ISLAMIC FINANCE: THE MISMATCH BETWEEN OBJECTIVES AND PRACTICE—DEBT DOMINANCE AND LIMITED DEVELOPMENTAL IMPACT

Islamic economics has witnessed massive institutional growth, with global assets previously exceeding $3 trillion. However, the actual implementation faces a profound objectives mismatch (Maqasid Mismatch). The sector is largely dominated by Debt-based Financing instruments, primarily Murabahah and Tawarruq, which constitute over 70% of portfolios. This reliance sidelines the Profit and Loss Sharing (PLS) instruments prescribed by Shariah principles (e.g., Al-Ghunm Bil Ghurm – gain accompanies liability). This paper diagnoses the reasons for the hegemony of debt tools, attributing it to a confluence of complex structural factors: First, global regulatory constraints (such as Basel capital adequacy requirements) that favor low-risk, easily measurable, and guaranteed instruments. Second, an ingrained risk-averse corporate culture within Islamic banks, coupled with a lack of the specialized competencies needed to evaluate and monitor long-term Mudarabah and Musharakah projects. Third, the organizational tendency toward instruments offering quick and guaranteed profitability. This dominance has led to a diminished developmental impact for Islamic finance, effectively reducing it to a formal substitute for the conventional banking system. To overcome this dilemma, the paper proposes a three-dimensional framework: regulatory reform to provide incentives for PLS instruments; a strategic shift toward investment intermediation by establishing specialized funds; and finally, the adoption of Islamic FinTech to digitize profit-sharing contracts, thereby increasing their transparency and efficiency. The goal is to achieve a qualitative transformation toward a more equitable and development-focused financial system.