interpretation: This can
7. Ijarah wa Iqtina (lease-to-own) – This combines be achieved by the establishment of global Sharia
leasing with gradual or eventual transfer of standards via bodies like the Accounting and

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Audit Organization for Islamic Financial the books in [29-36] and the following related
Institutions (AAOIFI). journals:
2. Regulatory frameworks: Strengthen regulatory International Journal of Islamic and Middle Eastern
bodies and collaboration between central banks Finance and Management
and Sharia scholars.
Journal of Islamic Accounting and Business Research
3. Product innovation: Need to develop innovative
Islamic Economic Studies
Sharia-compliant products to enhance
competitiveness. Journal of Islamic Economics, Banking and Finance
4. Capacity building: This is to enhance skills of International Journal of Islamic Finance
Islamic banking professionals through training ISRA International Journal of Islamic Finance (IIJIF)
and education.
Islamic Banking and Finance Review (IBFR)
5. Global integration: To foster international
cooperation and harmonization of Islamic finance Journal of Islamic Banking, Economics and Finance
standards. (JIBEF)
CONCLUSION Jihbiz: Global Journal of Islamic Banking and
Islamic banking represents a value-based financial Finance
system that integrates ethical considerations with Ihtifaz: Journal of Islamic Economics, Finance and
economic objectives through strict adherence to Banking
Shar’ah (Islamic law). Islamic banking promotes risk-
sharing, asset-backed financing, and real economic Economics & Islamic Finance Journal (ECIF)
activity through the prohibition of interest (riba), Journal of Sharia Banking (JSB)
excessive uncertainty (gharar), and speculative
AL-ARBAH: Journal of Islamic Finance and Banking
activities (maysir). The core contracts of Islamic
banking, such as Murabahah, Musharakah, Journal of Finance and Islamic Banking (JFIB)
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Figure 4. Profit and loss sharing Figure 6. Zakat

Source: Source:
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ng

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