Value Proposition of the Islamic Financial System

The conventional financial system, rooted in capitalism and the doctrine of self-interest, is largely value-neutral and unconcerned with moral values. It assumes human decision-making is rational and argues that pursuing individual self-interest naturally contributes to overall economic development. This led to the adoption of wertfreiheit (freedom from value judgments) as a cornerstone of conventional economics.

Islamic finance operates within the framework of Islam, guided by Shari’ah, which provides a clear path based on ethical values and legal principles. Shari’ah governs all aspects of life, including economics, emphasizing sincerity, justice, and moral values in human interactions. According to Ibn Taimiyyah, market order is seen as a “social and economic system governed by ethical values and legal precepts” rooted in ethics and law, forming the foundation of the Islamic economic system. In fact, the islamic economic system is based on the following philosophical foundations:
1. Tawhid – God’s unity and sovereignty

2. Rububiyyah – divine arrangements for nourishment and directing things towards their perfection

3. Risalah – prophethood and guidance

4. Akhirah – belief in accountability on the day of judgement and its implications for the life in this world and the Hereafter

5. Istikhlaf – man’s role as God’s vicegerent on earth

6. Tazkiyah – purification plus growth

7. Kafalah – social solidarity

8. ‘Adalah – justice

9. Falah – well-being or success in this world and the Hereafter


Integrating Ethics into Finance: The Islamic Perspective

In the wake of the 2007-2009 global financial crisis, many experts have emphasized the importance of incorporating ethics and values into finance to ensure stability. Islamic finance, deeply rooted in Shari’ah principles, provides a framework that contrasts sharply with conventional finance. While conventional finance is often value-neutral, driven by social consensus and self-interest, Islamic finance adheres to unchanging foundational values derived from Shari’ah.

The guiding principles of Islamic finance, known as maqasid al-Shari’ah (objectives of Shari’ah), aim to promote public welfare (maslahah) and prevent harm (mafsadah). These principles advocate justice, fairness, trust, and integrity while ensuring individual rights do not harm society.

Islamic finance operates within a moral framework emphasizing ethical norms and avoiding prohibited (haram) activities, such as interest-based transactions, unethical practices, and excessive speculation. It promotes economically productive activities, genuine trade, and fairness in contracts, fostering a balanced and equitable society.

This ethical foundation positions Islamic finance as a value-driven alternative to conventional systems, aligning economic activities with social and moral commitments for the greater good.
Islamic Financial Institutions (IFIs) are bound by the moral values of Islam, which prohibit financing activities harmful to society, such as alcohol production, gambling, pornography, and tobacco. Upholding ethical principles, IFIs avoid usury (riba), excessive ambiguity (gharar), and gambling (maysir), promoting fairness and societal well-being (maslahah).

Unlike the conventional system, which permits charging interest, Islamic finance views it as inherently unjust. Borrowers are burdened by debt repayment regardless of outcomes, while lenders miss out on higher profits when investments outperform the fixed interest rate. This inequity is stark in underdeveloped regions, where small savers’ deposits fund large corporations. The banks earn immense profits, while depositors receive minimal returns, exacerbating social and economic imbalances.

Islamic finance seeks to rectify these disparities by aligning returns with actual business performance, ensuring fairness for all parties and promoting a more just economic system.

Although there are no direct statements about the reasons for riba prohibition, reading from the Qur’an and hadith of the Prophet (p.b.u.h), Islamic scholars noted several reasons. For example, Siddiqi (2004) stated the following five reasons:
1. Riba corrupts society – This is clear from the following verses 37-41 of Surah ar-Rum, where Allah (s.w.t.) says:
See they not that Allah enlarges the provision and restricts it, to whomsoever He pleases? Verily in that are Signs for those who believe. (37) So give what is due to kindred, the needy, and the wayfarer. That is best for those who seek the Countenance of Allah and it is they who will prosper. (38) That which ye lay out for increase through the property of (other) people, will have no increase with Allah: but that which ye give for charity, seeking the Countenance of Allah (will increase): it is these who will get a recompense multiplied. (39) It is Allah who has created you: further He has provided for your sustenance; then He will cause you to die; and again He will give you life. Are there any of your (false) “partners” who can do any single one of these things? Glory to Him! and High is He above the partners they attribute (to Him)! (40) Mischief has appeared on land and sea because of (the need) that the hands of men have earned that (Allah) may give them a taste of some of their deeds: in order that they may turn back (from Evil). (41)

2. Riba implies improper appropriation of others’ property – This unlawful appropriation of others’ property is indicated in the verses 160-161 from chapter four, Surah an-Nisa’ that reads:
For the iniquity of the Jews We made unlawful for them certain (foods) good and wholesome which had been lawful for them; — in that they hindered many from Allah’s way. — (160) That they took usury, though they were forbidden; and that they devoured men’s substance wrongfully; — We have prepared for those among them who reject Faith a grievous punishment. (161)

3. Riba’s ultimate effect is negative growth – In Surah al-Baqarah, verse 276, Allah (s.w.t.) claims that riba is subject to destruction (mahq):
Allah will deprive usury of all blessing (destroy it), but will give increase for deeds of charity: for He loveth not creatures ungrateful and wicked.

4. Riba demeans and diminishes human personality – It is clear from the verse 275 of Surah al-Baqarah that reads: Those who devour usury will not stand except as stands one whom the Evil One by his touch hath driven to madness. That is because they say: “Trade is like usury, but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are. companions of the Fire: they will abide therein (for ever).

5. Riba is unjust – That riba is unjust is indicated in the verse 279 of Surah al-Baqarah, which reads:
If ye do it not, take notice of war from Allah and His Messenger: but if ye repent ye shall have your capital sums; deal not unjustly and ye shall not be dealt with unjustly.


Key Principles of the Islamic Financial System
Islamic finance emphasizes productive economic activities and real-sector connections, making these relationships fundamental to its stability. By tying financial activities to tangible goods and services, it avoids the uncertainty of speculative finance and limits excessive leveraging, which contributed to the 2007–2009 financial crisis.

Unlike conventional systems, money is not treated as a commodity, ensuring monetary stability. Islamic finance discourages speculative short-term fund flows, aligning monetary movements with the real economy.

The system also promotes cooperation and fairness through equity-based financing and risk-sharing. In partnerships like mudarabah, profits are shared based on pre-agreed ratios, while losses are borne by the investor (rabbul mal), unless caused by the entrepreneur’s (mudarib) misconduct, fostering mutual trust and justice.

Trust and Community Orientation in Islamic Finance
Islamic finance focuses on community well-being and entrepreneurial growth by prioritizing productivity and the physical expansion of economic activities. Unlike conventional finance, which relies heavily on financial collateral, Islamic finance emphasizes the trustworthiness of entrepreneurs (amanah) and the viability of their projects.

This trust-based approach has significant implications for credit distribution and economic stability. Research by Iqbal & Mirakhor (2007) highlights that countries with high trust levels and strong institutions perform better economically than those with low trust and weak systems. Historically, trust played a pivotal role in the dominance of risk-sharing contracts like mudarabah during the Middle Ages.

Interestingly, the principles of mudarabah were not limited to the Muslim world; similar practices, known as commenda, were adopted in Europe during that era. This underscores the mutual influence of Islamic finance on Western economic development, particularly during the Middle Ages in regions like Islamic Spain.

By fostering trust, fairness, and community-focused growth, Islamic finance offers a stable and inclusive alternative to conventional systems.


In Islam, the concept of vicegerency, or khalifah, shapes the values of the Islamic financial system. It teaches that humans are not the absolute owners of resources but are entrusted with them to benefit humanity. This principle emphasizes that individuals are accountable to Allah (s.w.t.) for their actions on earth. Wealth, therefore, is seen as a responsibility, and individuals are expected to use it wisely and ethically. Islamic Financial Institutions (IFIs) are guided by this philosophy, emphasizing governance, transparency, and fiduciary duty. These institutions face unique risks, which necessitate strong Shari’ah governance to ensure accountability while serving the public interest (maslahah).

All in all, Islamic economics and finance is not a value-neutral system as is the case with the conventional financial system. It is worth mentioning here following statements by

Muhammad Umar Chapra (1998, pages 104-105):
Islamic economics is based on a paradigm which is not secularist and value-neutral. It treats all human beings as vicegerents of God and brothers unto each other. All resources at the disposal of human beings are trust and must be used for the well-being of all in conformity with the values provided by the Shari’ah. However, well-being in Islam is not a function of just material possessions and unlimited consumption. It is rather a function of the balanced satisfaction of both the material and the spiritual needs of the human personality. This can be done by actualising the maqasid al-shari’ah (goals of Shari’ah).