Islamic finance is often misunderstood. Many look at it as a niche financing option or region-only; however, it plays a much greater role in global business, private equity, and mergers and acquisitions than many think. 

What is Islamic Finance? 

Islamic Finance (or Islamic Banking) refers to financial practices that comply with Islamic law. This means that banks, investors, and businesses must raise and use money in ways that align with Muslim ethical values. 

Islamic Finance Principles

Islamic finance follows a set of core principles grounded in Sharia law:

• No Interest (Riba): Instead of earning a fixed return regardless of outcome, financiers must share risk with borrowers or use profit-based contracts. 
• Risk Sharing & Fairness: Transactions should distribute risk and reward fairly between parties. Often, profit-and-loss sharing arrangements are made. 

• Asset-Backed Financing: Every deal must involve a tangible asset or real service. Therefore, every transaction needs a real economic purpose. 

• No Excessive Uncertainty or Gambling: Contracts with excessive uncertainty (gharar) or that resemble gambling/speculation (maysir) are forbidden. 

• Ethical Investments Only: Funds from Islamic financing cannot be used in businesses that deal in alcohol, pork, gambling, pornography, weapons, or other haram products.  

Collectively, these principles aim to promote justice, shared prosperity, and ethical behavior in finance. By following them, Islamic finance helps support economic development without compromising on moral values. 

Type of Islamic Finance Arrangements 

To comply with the above principles, Islamic finance uses specialized financial contracts instead of regular loans. 

Common types include: 

• Mudarabah (Profit-Loss Sharing Partnership): Both parties share any profits according to a pre-agreed ratio. If any losses occur, only the investor loses money. 
• Musharakah (Joint Venture Partnership): Two or more partners fund a venture and share profits and losses according to their equity share. 

• Murabaha (Cost-Plus Financing Installment Sale): Instead of lending money to the borrower, the financier first buys the asset and then sells it to the client at an agreed price without interest. 

• Ijara (Leasing): The financier purchases the asset and then leases it to the client for a fixed rent. Often.

• Salam and Istisna (Forward Contract): These are contracts for ordering goods with upfront payment and future delivery. Salam is used in agriculture, and Istisna is used for made-to-order products. 

Each of these arrangements replaces the idea of interest-based loans. Instead, they’re more trade or partnership-based contracts.

Example of Islamic Finance 

Consider a business acquisition (M&A) situation. Suppose Company A wants to purchase Company B for $50 million. 

With conventional finance, Company A might borrow $50 million from a bank at X% interest. They then use the loan to pay the seller. 

In Islamic finance, however, you don’t have interest-based debt. This is haram. Therefore, you need to finance the deal using a Mudarahbah (profit-loss sharing partnership), a Murabaha (cost-plus financing installment sales), or something else. 

For example, with a Murabaha, an Islamic bank would purchase shares or assets of Company B itself for $50 million. They would then sell them to Company A at an agreed higher price, like $55 million, and they can repay the bank in installments. 

As you can see, no interest is paid. The interest is included in the transaction as a bulk some so it’s compliant with Sharia Law. 

Common Myths About Islamic Finance 

Despite Islamic Finance’s growth in the global economy, many misconceptions still exist. 

For instance: 

• “Islamic finance is only for Muslims”: Regardless of faith, Islamic financial services are open to everyone. 
• “Islamic finance is more expensive than conventional loans”: Generally, Islamic banks offer rates and fees comparable (and sometimes better) than conventional banks. 

• “It’s basically the same as interest but with a different name”: Islamic deals come from owning or trading assets and sharing business risk, not simply renting out money. 

• “Islamic finance is too complicated”: While the terminology may seem confusing, the actual concepts are straightforward.  

• “Islamic banks are not competitive or profitable”: Collectively, Islamic banks own $3.5 trillion in assets and are growing at a rate of 10% each year. 

Islamic Finance vs Conventional Banking 

Aspect	Islamic Finance	Conventional Finance
Interest	Returns come from asset leasing or partnerships	Returns come from interest-based lending
Risk	Risk and reward are shared	Risk is transferred to the borrower
Assets	Financing is asset-based	Asset backing is not required
Investments	Ethical and Sharia-compliant only	Any legal investment
Governance	Sharia oversight applies	Standard regulation only
Purpose	Fairness and shared value	Profit driven

Does Islamic Finance Support M&A? 

Yes. Islamic finance can fully support mergers and acquisitions, provided the transaction is structured to avoid interest and complies with Sharia principles. 

A real example of this would be Kuwait Finance House’s acquisition of Ahli United Bank. The transaction was valued at $10.9 billion USD and was executed through a share-exchange structure. 

Apart from no interest being required, another benefit of Islamic finance for M&A is the risk-sharing and due diligence. Acquiring a business through such means requires proper auditing to ensure it complies with Sharia principles. 

Professionals like us at OCX Advisors support clients throughout this process, helping structure acquisitions that are both commercially sound and Sharia-compliant. 

Islamic Finance in the Global Economy 

In 2024, the Islamic finance industry grew by over 10%, reaching around $3.6 trillion. Between 2024 and 2027, projections estimate growth to $6.7 trillion. 

Islamic banking assets alone now exceed $2 trillion. They even hold as much as 15% market share in multiple countries, including Malaysia, Indonesia, and Saudi Arabia. 

Capital markets have also expanded quickly. Around $180 to $190 million of sukuk were issued in 2024, and outstanding sukuk volumes are estimated to be around $700 to $900 billion. 

Governments and corporations often use sukuk to fund large-scale projects. Generally, in projects for infrastructure, renewable energy, and corporate expansion. One notable project includes Indonesia’s 30-year Green Sukuk plan. 

FAQ 

Is Islamic finance only for Muslims? 

No. Islamic finance is available to anyone. Often, Muslims use Islamic financing as it is more ethical, asset-backed, and interest-free.

Can Islamic finance be more expensive? 

Not necessarily. Costs are often comparable to conventional finance, with pricing influenced by complexity, structure, and market conditions. 

Is Islamic finance legal in Western countries?

Yes. Islamic finance operates legally in many Western countries, including the US and UK. 

Get Islamic Financing Today 

 

Whether you’re considering acquiring a company, need growth capital, or simply want a bank aligned with your values, Islamic finance could be the solution. 

As a US-based advisory firm with Islamic finance expertise, OCX Advisors can help your future M&A or other financing needs in a Sharia-compliant way without compromising on business goals. 

Contact us today for a consultation and see how we can tailor an Islamic finance solution for your next deal.