Islamic Finance

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The Conscientious Investor – A Yielders View on Ethical Finance

Welcome to our eight-part series on Ethical Finance and Money. We’ll be exploring ethical finance with a focus on investments, AI, Islamic finance and more. If you’re feeling inspired, go out and research further or find out more at the Yielders Blog! This content does not constitute financial or investment advice and should not be read as recommendations to buy or sell any financial products or securities.

Islamic Finance

The value of the Islamic financial services industry hit $2.2tr in 2021[1].The growth rate has been as high as 8.5 per cent, and in Muslim-majority business hubs, such as Saudi Arabia, Malaysia and the UAE, it has become the default system of finance.

With return on equity at 16.3 per cent in 2018, Islamic banking performs better than its non-sharia counterparts in the US and the EU which recorded 11.9 and 7.2 per cent respectively[2]. But what is driving this surge of value in a centuries-old finance system?

The Background to Islamic Finance

Islamic finance, which is compliant with Islam’s Shariah law, differs from conventional banking in a few key ways, namely the prohibition of charging interest (riba) and avoiding unnecessary risk or uncertainty (gharar).

It also encourages more ethical business by promoting transparency and fairness while recognising the importance of protecting the environment and prohibiting profiteering at the expense of others, stressing the sharing of reward and risk in profit and loss sharing contracts.

To avoid charging interest, Shariah-compliant lenders can offer a number of options. They may partner with the businesses they are lending to, by buying the underlying asset. This type of transaction, a form of bond, is called sukuk. These bonds give the holder part ownership of the underlying asset, so they receive a share of the earnings generated by the asset, instead of receiving fixed interest payments from issuers. The underlying asset therefore needs to change in value.

The Scale of Islamic Finance

There are 1,407 Islamic financial institutions globally[3], ranging from retail banks, investment banks and asset managers. In recent years, ESG and Islamic finance have been the fastest growing financial sectors while providing economic resilience during downturns.

As the Islamic finance market grows, so does the options available to customers. Investors can now access halal robo-advice, payment platforms, and P2P finance through fintech offerings. Industry body Islamic Fintech Landscape now lists more than 100 companies (including Yielders!) which offer sharia-compliant services.

The Islamic Bond

The Islamic bond, known as sukuk, was first traded around 650AD in Damascus. Fast forward to 2014, the UK issued the first sukuk outside of the Islamic world; a £200m bond lease-based structure with profit deriving from three government properties. The UK’s City minister John Glen said at the time that the UK will continue to explore alternative sukuk structures.

The United Kingdom now has five Shariah-compliant banks and another 20 banks providing Shariah-compliant products and services to more than 100,000 retail customers[4].  An important area for growth has been Shariah-based neo-banking, and we are watching as Islamic-based challengers to market behemoths such as Revolut and Monzo are emerging.

The majority of sukuk issuance comes from sovereign nations, including a $9bn issuance from Saudi Arabia in 2017[5]. National governments and Central Banks deliver around 55 per cent of sukuk issuance, 30 per cent derive from companies and the remainder from financial institutions. The global sukuk issuance is expected to be reach $140-$155 billion in 2021, up from roughly $140 billion in 2020[6].

Financing in Islamic Banking

There are other finance options available in the world of Islamic banking that adhere to sharia law. For example, profit and loss sharing contracts, called mudarabah, allow Islamic banks to pool their investors money and take a share of any profits or losses.

There are mudarabah actively managed mutual funds, just like the ones we see in conventional Western banking, but passive ones also exist, such as those tracking the Dow Jones Islamic Market Index.

Islamic Banking and Home Purchases

There are also structures available that allow for partnership and joint stock ownership, called musharakah. One form of musharakah is used to finance a home purchase – whereby a bank and investor purchase a home together, with the bank gradually transferring equity of the home over to the homeowner as payments are made.

Another variant of this works on a lease-to-own arrangement, whereby the institution pays most, if not all, the money required at the beginning of the home purchase – and the institution agrees to sell the house back to the homeowner, at the end of a fixed term. The money paid goes towards the lease, and the balance towards the purchase price of the home.

Other options include murabaha, where an intermediary buys the home and then goes on to sell the property for an agreed price, plus a pre-agreed profit rate. The purchase can be made either as a lump sum or through a series of instalments. It is an acceptable form of finance in the Islamic banking world, and is not the same as a conventional loan.

Investment Vehicles in Islamic Banking


There are a number of permissible forms of investment models in Islamic investing. Sharia law permits investment into company shares so long as those companies are not engaged in prohibited activities such as lending, gambling or the production of alcohol, tobacco, weaponry or pornography.

Fixed-income funds

Fixed-income investments, such as government or corporate bonds, fall under the category of riba in Islamic Finance, and are therefore not permitted. A sukuk, outlined earlier, offers a type of leasing-bond equivalent, where the issuer sells certificates to an investor group. This certificate allows them to own the asset before renting them back to the issuer in exchange for a rental return. The return may be fixed, or a floating rate tied to a benchmark.

The world of Islamic Finance is an age-old practice which combines the traditions of Islam with an ethical approach to finance – this has attracted the interest of governments and institutions around the world and is creating huge interest in this new paradigm of finance. Interested in learning more about how Yielders takes the great traditions of Islamic finance and delivers them for a new generation of investors? Find out more here.







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