The impact of Islamic finance on global asset and liability management practices

Abstract

Islamic finance, based on Sharia principles that prohibit interest (riba), excessive uncertainty (Gharar), and unethical investments, offers an alternative approach to asset and liability management (ALM) that has gained increasing attention in the global financial system. This review explores the impact of Islamic finance on global ALM practices, focusing on how its unique principles shape financial strategies, risk management, and liquidity structures. In contrast to conventional finance, which relies heavily on interest-bearing instruments, Islamic finance emphasizes asset-backed financing, profit-sharing, and risk-sharing mechanisms.  The review discusses how Islamic financial institutions manage their assets and liabilities using Sharia-compliant products such as Murabaha (cost-plus financing), Mudarabah (profit-sharing), Musharakah (joint venture), and Sukuk (Islamic bonds). These products align with the principles of risk-sharing and ethical investment, leading to distinct ALM strategies that emphasize the importance of tangible assets and real economic activity. Unlike conventional derivatives that are often used for hedging, Islamic finance promotes alternative risk management techniques such as Tawarruq (commodity-based hedging) and Wa’ad (unilateral promises), which avoid speculation and excessive uncertainty. The review also examines how Islamic finance contributes to diversification in global ALM practices, especially in markets with significant Islamic investor bases, such as the Middle East and Southeast Asia. The growing adoption of Islamic financial instruments by conventional financial institutions further demonstrates the integration of Islamic principles into mainstream ALM practices.  Islamic finance has a transformative effect on global ALM practices by providing ethical, asset-backed alternatives that promote stability, transparency, and sustainability. Its integration into the global financial system not only expands the range of financial products available but also introduces a more inclusive, risk-sharing approach to managing assets and liabilities.

Keywords: Islamic Finance, Global Asset, Liability Management, Review.