Impact of Islamic Finance and Islamic Banking on Financial Stability: A Systematic Literature Review

Abstract

Purpose: Islamic Finance has emerged as a significant tool for financial development, with a 12% annual increase. It is regarded as a prominent component in achieving financial stability, grounded in the concepts of risk-sharing and profit-sharing. With its rapid expansion, previous research has sought to ascertain its impact on financial stability. However, there has been considerable uncertainty regarding which areas or concepts warrant further focus. This review responds to gaps left by Belouafi et al., (2015) and others, offering a comprehensive synthesis of recent studies (2016–2023) to re-evaluate Islamic finance's contribution to financial stability.

Research Design: The authors conduct an in-depth analysis of existing journals to create a systematic review of Islamic finance and its impact on financial stability, with a focus on studies published from 2016 to 2023.

Findings: The review reveals that Islamic banking, underpinned by principles such as profit-sharing, risk-sharing and the prohibition of interest (Ribā), offers distinctive advantages in fostering financial stability. These characteristics have positioned Islamic banks as resilient entities, especially during periods of economic distress, aligning with previous findings that highlight their robust performance in times of crisis.

Significance: The findings emphasize Islamic finance's value in promoting global banking resilience and ethical finance.

Future Research: Future research should aim to deepen the understanding of Islamic finance’s unique characteristics, explore its adaptability to diverse economic environments, and develop strategies for integrating it into a more cohesive and resilient global financial system.