Empowering Muslims: The Critical Need for Islamic Financial Literacy

Empowering Muslims: The Critical Need for Islamic Financial Literacy

Wan Noor Hazlina Wan Jusoh^1*., M. Elfan Kaukab²., Noor Hasyimah Sulaiman¹., Muhammad Amir Husairi Che Rani¹

¹Universiti Teknologi MARA Cawangan Terengganu, Kampus Dungun, Terengganu, Malaysia

²Universitas Sains Al-Qur’an Wonosobo, Indonesia

DOI: https://dx.doi.org/10.47772/IJRISS.2025.SPiKEM2

Received: 05 March 2025; Accepted: 12 March 2025; Published: 14 April 2025

ABSTRACT

In today’s dynamic financial landscape, Islamic financial literacy has become increasingly important for Muslims around the world. This article explores the key issues surrounding Islamic financial literacy and aims to bridge the knowledge gap to empower individuals and communities. Despite the increasing complexity of financial products, financial literacy remains low in Malaysia. This deficiency has contributed to rising bankruptcy cases, especially among young adults. Islamic financial literacy, which emphasizes Shariah-compliant financial practices such as the prohibition of riba (interest), responsible borrowing, and prudent financial planning, plays a crucial role in mitigating these issues. Library research is used to discuss the significant issues of Islamic financial literacy faced by Muslim consumers in managing their finance and how Islam looks at it. The study finds that the lack of awareness and understanding of Islamic financial concepts significantly contributes to poor financial decisions and increased debt levels among Malaysian Muslims.  The research implies that enhancing Islamic financial literacy is essential for fostering economic stability and reducing bankruptcy rates. This can be achieved through targeted educational programs and the collaboration of Islamic financial institutions, regulatory bodies, and educational organizations. Future research should focus on evaluating the effectiveness of these educational initiatives and developing innovative strategies to improve Islamic financial literacy, particularly in addressing the needs of young adults and economically vulnerable populations.

Keywords: Islamic financial literacy, issues; awareness, Shari’ah compliance, financial education

INTRODUCTION

In the 21st century, financial literacy has become increasingly vital due to the growing complexity of financial products and the introduction of new ones (M. A. Abdullah & Anderson, 2015; Faulkner, 2022). In today’s globalized and risky marketplace, the ability to make well-informed financial decisions is crucial (Lusardi & Mitchell, 2011). Financial literacy is now a global priority, driven by the changing socio-economic environment and the sophistication of the financial landscape. Without adequate financial knowledge, individuals are vulnerable to exploitation, such as financial scams (Mohamad Azhar, 2012). Thus, financial literacy forms the foundation for sound financial decisions and economic well-being (Mahadi, Mazli, & Muneeza, 2019; Md. Sapir & Wan Ahmad, 2020), enabling individuals to make informed choices regarding money management (Noctor, Stoney, & Stradling, 1992).

The concept of financial literacy is often associated with various terms including financial knowledge, financial capability, financial education, and financial competence (Ahmad, Widyastuti, Susanti, & Mukhibad, 2020). However, achieving comprehensive Islamic financial literacy poses unique challenges, particularly in understanding Shariah compliance (Dinc, Çetin, & Jahangir, 2023). Islamic finance prohibits interest (riba) and restricts investments in certain industries (ISRA, 2020). Furthermore, Islamic financial literacy encompasses financial planning, including the principles of zakat and sadaqah, responsible borrowing, and strategies to avoid unnecessary debt (M. F. Abdullah, Hoque, Rahman, & Said, 2022; Bensaid, Grine, Nor, & Yusoff, 2013). Normally, those who have knowledge related to Islamic finance are likely to have a positive attitude towards a sound Islamic financial management (Osman et al., 2024). In the digital age, the rise in financial scams targeting the Muslim community highlights the need for awareness and protection against fraud (Swandaru & Muneeza, 2022). In fact, a study shows that Islamic financial literacy is an important variable to increase Islamic financial inclusion (Masrizal, Sukmana, & Trianto, 2025). Hence, this study explores these key issues in Islamic financial literacy, aiming to bridge the knowledge gap and empower individuals and communities.

RESEARCH METHODOLOGY

In this conceptual paper, library research is used to explore existing research and scholarly works on the issues surrounding Islamic financial literacy and the efforts undertaken to bridge the knowledge gap and empower communities. By examining the current literature, key insights, gaps, and recommendations for further enhancing Islamic financial literacy can be identified.

Islamic Financial Literacy

Many people acquire financial knowledge and skills through trial and error, as evidenced by surveys conducted around the world. Some households believe that financial knowledge and skills can be acquired through a “natural process” or that this skill is simply a “natural instinct” of humans. Therefore, formal financial knowledge and skill acquisition is unnecessary. This may have been the case in previous decades, but a formal financial education will serve us well in the present day (Mohamad Azhar, 2012). As such, financial literacy is one of the important skills under financial education that need to be acquired by every person, since financial literacy empowers a person to plan and manage financial matters by equipping him/her with the right knowledge, skills and attitudes necessary to secure a good financial position in present and future situations (Md. Sapir & Wan Ahmad, 2020).

Literacy levels affects one’s life in terms of financial decision making (Kimiyaghalam & Yap, 2017) and financial planning starting from their initial stages of life until retirement (Mohd Aziz & Kassim, 2020). However, several studies have revealed that the financial literacy of today’s youth is significantly lacking. Even in developed nations, college and undergraduate students have inadequate financial knowledge, resulting in a high rate of debt, bankruptcy, and poor retirement planning ability  (M. F. Abdullah et al., 2022). Therefore, university students, who are primarily financially dependent and in a crucial phase of knowledge and skill formation, have a heightened appreciation for the significance of financial literacy. Financial literacy would enhance undergraduates’ optimal decision-making regarding their financial options. One is able to identify his or her basic needs, wants, and desires, which enhances understanding of his or her current financial situation and ultimately facilitates navigation towards a stronger financial footing. They will have a more secure financial future if they possess the specific financial knowledge, skills, attitudes, and behaviours that are the pillars of financial literacy (Md. Sapir & Wan Ahmad, 2020).

Financial literacy is one of the human capitals, which has a contribution in influencing financial behaviour. In line with the development of Islamic financial products, the Islamic financial literacy is needed to be enhanced to support people’s financial decision making (Ahmad et al., 2020). The study on Islamic financial literacy can be considered as a new concept being brought into the area of financial literacy (S. Ab Rahman, Tajudin, & Tajuddin, 2018). Abdul Rahim, Abdul Rashid, and Hamed (2016) have defined Islamic financial literacy as “the ability of a person to use financial knowledge, skill and attitude in managing financial resources according to the Islamic teachings.” Islamic financial literacy is an essential aspect of economic empowerment for Muslims, enabling them to make informed financial decisions in accordance with their religious beliefs. Islamic financial literacy does not only include the knowledge of interest-free Islamic financial products, but it is more comprehensive, including a person’s different aspects of financial actions such as saving for the future, incurring debt, and purification of wealth (M. F. Abdullah et al., 2022). Thus, issues regarding understanding Shari’ah compliance, purification of wealth, responsible borrowing, financial planning, and fraud awareness will be discussed in this paper.

Understanding Shariah Compliance and Awareness of Islamic Financial Products

Understanding Islamic financial instruments is important to Muslims. Muslims should observe the principles of halal and haram in all their actions and behaviour including financial affairs. Indeed, perpetuating the conventional financial systems will not contribute to the progress of the Islamic financial system. Besides, the conventional financial system tolerates riba, maysir (gambling) and gharar (uncertainty) which are strictly prohibited in Islam. Being involved in whatever form associated with such three elements will bring nothing positive but sin upon oneself (Muhammad Hisyam, 2019). However, there is a fundamental problem in the current financial literacy domain since interest or riba is one of the primary reasons for this. The current financial system or financial literacy is predominantly based on the riba concept, whereas Islamic financial literacy excludes interest or riba (Dinc et al., 2023). Thus, the purpose of the development of Islamic financial literacy is to provide knowledge and understanding of Islamic financial services institutions, products, and services offered. It is also to change individual behavior in Islamic financial management to create beneficial, prosperous, and blessed life. If the level of literacy is low, it can be raised to a high level so that the Islamic financial system can develop dynamically alongside national development (Amaroh & Istianah, 2020).

Unfortunately, people are unaware of the concept of interest; even academia and professionals involved with the financial sector have an inconspicuous understanding of it (Dinc et al., 2023), including students from religious education background (Md. Sapir & Wan Ahmad, 2020). The majority of people know only a few Islamic financial contracts and how these work without realizing the philosophical aspect of these contracts. Therefore, people should know the answers to the following questions in the first place, that is, why do we need Islamic finance in the first place? How devastating is the concept of “interest”? and What are the detrimental impacts of interest (riba) on an individual and social domain? To answer these questions, acquiring Islamic financial literacy is imperative for all, especially people involved in economics and finance (Dinc et al., 2023). As such, Muslims should be informed that any form of savings or investments that offer interest or (riba) of any kind is considered “haram” and cannot be accepted (Md. Sapir & Wan Ahmad, 2020). In Islam, it is evident that the nature of consumption is to choose what is lawful and good. The essence of halal as well as the way to obtain it is aimed at hifdz nafs as well as hifdz aql because if someone consumes what is not halal can affect his behavior (Sofa & Mukhlisin, 2020).

Purification of Wealth

Zakah is one of the important instruments in the economics of Muslims, that refers to a monetary religious obligation (Ismail & Abidin, 2020) paid by wealthy Muslims to the poor and other needy categories, as defined in the holy Qurʾan. Zakah has significant economic purposes besides purification of the souls and wealth of zakah payers (Sawmar & Mohammed, 2021) and can be considered as part of Islamic financial literacy instruments which is absent in conventional financial literacy domain. Zakah is a pillar of Islam that must be fulfilled by every capable Muslim who meet the requirements (A. Ab Rahman, Zakaria, Yeap, Zakaria, & Abd Ghani, 2020). Looking at the material context, the distribution part of the property released by muzakki (Muslim individuals who are obligated to pay zakah) is one of the instruments that has the potential to help asnaf or recipients of zakah assistance from an economic aspect and some are also able to continue their studies at the university level. From the spiritual context, zakah worship which is obligatory will purify the property owned and also the property acquired (Alin & Ibrahim, 2022).

Islam prescribed zakah, a mandatory charity for the rich to donate 2.5% of their wealth to eight types of recipients. Zakah collection will be distributed to eight asnaf groups which consists of zakat should be distributed. They are namely, faqir, poor, ‘amil, muallaf, fisabilillah, gharim, ibn sabil and riqab. The following verse describes the recipients of zakah:

Meaning: “Zakah expenditures are only for the poor and for the needy and for those employed to collect [zakah] and for bringing hearts together [for Islam] and for freeing captives [or slaves] and for those in debt and for the cause of Allah and for the [stranded] traveler – an obligation [imposed] by Allah. And Allah is Knowing and Wise.” (Al-Taubah, 9:60)

However, some Muslims do not bother the command obligatory zakat of their income. The unwillingness to pay zakat symbolizes the reluctance to commit religious orders and gives the impression that the level of religiosity is low (Ismail & Abidin, 2020). Therefore, action should be taken to nurture zakah as part of Muslim obligations for wealth purification under Islamic financial literacy domain.

Responsible Borrowing

Over the past few decades, the importance of financial literacy has led to financial research ranging from identifying individuals likely to be financial literate, to determining the role of financial literacy in debt management and bankruptcy (Pg Hj Md Salleh & Baha, 2020). For example, Malaysians lack financial literacy but are generally unaware of the fact. The national level of financial literacy measured in terms of financial knowledge is still low among Malaysians (M. A. Abdullah & Anderson, 2015; Bayram, Olasubomi, & Thartori, 2021; Mohd Aziz & Kassim, 2020; Sawandi, Bakar, Shaari, Saad, & Amran, 2018) and has yet to reach a satisfactory standard (Muhammad Hisyam, 2019). The finding of analyses shows that generally 51.54% of Malaysians have the basic financial knowledge and this figure drops to 37% for advance financial literacy (Kimiyaghalam & Yap, 2017). Consequently, bankruptcy cases among young adults in Malaysia are rising. The government and its relevant institutions, that is, credit counselling and debt management agency, provide different training and awareness programs to minimize the bankruptcy rates. Muslims are among the majority that declared bankruptcy. Hence, Islamic financial literacy may have a considerable role to minimize bankruptcy cases by changing the attitudes and behaviours of debtors (M. F. Abdullah et al., 2022). Therefore, the increasing attention to the significant role of financial literacy is attributed to the rising level of indebtedness among the young people (Abdul Rahim et al., 2016).

In the case of debt management, although debt plays an important role in the household to meet temporary cash flow, but it must be limited. In some cases, the availability of low-cost credit facilities can encourage households to become burdened by debt to the point of causing financial difficulties (Amaroh & Istianah, 2020). In the context of Malaysia, statistics issued by Malaysian Department of Insolvency (MDI) show that number of individual person declared bankrupt is keep increasing from year to year (Malaysian Department of Insolvency, 2023). These bankruptcy cases have been argued as, to some extent, reflect poor money management skills amongst Malaysian (Sawandi et al., 2018), due to improper financial behaviors among the public. It is believed that improper financial decisions are a result of low financial literacy (Kimiyaghalam & Yap, 2017).

However, Islam provides a comprehensive guideline of Islamic financial literacy, especially concerning debt management. These guidelines are not only for the borrowers but also for the creditors and the society at large (M. F. Abdullah et al., 2022). Bensaid et al. (2013) reviewed Islamic jurisprudence literature to examine several fundamental concepts of indebtedness in Islam. They found that debt is not desirable in Islam as Muslims are encouraged to work hard to earn their living through legitimate means. Debt is not only a burden for a Muslim, but it will affect him in the Hereafter if the debt is not settled. Allah SWT cannot forgive debt obligation as it is the human being’s right (haqq al-‘ibad). Therefore, the complete clearance of financial obligation to the public is necessary as it may affect a person’s religious deeds. Muslims are taught to avoid over-indebtedness; therefore, they should be prudent in their spending and financial planning. However, giving loans to others and showing compassion to debtors are righteous deeds (M. F. Abdullah et al., 2022). In fact, Muslims are encouraged to assist the indebted as a reflection of religious brotherhood and moral values and as an act of piety pleasing God (Bensaid et al., 2013).

The Shariah guidelines encourage the debtor to repay loans with integrity. It suggests that the debtor should avoid financial distress by not taking out loans for extravagant activities and by controlling his or her spending behaviour. Some Shariah texts place great emphasis on the repayment of debt while describing it as a human right, in which Allah will not forgive the transgression if the creditor does not forgive the debtor (M. F. Abdullah et al., 2022). The Shariah discourages incurring debts for luxury, which is the excess to needs. The Quran and Sunnah condemn the wastage of wealth, which is consuming wealth more than one’s needs as mentioned in Surah al-A’raf verse 31:

Meaning: “O children of Adam! attend to your embellishments at every time of prayer and eat and drink and be not extravagant; surely, He does not love the extravagant”

Although this verse specifically mentions the wastage of food and drink, it provides a general rule for the consumption of wealth (M. F. Abdullah et al., 2022).

Unwise spending behaviour is one of the reasons for personal bankruptcy (M. F. Abdullah et al., 2022).  The Shariah has provided principles for Muslims on how to consume wealth. First, the Shariah sets an objective for spending, which is fulfilling the needs but not desires. Second, it provided the priorities to fulfil the needs. Finally, it prohibited wastage (Hossain, 2014). After setting the goals for needs, a rational man should follow the hierarchy of needs. He should satisfy the top level of needs first, followed by secondary needs. In this regard, the Maqasid al-Shariah’s level of needs might be referred to (Khan, 2013).

Financial Planning

In a living environment where most of us are cornered by several economic challenges and risks ranging from the escalating cost of living, inflation, and slow wage growth among others, it is paramount to have a good understanding and equip ourselves with the right skills on how to take care of our hard-earned money (Muhammad Hisyam, 2019). Indeed, proficiency in managing personal finance is crucial in contributing towards greater empowerment and competent financial decision by the households and thus, should they acquire this skill, banks and financial institutions in the country will be more responsive to their demand (Mohamad Azhar, 2012). Good financial planning affects the ability of individuals to overcome their financial problems (Amaroh & Istianah, 2020).

Among the worrying findings from a study in Malaysia is that almost 83.7% of the respondents feel that it is all right to allow expenses to be occasionally higher than income in their general management of cash flows. While the Employee Provident Fund (EPF) data shows that more than two-thirds (68%) of its members aged 54 have less than RM50,000 in their EPF savings and the amount could sustain them for 4.5 years; 43.8% of the respondents believe that they could rely on EPF savings for their living cost after retirement. Another disturbing discovery is that 57% of respondents are illiterate in risk management that makes buying insurance policy less significant in their list of priority (Muhammad Hisyam, 2019). In fact, most Malaysians believe that financial management is merely ensuring that their income meets their expenses. However, they overlook the savings and insurance aspects crucial to cover the costs in unexpected events in life (M. F. Abdullah et al., 2022). One of the causes of not taking financial responsibility is insufficient financial knowledge and skill (Hauff, Carlander, Gärling, & Nicolini, 2020).

In the field of personal finance, financial literacy is also commonly touched upon in retirement studies, given the potential benefits that it can bring to retirement planning. Understanding retirement concerns prior to retirement is important given how it affects retirement satisfaction. Knowing how much to save for retirement towards determining those with an additional retirement plan, and consequently reducing their retirement concerns. The value of financial advice is also significant in determining the amount to save for retirement and in possessing an additional retirement plan (Pg Hj Md Salleh & Baha, 2020). Financial literacy potentially influences retirement financial behaviour entailing planning, saving, and investment management (Hauff et al., 2020).

It is also found that Malaysian households are quite stressed about their personal finances and often worry about meeting their monthly expenses. The low-income households, especially, tend to eagerly wait for their upcoming pay, suggesting that they live on rather tight monthly budgets. However, most Malaysian households are confident about being able to come up with a financial emergency expense and appear to be able to afford dining out and going for movies. Hence, it can be inferred that spending for leisure and lifestyle purposes is regarded as quite important for Malaysian households, despite having difficulty living on tight monthly budgets (Mahdzan, Zainudin, Abd Sukor, Zainir, & Wan Ahmad, 2020).

Fraud Awareness

Nowadays, internet technology is commonly used to handle business services and financial transactions. The rapid adoption of information technology has increased information accessibility, and more individuals, regardless of age, gender, or social standing, engage in online transactions  (K. Abdullah, Mohd Maksom, & Abu, 2015). As of April 2023, there were 5.18 billion internet users worldwide, which amounted to 64.6 percent of the global population. Of this total, 4.8 billion, or 59.9 percent of the world’s population, were social media users (Petrosyan, 2023). Even though there are many benefits of using the internet, there are also a lot of disadvantages by using it. The internet can be mistreated for any harmful purposes (Puram, Kaparthi, & Rayaprolu, 2011) especially fraud activities. Fraud is defined as an act that is deceptive, or of trickery, or an act perpetrated to gain unfair profit from a victim (K. Abdullah et al., 2015). Islam prohibits its followers to do any fraud in any circumstances. Fraud is one of the mazmumah act and has significant impact on human morality. Therefore, every Muslim must avoid fraud (Mohamed, Mohamed, & Baharom, 2016) which can be implied from Surah al Baqarah, verse 42:

Meaning: “And do not mix the truth with falsehood or conceal the truth while you know [it].”

Online scam is one of the financial frauds faced by many consumers at present. Scams are a dishonest action or actions of fraud that are taken by an individual or group towards another individual (Zahari, Bilu, & Said, 2019). Many decades have passed but it is still showing the rises in online scams cases. Although Malaysia has the advantage in internet technology, there are still cases of cyber security and scams that requires attention of all (Muniandy, Muniandy, & Samsudin, 2017). In fact, cybercrimes occurred almost every day and it is uncontrollable. It is worrying that some people would take advantages of others for their own benefits (Mokhsin, Aziz, Zainol, Humaidi, & Zaini, 2018).

Recently, we had heard news of many people in our community becoming victims of financial scammers, that results in huge amount of financial losses (Isamudin, 2024; Malay Mail, 2024a, 2024b; Sekaran, 2024; The Vibes.com, 2025). Sadly, to hear that many households had lost their hard-earned income to various financial and investment scams. They had been working so hard spanning many decades in their lives, alas the fruits of their hard-earned labour disappear in no time. These sad episodes in our society will continue to be a prevalent feature in the country, lest our society does not take financial literacy seriously. Scammers relentlessly prowling for victims, as they have the edge over a financial illiterate community (Mohamad Azhar, 2012). Consumers nowadays are exposed to many types of online scams. Among others are job scams (K. Abdullah et al., 2015), love scams (Alavi, Sooed, & Bakar, 2018; Hamsi, Bahry, Tobi, & Masrom, 2015), investment scams (Padil, Kasim, Muda, Ismail, & Zin, 2022), and shopping scams (Mokhsin et al., 2018). Undeniably, the reality of today’s environment really motivates Muslims to become more financial literate.

CONCLUSION

In today’s interconnected global economy, financial literacy plays a critical role in empowering individuals and communities to make sound financial decisions. For Muslims, Islamic financial literacy takes on added significance as it involves aligning financial practices with the principles of Shariah law. By adhering to ethical guidelines that promote fairness, justice, and social responsibility, Islamic finance offers a unique alternative to conventional financial systems.

This study delves into the challenges, ranging from understanding Shariah compliance and limited awareness of Islamic financial products, purification of wealth, responsible borrowing, financial planning, and fraud awareness. This study implies that, by addressing these challenges head-on and promoting education and accessible resources, individuals and communities can cultivate robust Islamic financial literacy. Empowered with knowledge and understanding, individuals will be better equipped to navigate the complex world of Islamic finance, make informed financial decisions, and ultimately achieve economic stability and prosperity while upholding their religious beliefs. It seems clear now that Islamic financial literacy should not be taken for granted. Based on the financial challenges exist these days, it is becoming very crucial for every Muslim to acquire at least essential Islamic financial knowledge and skills since there is widespread financial illiteracy anywhere in the world.

The literature review reveals that Islamic financial literacy is a multifaceted and evolving field. While efforts are being made to bridge the knowledge gap, there is still a need for comprehensive educational programs, accessible resources, and collaborative initiatives involving Islamic financial institutions, regulatory bodies, educational institutions, and community organizations. Future research should focus on evaluating the effectiveness of different educational approaches, exploring innovative methods to enhance financial literacy, and assessing the long-term impact of financial literacy initiatives on individuals and communities within the Islamic finance context.

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