Challenges in Islamic finance

Challenges in Islamic finance are the difficulties in providing modern finance services without violation of sharia (Islamic law).

Islamic finance has faced criticism both from within its community and from external observers. A primary concern is that conventional Islamic financial institutions often fail to fully implement the core principle of profit and loss sharing (PLS) financing. Supporters contend that these institutions sometimes resort to hiyal, legalistic maneuvers considered ethically questionable in Islam, to circumvent the spirit of PLS.

The industry of Islamic banking and finance has developed around avoiding riba (unjust, exploitative gains made in trade or business) by avoiding interest.

The majority of Islamic banking clients are found in the Gulf states and in developed countries that are in the Muslim world. The challenges include that interest rate benchmarks have been used to set Islamic "profit" rates so that "the net result is not materially different from interest based transactions". giving the impression that Islamic banking is "nothing but a matter of twisting documents ....".

The religiously preferred mode of Islamic finance is profit and loss sharing (PLS) but this causes several issues including that it must wait for the project invested in to come to fruition before profits can be distributed and increases the risk and complexity for financial providers.