Islamic finance must avoid becoming a debt-only industry: Mufti Jakhura

Sri Lanka’s Islamic finance industry risks undermining its own long-term purpose if the debt-based financing structures come to dominate the sector, at the expense of equity-based alternatives, a leading Sharia scholar warned.

While the debt-based products are recognised and permissible within Islamic finance, the industry must remain faithful to the broader principles of Islamic economics by maintaining a balance between debt and risk-sharing financing models, LOLC Al-Falaah Chairman Scholar Supervisory Board Mufti Shafeeque Jakhura cautioned.

“It is important for us to understand that this product is a debt-based product ... the true consequences and results of the Islamic economic system can only bear fruition when we have a mix of debt-based products and equity-based products,” he said.

Sri Lanka’s Islamic finance sector is broadening its product offerings and seeking to expand access to Sharia-compliant financial solutions.

However, Jakhura warned that the growing appeal and practicality of debt-based instruments should not result in the industry gravitating entirely towards such structures.

“If this product, whereas it has a lot of benefits, it also has the potential of cannibalising all of the other products in the industry and causing the entire industry to be based on a debt-based product and that is something that I would like to caution at this point in time,” he said.

The warning touches on a broader challenge facing Islamic finance globally: how to balance commercial realities with the original objectives of an economic system built on ethical finance, shared responsibility and real economic activity.

Jakhura stressed that the objective of Islamic finance was not merely to replicate conventional financing through Sharia-compliant structures but to achieve the wider objectives of Sharia through responsible and balanced financial practices.

He also cautioned against encouraging borrowing beyond genuine financial need, emphasising that both financial institutions and customers have a responsibility to avoid excessive indebtedness.

Beyond product innovation, Jakhura identified governance as a cornerstone of a credible Islamic finance industry, arguing that Sharia compliance extends far beyond the approval of contracts and documentation.

“The responsibility of the Sharia Supervisory Board extends beyond just approving documentation. We ensure the contracts are Sharia-compliant. The operational processes are faithfully implemented in accordance with the approved structure,” he said.

He said continuous monitoring, audits and reviews were essential to preserving confidence in Islamic finance and ensuring institutions remain aligned with the approved structures.

“Sharia compliance is a continuous commitment; it is not a one-time certification,” he added.

Furthermore, Jakhura also called for stronger collaboration among scholars, regulators, legal professionals and industry practitioners as Islamic finance continues to evolve. 

“I often say that there is no transaction worth doing that cannot be structured in a Sharia-compliant manner. All it requires from us is to be solution-oriented,” he said. 

(SAA)