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Issues in modern Islamic Finance

ByShaykh Haytham Tamim

Contemporary practice of mudaraba

In modern settings, the most common example of mudaraba (profit sharing) is when you deposit money into an Islamic bank. The bank acts as the mudarib, investing the money in Sharia-compliant ventures, while you, the depositor, are the rabb al-mal. You remain a silent partner, and the bank conducts the business. Profits are then shared according to a pre-agreed ratio, while the bank takes its share for managing the investment.

Comparison with conventional fund management

This model can appear similar to modern asset management or investment funds, where managers receive a percentage of the profit. The difference, however, lies in the principle of risk and profit-sharing. In mudaraba, both parties share the actual business risk, the rabb al-mal risks his capital, and the mudarib risks his time and effort.

There is no fixed or standard ratio such as “20%” or “2%”. The profit share is determined entirely by mutual agreement, provided it is fair and not exploitative. As the Prophet ﷺ said:

إِنَّمَا الْبَيْعُ عَنْ تَرَاضٍ

“A sale is only valid with mutual consent.” (Sunan Ibn Majah)

Thus, if the mudarib asks for 70% and the rabb al-mal agrees, it is valid, as long as both find the arrangement equitable and transparent.

Salary or payment to the mudarib

The majority of scholars agree that the mudarib does not receive a salary in addition to his share of the profit. His reward is tied solely to the success of the venture. However, the mudarib may legitimately claim necessary expenses, such as travel costs or business-related spending, provided they are within reason.

Some scholars, particularly within the Hanbali school, have allowed limited concessions, permitting a basic allowance for the mudarib in certain cases to cover essential living expenses during long-term projects. But if the mudarib receives a fixed salary alongside profit, he ceases to be a true mudaraba partner; the nature of the contract changes.

Relationship with modern investment models

At its core, mudaraba is indeed a form of investment partnership. However, Islamic financial institutions may use other structures too, such as wakala (agency), where the investor appoints the bank as an agent rather than a partner.

Both models, mudaraba and wakala, are legitimate under Islamic law, though they differ in how risk and profit are distributed. mudaraba is a profit-sharing partnership, while wakala is a fee-based agency.

So when you see major Islamic investment firms or Sharia-compliant funds such as iShares promoting Sharia-compliant investments, they usually employ one of these two mechanisms: mudaraba or wakala, ensuring that all activities remain free from riba (interest), gharar (excessive uncertainty), and haram sectors.

In essence:

  • Mudaraba remains widely practiced today, especially in Islamic banking and investments.
  • It is a silent partnership, where the investor does not interfere in business management.
  • The profit ratio is negotiable and must be agreed upon at the start.
  • The mudarib usually receives no salary but may cover necessary expenses.
  • Modern Sharia-compliant funds often operate through either mudaraba or wakala structures to conform with Islamic ethics and law.

Sharia-compliant investment companies

In recent years, a number of institutions have developed Sharia-compliant investment platforms, making it easier for Muslims to invest ethically and in accordance with Islamic principles. Some of the more established names include:

  • Wahed Invest (Wahed) – One of the most recognised global Islamic investment platforms, originally launched in the United States and now active in the UK, Malaysia, and several other countries. Wahed offers diversified portfolios that avoid riba (interest), gharar (excessive uncertainty), and companies involved in haram sectors such as alcohol, gambling, and conventional finance. Their UK office is located near Baker Street in London.
  • Oasis Crescent – Based in South Africa, Oasis manages a range of Sharia-compliant funds, including equity, property, and income portfolios. However, investors should always review the fund’s holdings and fee structures carefully, as past criticism has been directed at high management charges and unclear screening of some companies.
  • iShares (by BlackRock) – Offers a small range of Sharia-compliant ETFs, usually available through Vanguard, AJ Bell, or other brokers. These funds are screened against Islamic guidelines and follow the Dow Jones Islamic Market Index or FTSE Sharia Index. The selection is limited (around four funds) but provides easy access for UK investors.
  • Amana Mutual Funds – An American-based Sharia-compliant investment group run by Saturna Capital. They have long experience in ethical Islamic investing, with funds available to international investors through certain brokers.
  • ICD and IIFM-linked Funds – Some products are associated with the Islamic Corporation for the Development of the Private Sector (ICD) and International Islamic Financial Market (IIFM), which support Sharia-compliant investments at a larger institutional scale.

These examples show that Sharia-compliant investing is becoming increasingly mainstream, though still limited compared to conventional markets. Investors should always review each fund’s Sharia screening methodology, fees, and ethical compliance reports before investing.

Guidance on sharia screening

For a fund to be genuinely Sharia-compliant, it must meet the following key criteria:

  1. No investment in haram sectors – including alcohol, gambling, pork, adult entertainment, arms manufacturing, or interest-based financial services.
  2. Debt ratios must remain within Islamic limits, typically less than 33% of total assets.
  3. Interest income or non-permissible gains must be purified through charitable donations.
  4. Transparent governance – the fund must have a Sharia Supervisory Board (SSB) to oversee and certify compliance.

While there are global standards, notably from AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) and IFSB (Islamic Financial Services Board), the reality is that screening can still vary between providers. Some firms remain cautious about naming specific prohibited companies for political or commercial reasons, preferring to adjust quietly behind the scenes.

Mudaraba in non-Islamic contexts

The principle of mudaraba, one party providing capital and the other providing labour or expertise, is not unique to Islamic finance. Similar arrangements exist in conventional business, such as venture partnerships, property development deals, or joint ventures where one partner invests money and another contributes skill or management.

However, what makes mudaraba distinctively Islamic is its ethical and contractual framework:

  • There is no guaranteed return or fixed payment to the investor.
  • Interest-based financing or debt instruments are excluded.
  • The arrangement is grounded in trust (amanah) and risk-sharing, as required by Islamic commercial law.

Thus, even if a conventional joint venture mirrors the structure of mudaraba in practice, it would only qualify as a true mudaraba if it also adhered to Islamic principles, free of riba, gharar, and dhulm (injustice).

In short, mudaraba provides a universal business model based on fairness, transparency, and shared risk, principles that could benefit any economic system, Islamic or otherwise.

Debt finance and leverage in Islam

In conventional finance, leverage refers to borrowing money to amplify potential returns, for example, using £2 million as collateral to borrow £20 million and invest it for profit. However, this mechanism almost always involves interest-bearing loans, which are strictly haram in Islam.

The Qur’an explicitly forbids such arrangements:

يَا أَيُّهَا الَّذِينَ آمَنُوا اتَّقُوا اللَّهَ وَذَرُوا مَا بَقِيَ مِنَ الرِّبَا إِن كُنتُم مُّؤْمِنِينَ

“O you who believe, fear Allah and give up what remains due to you of interest, if you are truly believers.” (Surat al-Baqarah 2:278)

Therefore, any contract that includes or depends upon interest (riba) is impermissible, regardless of how profitable or widespread it may be. Modern leverage, margin trading, and debt-based growth all fall into this category, as they rely on borrowing money with interest and repaying more than was borrowed.

The ethical contrast

Indeed, this is how the modern financial world multiplies wealth, but it is done through riba, speculation, and risk transfer, not genuine value creation. Islam, in contrast, bases finance on real assets, shared risk, and lawful trade. The Qur’an draws a clear distinction:

لَا يَسْتَوِي الْخَبِيثُ وَالطَّيِّبُ وَلَوْ أَعْجَبَكَ كَثْرَةُ الْخَبِيثِ

“The bad and the good are not equal, even though the abundance of the bad may please you.” (Surat al-Ma’idah 5:100)

Muslims may seem at a financial disadvantage when avoiding riba-based systems, but the ethical and spiritual integrity of halal finance brings barakah (divine blessing) and long-term sustainability.

The need for Islamic alternatives

Avoiding interest does not mean isolation or passivity. Muslims are commanded to be active, creative, and competitive within the boundaries of Sharia. The goal is to build halal alternatives, strengthen Islamic financial systems, and promote collective growth.

As the discussion highlighted, the issue is not that the Islamic system is weak, it is that it has not been fully implemented. The system exists in theory; the problem lies in the lack of unified application.

“We have the system, but we don’t have the application.”

To compete globally, the Ummah must act collectively, pooling resources, investing ethically, and creating joint markets. If Muslim nations united their capital, the Islamic financial world could form a powerful independent alternative to conventional systems.

The role of Islamic development institutions

One such effort already exists in the form of the Islamic Development Bank (IDB), established under the Organization of Islamic Cooperation (OIC), which brings together 57 Muslim-majority countries. The IDB’s mission is to provide interest-free development finance, promote trade among Muslim countries, and support Sharia-compliant investment.

In principle, the IDB serves as a halal counterpart to the IMF or World Bank, offering development funding to member nations. However, its impact remains limited because:

  • Many Muslim countries still rely heavily on conventional debt financing.
  • There is insufficient coordination among Islamic economies.
  • Global markets are still dominated by riba-based systems.

Towards a unified Islamic capital market

The ideal long-term solution is for Muslim countries to form a shared financial market, a global Islamic fund where individuals, businesses, and governments can borrow or invest purely through halal means.

Such a system would use models like mudaraba (profit-sharing) and musharaka (joint partnership) rather than debt-based leverage. It would encourage real economic activity, trade, innovation, and entrepreneurship, without the injustice of interest.

Until that vision is realised, Muslims can still invest through genuine Sharia-compliant institutions like Wahed, iShares, Amana, and Oasis, while continuing to advocate for broader, unified Islamic economic reform.

In short, Islamic finance does not forbid growth, it forbids unethical growth. True prosperity, in Islam, comes not through leverage and speculation but through trust, fairness, and shared effort under the blessing of Allah.

The question of stock market investments

Are stocks and shares traded on global markets halal, given that most listed companies operate within a debt-based system? It is true that nearly all public companies, directly or indirectly, rely on interest-bearing loans, credit facilities, or financial instruments that involve riba (interest). This reality makes investing in them ethically complex from an Islamic perspective.

From a purist standpoint, bearer assets, such as physical gold, silver, property, or Bitcoin, are indeed cleaner and more halal forms of investment. These assets have intrinsic value, involve no interest, and are owned outright. The Prophet ﷺ said:

الذَّهَبُ بِالذَّهَبِ، وَالْفِضَّةُ بِالْفِضَّةِ… مِثْلًا بِمِثْلٍ يَدًا بِيَدٍ

“Gold for gold, silver for silver… equal for equal, hand to hand.” (Sahih Muslim)

This hadith reflects the principle of real, tangible exchange, free from speculation and delay, the very foundation of halal trade.

Screening and halal stock criteria

However, Islamic scholars and economists have developed screening criteria to identify shares that, while not perfectly pure, are acceptably compliant within the modern economy. This is how indices such as the Dow Jones Islamic Market Index and the FTSE Shariah Index were established.

These screening systems analyse each company according to three main filters:

  1. Sector screening – Excluding companies engaged in prohibited industries (alcohol, gambling, weapons, conventional finance, entertainment, etc.).
  2. Financial ratio screening – Allowing only limited levels of interest-bearing debt (usually below 30–33% of total assets).
  3. Purification of income – Any small amount of impermissible income must be donated to charity to cleanse the investment.

As a result, some shares can be conditionally halal if they pass these filters. Major technology and healthcare companies, for instance, may appear on Sharia-compliant lists if their core business is halal and their debt exposure is within permissible limits.

Modern Screening Platforms

There are a number of apps and online tools that help Muslims assess whether a company or fund is Sharia-compliant:

  • Zoya – A mobile app that screens individual stocks for halal compliance based on AAOIFI standards.
  • Islamicly – Another comprehensive app used by many investors for real-time halal screening and portfolio tracking.
  • Wahed Invest – Offers fully screened portfolios managed according to Islamic investment principles.
  • FTSE Shariah Index and Dow Jones Islamic Index – Official benchmarks listing companies that meet Sharia criteria.

These tools typically rate each stock as green (halal), amber (doubtful), or red (haram). The “amber” zone often includes companies with minor involvement in interest or questionable subsidiaries, requiring extra caution or purification.

The cautionary view

That said, many scholars, especially traditional jurists, remain cautious. Even if screening filters make some shares technically acceptable, the systemic link to riba-based financial markets remains. As you noted, the deeper infrastructure of global finance is inseparable from interest, leverage, and speculation.

The Prophet ﷺ warned that such times would come:

يَأْتِي عَلَى النَّاسِ زَمَانٌ لَا يَبْقَى أَحَدٌ إِلَّا أَصَابَهُ مِنَ الرِّبَا غُبَارُهُ

“A time will come when no one will remain who is not affected by riba, even if only its dust reaches him.” (Musnad Ahmad)

Therefore, the safest approach remains to prioritise real, tangible, and debt-free assets such as:

  • Gold and silver
  • Property
  • Productive businesses (based on mudaraba or Musharaka)
  • Halal commodities
  • Decentralised assets like Bitcoin, provided they are not used for speculation

Striving for purity and balance

The reality is that absolute purity in today’s financial system is nearly impossible. What Islam requires is that we make the best available halal choice, avoiding what is clearly haram and staying cautious about doubtful matters. As the Prophet ﷺ said:

دَعْ مَا يَرِيبُكَ إِلَى مَا لَا يَرِيبُكَ

“Leave what causes you doubt for what does not cause you doubt.” (Sunan al-Tirmidhi)

So, while halal stock screening offers a practical middle path for Muslim investors, the highest standard remains ownership of real, riba-free assets that carry no trace of interest or debt, embodying the spirit of justice, balance, and self-sufficiency that Islamic finance was built upon.

Bearer ownership and the modern financial system

The question of bearer ownership versus custodial or paper ownership is becoming one of the most critical discussions in both Islamic and conventional finance today. It strikes at the very heart of what it means to own an asset.

When Muslims raise concerns about shares, ETFs, or other financial products, even those labelled Sharia-compliant, they are often pointing out a deeper structural problem: you don’t actually hold your shares in your hand; they are recorded within centralised settlement systems such as DTCC (Depository Trust & Clearing Corporation) in the US or Euroclear in Europe. These institutions act as custodians or intermediaries, and legally, what you own is often just a claim or an IOU within a layered, debt-based system.

From an Islamic standpoint, that is a legitimate concern. True ownership (milk tamm) means having direct possession and control over the asset, not a paper promise or digital record that can be frozen, reset, or tokenised.

The Qur’an stresses the principle of clear and lawful ownership:

لَا تَأْكُلُوا أَمْوَالَكُم بَيْنَكُم بِالْبَاطِلِ إِلَّا أَن تَكُونَ تِجَارَةً عَن تَرَاضٍ مِّنكُمْ

“Do not consume one another’s wealth unjustly, except through trade by mutual consent.” (Surat al-Nisa 4:29)

If the system obscures who truly owns what, or allows third parties to seize, suspend, or reassign assets, it naturally creates doubt (shubha) under Islamic law.

Why the concern matters

These systems were built on centralisation, credit expansion, and counterparty risk. When you buy a share through a broker, it is almost never registered in your name directly. It is held in street name (also known as a nominee account), meaning your broker or the clearinghouse is the legal (nominal) owner, and you are the beneficial owner i.e. you have a beneficial interest only.

So, if central banks or regulators shift towards tokenised settlement or programmable money, they could, in theory, freeze or reassign ownership without your consent. That is what many critics, including Muslim thinkers, refer to when they say, “you can be reset.”

In contrast, bearer assets, like physical gold, silver, real property, or Bitcoin held in self-custody, give the owner direct possession. No intermediary, no promise, no counterparty risk. You truly own it.

Balanced view

In principle, bearer ownership is superior and far cleaner Islamically. Gold, silver, property, and Bitcoin are all examples of tamlik haqiqi (true ownership), provided they are acquired lawfully and without speculation.

However, Islamic finance is still developing its infrastructure. The aim is not to copy the Western system with a halal label, but to build parallel systems rooted in genuine ownership, transparency, and fairness.

“We are trying our best to find alternatives and invest in halal and avoid the haram as much as possible. Do we have mistakes and issues to improve? Of course.”

So while we must be cautious of the flaws in centralised settlement, we should also recognise that the Islamic finance community is working toward more decentralised, trust-based models.

The role of Bitcoin and real assets

Bitcoin, when understood and held properly, reintroduces the concept of self-sovereign ownership. Holding it in cold storage (private wallet, not an exchange) means you own it outright, just as you would own a gold coin or a piece of land.

The Prophet ﷺ said:

الْمُسْلِمُونَ عَلَى شُرُوطِهِمْ

“Muslims are bound by their conditions.” (Sunan Abu Dawud)

In that sense, Bitcoin fulfils one of the highest principles of Islamic finance, no counterparty, no riba, no deception, and transparent ledger-based accountability. However, it also carries its own risks (volatility, regulatory uncertainty, misuse for speculation), so education and prudence are essential.

A way forward

The ideal Islamic economy would integrate both:

  • Real assets (gold, silver, land, trade goods, and productive ventures).
  • Decentralised digital assets (Bitcoin, tokenised halal contracts) that preserve true ownership and eliminate intermediaries.

Until then, Muslims must navigate a mixed system, engaging cautiously with what exists, supporting Islamic alternatives, and continuing to develop halal, bearer-based financial models that restore what the Prophet ﷺ called “trade by mutual consent.”

So the future of ethical Islamic finance will depend on returning to real, decentralised, and accountable ownership, and the rise of technologies like Bitcoin may actually be part of that journey.

Delivered by Shaykh Haytham Tamim on 11th November 2025 to the Convert Club.

Disclaimer: Any financial institutions or companies mentioned in this book are included for informational purposes only and do not constitute endorsements or investment recommendations.

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