Author(s) :

Syed Shah.

Volume/Issue :

Abstract :

Debt-driven financial crises expose structural vulnerabilities in conventional interest-based banking systems, yet alternatives based on ethical frameworks remain understudied in mainstream financial literature. This narrative review examines how four core Shariah-compliant mechanisms—prohibition of interest (riba, the Quranic term for unlawful excess), profit-and-loss sharing, asset-backed financing, and ethical investment screening—reduce systemic financial risk. Drawing on published studies, institutional reports, and case study evidence from the International Monetary Fund (IMF), major Islamic banks, and regional financial authorities, this review demonstrates that Islamic banks experienced 25–40% lower insolvency rates and required significantly less government intervention than conventional banks during the 2008 global financial crisis. The findings suggest that Islamic banking’s faith-based structure functions as an effective risk management framework by limiting leverage (debt-to-equity ratios averaging 1:3 versus 1:10 in conventional banks), preventing speculative bubbles through mandatory asset backing, and reducing exposure to volatile sectors through ethical screening. These results have important implications for financial regulation and sustainable economic development, particularly in contexts seeking alternatives to debt-dependent growth models.