Concluding Remarks

During this ongoing period of rapid growth in Islamic finance, market participants need to maintain the quality of their services and avoid letting actual practices drift away from core principles of Islamic finance. As detailed earlier in this note,
these emphasize avoidance of riba and gharar; adherence to the principles of risk sharing; respect for property rights and contractual obligations; and pursuit of good governance. Taken together, these will sustain the link between the financial sector and the real sector.

A meaningful development of the practice of Islamic finance will require abandoning the mechanical emulation of conventional instruments and packaging them as seemingly Islamic financial instruments. Investments in human capital and research and innovation are also necessary to facilitate the development of Islamic finance solutions and products to respond to economic needs and financing requirements. By addressing the challenges noted above, Islamic finance could increasingly meet the preferences of local cultures and boost financial inclusion and intermediation. Islamic finance could also help mobilize financing for small and medium enterprises, as well as long-term funding for infrastructure and other development projects, which are critical for accelerating sustainable and inclusive growth.

So far, Islamic finance has been driven predominantly by supply-side factors and considerations. However, as highlighted above, there are important factors from the demand side that are likely to change the dynamics of the practice of Islamic finance. One of the factors worthy of monitoring in the near future is the growing demand for Islamic financial products by entrepreneurs across sectors and with different sizes of operations. The second factor is a potential rise in demand by sovereign and quasi sovereign entities in accessing Islamic capital markets. This would help advance some Islamic finance products that were developed in theory, but had little chance of being implemented in practice, such as mudarabah and musharakah. Moreover, with greater emphasis on risk sharing, Islamic finance could contribute meaningfully to financial stability.