Does Islamic Finance Industry Lack a Certain Degree of Credibility?

Abstract

 

This article critically explores the challenges facing the Islamic finance industry, particularly its credibility, governance, and sustainability. Despite its rapid growth and resilience during global financial crises, Islamic finance still commands less than 1.2% of global banking assets. The author questions why Islamic finance hasn’t attracted more investors, suggesting shortcomings in transparency, governance, and the perceived integrity of Shariah compliance. A central concern is the role of Shariah boards. These boards are crucial in ensuring financial products comply with Islamic law, yet members are often unaccountable, unregulated, and overextended—some serve on over 70 boards globally. This creates conflicts of interest and diminishes the boards’ effectiveness. Furthermore, appointments often rely on personal networks rather than merit, and there is little transparency or performance evaluation. Corporate governance in Islamic banks is highlighted as a key weakness. The lack of accountability among Shariah scholars, combined with inadequate training for new members, stalls progress. The article calls for reforms including term limits, mandatory attendance, performance transparency, and independent regulation. Regarding regulatory frameworks like Basel III, Islamic banks often exceed capital requirements due to their minimal use of risky instruments. However, liquidity remains a challenge due to the scarcity of Shariah-compliant investment tools. In conclusion, the author warns that without fundamental reform, particularly in governance and scholar accountability, Islamic finance risks squandering its opportunity to present itself as a credible, ethical alternative to conventional banking. Malaysia is cited as a model for best practices, though global consistency is still lacking.