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Understanding the Role of Islamic Finance in Economic Resilience
Elyn Mohd Ridzwan1, Nor Hasradiana Aman2, Suhana Mohamed3*

1Department of Commerce, Politeknik MeTRO Johor Bahru, Taman Putra, Johor, Malaysia

2Department of Commerce, Politeknik MeTRO Johor Bahru, Taman Putra, Johor, Malaysia

3Faculty of Business and Management, Universiti Teknologi MARA, Pasir Gudang Branch, Jalan
Purnama, Bandar Seri Alam, Johor, Malaysia

DOI: https://dx.doi.org/10.47772/IJRISS.2025.910000202

Received: 07 October 2025; Accepted: 14 October 2025; Published: 07 November 2025

ABSTRACT

This paper explores the role of Islamic finance in enhancing economic resilience, with a focus on Malaysia as a
case study. In an increasingly uncertain global environment, financial systems must be both stable and ethically
grounded. Islamic finance, based on Shariah principles such as risk-sharing, prohibition of interest (riba), and
asset-backed transactions, offers a unique framework that promotes financial stability and social responsibility.
Through a review of recent literature, this study highlights how Islamic financial institutions and instruments
such as zakat, waqf, and sukuk have contributed to economic recovery and social protection, particularly during
crises like the COVID-19 pandemic. The discussion also examines the increasing role of financial technology
(FinTech) and sustainability in expanding the reach of Islamic finance. Malaysia's proactive regulatory
environment and institutional development make it a valuable model for other countries seeking to build
inclusive and resilient financial systems. The paper concludes with recommendations for strengthening Islamic
finance through policy support, innovation, and public awareness. This review contributes to a better
understanding of how Islamic finance can support long-term economic resilience in both national and global
contexts.

Keywords: Islamic, Finance, Economic, Resilience, Environment

INTRODUCTION

The global economy has become increasingly unstable over the past few years. Events such as financial crises,
trade disruptions, energy price changes, and political conflicts have made it harder for countries to maintain
economic stability. These challenges have demonstrated that conventional financial systems often lack the
flexibility and strength needed to handle sudden shocks. As economies become more interconnected, there is a
growing need for economic systems that are not only robust but also grounded in moral principles.

Islamic finance, with its unique features such as the prohibition of interest (riba), the sharing of risks, and the
requirement that tangible assets back financial transactions, offers an alternative model that is both robust and
ethically grounded. These features make it a promising approach for building economic resilience, especially
during uncertain times (Budiharjo et al., 2024). Malaysia is one of the leading countries in Islamic finance. It
has a robust legal and regulatory framework, and its Islamic financial institutions have grown steadily.
Malaysia’s experience offers a valuable example of how Islamic finance can support economic stability. Studies
have shown that Islamic financial tools such as zakat, waqf, and sukuk can help communities and businesses
recover from economic shocks (Mahadi et al., 2024). The ability of Islamic finance to combine ethical values
with financial stability makes it an important area of study.

Besides its ethical values, Islamic finance also offers practical advantages during times of economic uncertainty.
Its focus on tangible assets and sharing of risks helps reduce speculation and encourages stable, productive
economic activities. This makes Islamic financial institutions less vulnerable to financial crises compared to
conventional systems that often rely on high-risk investments. Tools like sukuk (Islamic bonds) give

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governments and businesses access to funding that supports social and development goals. Social finance
instruments such as zakat and waqf are beneficial during emergencies, like the COVID-19 pandemic, by
providing support to affected communities. These tools not only provide financial assistance but also build trust
and unity in society. Malaysia’s success in applying Islamic finance within its national development plans shows
how this system can promote inclusive and sustainable growth, providing a sense of reassurance and confidence
in its effectiveness.

This paper reviews the existing literature on the role of Islamic finance in promoting economic resilience, with
a focus on Malaysia. It aims to understand how Islamic financial principles and practices can help economies
manage risks and recover more effectively. The findings may provide valuable insights for researchers,
policymakers, and financial institutions seeking to develop more stable and ethical financial systems.

Components of Economic Resilience

Economic resilience refers to an economy’s ability to absorb, adapt to, and recover from external shocks such
as financial crises, pandemics, or geopolitical instability. A resilient economy is not only capable of withstanding
disruptions but also of maintaining essential functions and returning to a stable growth path on time (Shaikh,
2025).

The main key components of economic resilience include shock absorption, which is the capacity to minimize
the immediate impact of financial disruptions. The second component is recovery speed, which is the ability to
return to pre-crisis levels of output and employment. The third component is adaptability, which is the flexibility
to adjust policies, institutions, and structures in response to changing conditions. The fourth component is
inclusiveness, which ensures that recovery efforts benefit all segments of society, especially the vulnerable.

In the context of Islamic economics, resilience is further supported by ethical norms and institutional
mechanisms that promote social justice, reduce inequality, and discourage excessive speculation and debt
accumulation. This emphasis on social justice and equality is a key aspect of Islamic finance that can resonate
with the audience, making them feel empathetic and supportive of its principles.

Core Principles of Islamic Finance

Islamic finance is grounded in Shariah principles that aim to ensure fairness, transparency, and social
responsibility in financial transactions. These principles form the foundation of a financial system that is
inherently more stable and resilient. The core principles of Islamic finance are:

Prohibition of Riba (Interest):

Islamic finance strictly forbids interest-based transactions. Instead, it promotes profit-and-loss sharing
arrangements such as Mudarabah and Musharakah, which align the interests of all parties and reduce systemic
risk (Ahmed, 2025). Benazeer (2025) claims that although the term "ar-Riba" in the Quran has unique properties
in passages, it is not explicitly defined in the Holy Quran or the Sunnah. The Arabic word "raba," which means
"to grow" or "to increase," is the origin of the term. Following this literal interpretation, traditionalists and
revivalists claim that "ar-Riba" is illegal and link it with modern bank interest. By employing a quantitative
methodology with SAS to examine English translations of the Holy Quran from 1649 to 2023, this study
questions such interpretations. The results show that "usury," which by definition entails exploitation, is the most
accurate English word for "ar-Riba." It is inaccurate to equate "ar-Riba" with bank interest without considering
its exploitative aspect.

Risk Sharing:

Financial contracts in Islamic finance are structured to distribute risk equitably among participants. This reduces
the concentration of risk and enhances financial stability (Al Adl Legal, 2024). Despite continuous efforts by
financial and economic leaders to find formulas, contracts, behaviors, and mechanisms to reduce these risks,
they remain the most significant concern in all financial transactions. They are primarily a direct cause of

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increasing economic and monetary fluctuations. In both its conventional and Islamic variants, financial
engineering does just this (El Tayeb & El Bashir, 2025).

Asset-Backed Financing:

All financial transactions must be linked to tangible assets or services. This discourages speculative behavior
and ensures that finance supports real economic activity. Interest is the primary source of revenue for modern
banks, whether they offer personal loans, business finance, or other financial products. (Sholeh, 2023). Mukhlis
and Alam (2025) stated that central banks employ interest rates as their primary monetary instrument to control
inflation, preserve currency stability, and promote economic expansion. An interest system is also used by bonds,
one of the primary instruments in the global capital market.

Ethical Investment:

Investments must comply with Islamic ethical standards, avoiding industries such as alcohol, gambling, and
weapons. This promotes responsible finance and long-term sustainability. The so-called tawarruq is one of the
most common working capital financing mechanisms that, although they may appear to be Shari’ah-compliant
in practice, are actually not. It is a set of contracts wherein a bank purchases metal and then immediately sells it
to the customer (borrower) at a higher price and on an installment plan; the customer then immediately resells
the metal (usually to the same party from which it was purchased); ultimately, the customer has money and an
obligation to the bank, and the bank has an obligation to repay the debt plus interest for the credit, albeit implicitly
(Magomet, 2025).

Social Finance Instruments:

Tools such as zakat, waqf, and qard al-hasan play a key role in wealth redistribution and social protection,
especially during crises (Oseni & Shuaib, 2023). Magomet (2025) suggested executing a contract for working
capital financing in the form of a promissory note, stipulating the payment of the loan amount and a percentage
of the promissory note maker's financial results by a specific date. This approach considers quick working capital
turnover, as mudarabah is an ordinary contract. Sukuk is the issuance of debt obligations (bonds). A contract for
working capital financing might be referred to as an "Islamic promissory note," even if sukuk is frequently
referred to as "Islamic bonds."

These principles not only differentiate Islamic finance from conventional systems but also contribute to a more
inclusive and resilient economic framework. Strong regulatory institutions support Malaysia's Islamic financial
system, which effectively implements these principles to support national economic resilience (IFSB, 2024).

RESEARCH DISCUSSION

Potential Tool in Islamic Finance

Islamic finance has gained increasing attention as a potential tool for promoting economic resilience, particularly
in times of crisis. Several studies have explored how Islamic financial principles such as risk-sharing, prohibition
of interest (riba), and asset-backed transactions can contribute to economic stability and inclusive growth.

Mahadi et al. (2024) examined the role of Islamic social finance in supporting women-owned SMEs in Malaysia
during and after the COVID-19 pandemic. Although their findings showed limited direct impact of instruments
like zakat and waqf on financial resilience, the study highlighted the need for better operational frameworks to
enhance effectiveness.

Similarly, Othman et al. (2022) emphasized the importance of Islamic social finance tools such as zakat, waqf,
and Islamic crowdfunding in helping vulnerable communities recover from economic shocks. Their study found
that these instruments were actively used to provide healthcare, income support, and job creation during the
pandemic.

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Ghaffour (2021) argued that Islamic finance, guided by the principles of maqasid al-Shariah, offers a framework
for inclusive and sustainable crisis management. He stressed that Islamic financial institutions can play a
leadership role in rebuilding economies by focusing on ethical and socially responsible financial practices.

Institutional Development in Islamic Finance

In terms of institutional development, Malaysia has made significant progress in integrating Islamic finance into
its national financial system. The World Bank and Bank Negara Malaysia have jointly promoted Islamic finance
as a means to enhance financial inclusion and resilience, especially among underserved populations.

Furthermore, studies on fintech adoption in Islamic social finance show promising potential for improving the
efficiency of zakat and waqf distribution, which could strengthen the overall impact of Islamic finance on
economic resilience (Kamaruddin et al., 2023)

Overall, the literature suggests that while Islamic finance holds strong theoretical potential for enhancing
economic resilience, its practical impact depends on effective implementation, institutional support, and
integration with broader financial systems. Malaysia’s experience provides valuable insights into both the
strengths and challenges of using Islamic finance as a stabilizing force in uncertain economic environments.

The literature reviewed in this study highlights the theoretical and practical potential of Islamic finance in
enhancing economic resilience. Islamic finance, with its foundation in ethical and risk-sharing principles, offers
a distinct approach to financial stability that contrasts with conventional systems. This discussion explores how
these principles contribute to resilience, particularly in the Malaysian context.

Risk Management in Islamic Finance

One of the key strengths of Islamic finance is its emphasis on risk-sharing and asset-backed transactions. Unlike
conventional finance, which often relies on interest-based lending and speculative instruments, Islamic finance
promotes contracts such as Mudarabah and Musharakah, where profits and losses are shared among parties. This
structure reduces the concentration of financial risk and encourages more responsible lending practices (Ahmed,
2025). In times of economic crisis, such mechanisms can help prevent systemic failures and support recovery.

Furthermore, Islamic social finance instruments, such as zakat, waqf, and qard al-hasan, play a vital role in
supporting vulnerable populations during crises. Studies have shown that these tools were actively used in
Malaysia to provide healthcare, income support, and job creation during the pandemic (Mahadi et al., 2024).
While operational challenges remain, the potential of these instruments to enhance social protection and
economic recovery is significant.

However, the effectiveness of Islamic finance in promoting resilience depends on several factors. These include
the quality of governance, the efficiency of financial institutions, and the level of public awareness and trust.
Without strong institutional support and proper implementation, the benefits of Islamic finance may not be fully
realized. Therefore, future efforts should focus on improving regulatory coordination, enhancing financial
literacy, and leveraging technology to expand access to Islamic financial services.

Recent developments in Islamic finance show that its integration with financial technology (FinTech) can further
enhance economic resilience. FinTech tools such as blockchain, crowdfunding, and digital payment systems
have been used to improve transparency, accessibility, and efficiency in Islamic financial services. These
innovations allow for better resource mobilization and distribution, especially in times of crisis. Alamm et al.
(2025) argue that combining FinTech with Islamic social finance instruments like zakat, waqf, and microfinance
can significantly strengthen community-level resilience, particularly in underserved regions.

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Economic Challenges in Islamic Finance

Moreover, Islamic finance has shown potential in addressing climate-related economic risks. Climate change
poses serious threats to food security, livelihoods, and infrastructure, especially in vulnerable communities.
Islamic finance, with its emphasis on social justice and ethical investment, can support climate adaptation
strategies. By funding sustainable projects and promoting inclusive financial services, Islamic finance
contributes to long-term resilience against environmental shocks (Alamm et al., 2025; Ahmed, 2023)

The Islamic Financial Services Industry Stability Report (2024) also highlights that Islamic banking and capital
markets have remained stable despite global financial pressures such as rising interest rates and inflation. This
resilience is attributed to strong regulatory frameworks, prudent risk management, and adherence to Shariah
principles that discourage excessive leverage and speculation.

However, challenges remain. The adoption of FinTech in Islamic finance is still limited due to regulatory gaps,
infrastructure constraints, and the need for Shariah-compliant digital solutions. Malik and Shahzad (2025)
emphasize that while FinTech offers many benefits, its integration into Islamic finance requires careful
alignment with ethical and religious standards.

Islamic finance offers a robust and ethical foundation for building economic resilience, particularly during times
of uncertainty. Malaysia’s experience demonstrates how Islamic financial principles, such as risk-sharing and
social finance, can support stability and recovery. As Islamic finance continues to grow, its connection with
technology and sustainability opens new opportunities to strengthen financial systems. Malaysia’s efforts in
adopting these innovations make it a valuable example for other countries aiming to build inclusive and stable
economies. To fully realize its potential, ongoing research and supportive policies are needed to guide the future
development of Islamic finance.

CONCLUSION

This review has explored how Islamic finance can contribute to economic resilience, especially in the context of
Malaysia. Islamic finance, built on ethical principles such as risk-sharing and prohibition of interest, offers a
stable and inclusive alternative to conventional financial systems. Malaysia’s experience shows that with strong
regulatory support and institutional development, Islamic finance can help economies manage crises and recover
more effectively. One of the key strengths of Islamic finance is its emphasis on risk-sharing and asset-backed
transactions. Unlike conventional finance, which often relies on interest-based lending and speculative
instruments, Islamic finance promotes contracts such as Mudarabah and Musharakah, where profits and losses
are shared among parties (Ahmed, 2025).

Malaysia’s experience demonstrates how Islamic finance can be integrated into national financial systems to
promote stability. The country’s regulatory framework, supported by institutions like Bank Negara Malaysia and
the Islamic Financial Services Board (IFSB), has enabled the growth of Islamic banking, takaful, and capital
markets (IFSB, 2024). Islamic social finance instruments such as zakat, waqf, and qard al-hasan play a vital role
in supporting vulnerable populations during crises (Mahadi et al., 2024). The integration of Islamic finance with
technology and sustainability further strengthens its potential to support long-term resilience. Recent
developments in Islamic finance show that its integration with financial technology (FinTech) can further
enhance economic resilience. FinTech tools such as blockchain, crowdfunding, and digital payment systems
(green finance) have been used to improve transparency, accessibility, and efficiency in Islamic financial
services (Alamm et al., 2025).

Moreover, Islamic finance has shown potential in addressing climate-related economic risks. Climate change
poses serious threats to food security, livelihoods, and infrastructure. Islamic finance can support climate
adaptation strategies through ethical investment and inclusive financial services (Ahmed, 2023). Challenges
remain, including regulatory gaps and the need for Shariah-compliant digital solutions (Malik & Shahzad, 2025).
However, the success of Islamic finance in promoting resilience depends on practical implementation, public
awareness, and continuous policy support. The policymakers should continue to enhance the regulations that
support Islamic finance, ensuring clarity, consistency, and alignment with global standards while maintaining

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Shariah compliance. Public education campaigns and academic programs should be expanded to improve
understanding of Islamic finance principles and their benefits for economic resilience.

Support for Shariah-compliant financial technologies can improve access, efficiency, and transparency in
Islamic financial services, especially for underserved communities. Institutions should strengthen the use of
zakat, waqf, and qard al-hasan to support vulnerable groups during economic shocks by improving governance
and utilizing digital tools. Continued academic research and collaboration between universities, financial
institutions, and government agencies are essential to explore new models and measure the impact of Islamic
finance on resilience.

ACKNOWLEDGEMENTS

We are expressing our sincere gratitude to all team members for invaluable guidance, support, and
encouragement throughout this research project. The expertise and insights were instrumental in shaping the
direction of this study.

FUNDING

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit
sectors.

AUTHORS' CONTRIBUTION

The authors, Elyn Mohd Ridzwan, Nor Hasradiana Aman, and Suhana Mohamed, conceived and designed the
study, conducted data collection and analysis, drafted the manuscript, and approved the final version for
submission.

CONFLICT OF INTEREST DECLARATION

We affirm that no conflicts of interest could influence our research. No financial support or funding was received
for this study. We also affirm that this declaration ensures transparency in disclosure before submitting it to the
journal.

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