Understand Islamic banking in five questions

Despite its expansion into the mainstream, Islamic banking remains complex and often misunderstood.

Our recent global corporates survey¹ revealed that 42 per cent of corporates that were interested in Islamic banking products were, at most, somewhat familiar with them. Furthermore, 65 per cent of those interested had no prior background on Islamic banking products.

Ambiguities around what it is, its principles, structures, and market dynamics pose challenges for corporate leaders looking to engage with or invest in this space. Without clear understanding and visibility, participants in the wider market, including multinational corporates, could miss out on a five trillion-dollar strategic financing opportunity that offers access to values-driven, Shariah-compliant capital and growing investor demand across key markets.

To unlock its full potential, it is essential to first build a clear and nuanced understanding of how Islamic banking works and where it creates strategic value.

1 Standard Chartered 2025 Capital Structure & Rating Advisory (CSRA) survey. Please refer to appendix for more information.

1. What is Islamic banking?

Islamic banking is a values-based approach to banking that operates under Shariah principles. It emphasises ethical and transparent practices, links finance to real economic activity, and promotes social responsibility, financial inclusion, and economic stability by avoiding interest, excessive leverage, and speculative transactions.

It applies asset-based financing and risk-sharing models that aim to minimise financial risk and promote a more equitable sharing of profits between parties.

Islamic banking is delivered through two channels:

Full-fledged Islamic banks offering only Shariah-compliant services.
Islamic windows within conventional banks, allowing corporates to access Islamic finance while maintaining existing banking relationships.

Eligible assets for Islamic asset-based or asset-backed structures must meet specific criteria:

Shariah-compliant, meaning they cannot be associated with prohibited activities such as alcohol, gambling, or conventional interest-based finance.
Tangible, identifiable, and legally transferable, with a stable valuation and free
from excessive uncertainty.

Common assets used in asset-based or -backed financing include inventory, equipment, vehicles, real estate, and commodities. These are typically applied in operational contexts like Murabaha or Ijara. For asset-backed structures, such as Sukuk, they often involve income generating real estate, infrastructure projects, leased assets, or other capital-intensive assets that can be securitised.

2. What are the key principles of Islamic finance that corporates should be aware of?

3. What governance structures ensure the integrity of Islamic banks?

Islamic banks operate under a multi-layered governance framework that ensures both financial soundness and Shariah compliance. This includes:

Banking regulation: Islamic banks are regulated by central banks under general banking regulations, and often also under dedicated frameworks in markets like the GCC, Malaysia, and Pakistan.

Shariah governance: Each Islamic bank appoints an internal Shariah board to oversee product compliance, supported in some jurisdictions by national level boards that issue binding guidance. Internal Shariah audits and advisory functions are key to day-to-day oversight.

Standard-setting bodies: Institutions such as AAOIFI and IFSB provide voluntary standards for accounting, governance, and prudential regulation, widely adopted to enhance consistency and credibility across markets.

4. How does Islamic banking differ from conventional banking?

While the outcomes of Islamic and conventional banking may appear similar, such as financing solutions or returns, their underlying principles and execution are fundamentally different.

2, 3 Please refer to glossary for more information.

5. Is Islamic banking easily accessible for corporates?

Although Islamic finance may initially appear complex due to its unique terminology and principles, in practice it is much more accessible. With the right support, corporates find that Islamic banking can be a strategic complement to their existing funding toolkit without requiring a fundamental shift in how they operate financially.

Most Islamic financial products are intentionally structured to align closely with conventional banking tools, making them familiar in function even if they are different in form. For example, Murabaha resembles a fixed-rate loan, Ijara operates like a lease, and Sukuk replicates the cash flows of conventional bonds but
is asset-backed.

Corporates typically navigate the nuances of Islamic finance by:

Partnering with Islamic banks or advisors which have long-standing experience and capabilities in structuring Islamic finance solutions across diverse markets.

Using standardised structures that simplify documentation and compliance.

Starting with pilot transactions to build internal familiarity.

Translating Islamic finance concepts into conventional finance language for internal teams.