literature review islamic banking system

A systematic literature review of risks in Islamic banking system: research agenda and future research directions

• Original Article
• Published: 20 December 2023
• Volume 26 , article number  3 , ( 2024 )

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• M. Kabir Hassan 1 ,
• Md Nurul Islam Sohel 2 ,
• Tonmoy Choudhury 3 &
• Mamunur Rashid   ORCID: orcid.org/0000-0002-6688-5740 4  

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This study employs a systematic review approach to examine the existing body of literature on risk management in Islamic banking. The focus of this work is to analyze published manuscripts to provide a comprehensive overview of the current state of research in this field. After conducting an extensive examination of eighty articles classified as Q1 and Q2, we have identified six prominent risk themes. These themes include stability and resilience, risk-taking behavior, credit risk, Shariah non-compliance risk, liquidity risk, and other pertinent concerns that span various disciplines. The assessment yielded four key themes pertaining to the risk management of the Islamic banking system, namely prudential regulation, environment and sustainability, cybersecurity, and risk-taking behavior. Two risk frameworks were provided based on the identified themes. The microframework encompasses internal and external risk elements that influence the bank's basic activities and risk feedback system. The macro-framework encompasses several elements that influence the risk management environment for Islamic banks (IB), including exogenous institutional factors, domestic endogenous factors, and global endogenous factors. Thematic discoveries are incorporated to identify potential avenues for future research and policy consequences.

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Riba has been at the center of mainstream debate categorizing Islamic finance from its counterpart. While many scholars identify Riba is the excessive amount of additional payment charged or given on the principal amount, for others it is the fixed or predetermined amount of payment on the top of the principal amount. However, the consensus among Islamic scholars forwards the notion that Riba in any form is prohibited in Islam.

Mudarabah is a partnership-based Islamic finance contract between two parties, one party supplying the finance ( rabbulmal ), while the other party gets involved with their physical labor and skills ( mudarib ), granting each party a share of the income at predetermined ratio.

Musharakah is another classical partnership contract in Islamic banking where more than one party contributes in financing a shared company. The contract involves both parties agreeing on sharing profit on an agreed-upon ratio and sharing losses on ratio of equity capital financed.

Operational risk is the potential loss due to inefficient internal processing, system and people, and external factors such as the limited legal support and uncontrollable compliance issues (Čihák & Hesse 2010 ).

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Hassan, M.K., Sohel, M.N.I., Choudhury, T. et al. A systematic literature review of risks in Islamic banking system: research agenda and future research directions. Risk Manag 26 , 3 (2024). https://doi.org/10.1057/s41283-023-00135-z

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12 Islamic banking: A Review of the Empirical Literature and Future Research Directions

Narjess Boubakri is the Bank of Sharjah Chair in Banking and Finance, Professor of Finance and Head of the Finance Department at the School of Business Administration of the American University of Sharjah. Her research interests include, among other things, privatization, corporate governance, political economy of reforms, institutional economics, and the impact of institutional infrastructure on corporations. Her papers have been published in the Journal of Finance, the Journal of Financial Economics, the Journal of International Business Studies, the Journal of Accounting Research, and the Journal of Financial and Quantitative Analysis, among others. She acts as Associate Editor for the Journal of Corporate Finance, as Editor in Chief for Finance Research Letters, co-editor for the Quarterly Review of Economics and Finance, and is on the editorial boards of Emerging Markets Review and the Journal of International Financial Markets Institutions and Money.

Ruiyuan Ryan Chen is an Assistant Professor of Finance at the West Virginia University. His current research focuses on state ownership, corporate governance, and corporate cash holdings. His research has been published in Emerging Markets Review, the Journal of Corporate Finance, and the Journal of Financial and Quantitative Analysis.

Omrane Guedhami is the C. Russell Hill Professor of Economics and Professor of International Finance at the Moore School of Business at the University of South Carolina. His current research focuses on corporate governance, privatization, corporate social responsibility, and formal and informal institutions and their effects on corporate policies and firm performance. His research has been published in the Journal of Financial Economics, the Journal of Accounting Research, the Journal of Accounting and Economics, the Journal of Financial and Quantitative Analysis, the Journal of International Business Studies, and Management Science, and the Review of Finance, among others. He is a member of the editorial boards of major journals, such as Contemporary Accounting Research and the Journal of International Business Studies, and is currently serving as a Section Editor at the Journal of Business Ethics and Associate Editor of the Journal of Corporate Finance and the Journal of Financial Stability.

Xinming Li is an Associate Professor of Finance at the School of Finance at Nankai University and a consultant at the World Bank Group. He is also the holder of the Emerging Scholars Award by the Federal Reserve and the Conference of State Bank Supervisors. His research areas include a variety of topics related to banking and financial institutions, corporate finance, and international finance.

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The last two decades have witnessed a tremendous global growth in Islamic finance and banking, mainly prompted by the global financial crisis. This growth has been accompanied by an increasing interest among researchers, policymakers, managers of financial institutions, and the public about the functionalities of the Islamic banking system and how it differs from conventional banking. Against this backdrop, we start this chapter with an overview and assessment of the practice of Islamic banking around the world. Then, we discuss its primary characteristics, including its underlying principles and common financial products. Next, we review the key findings in the empirical literature on the differences between Islamic and conventional banking at the micro and macro levels. We conclude with a discussion of avenues for future research.

12.1 Introduction

The last two decades have witnessed dramatic global growth in Islamic finance and banking. Since the founding of the first Islamic bank in 1975, Islamic financial assets in the banking, capital markets, and insurance sectors have reached over $2 trillion (IFSB, 2018 ), 1 and more than 350 Islamic banks now operate worldwide.

The term “Islamic banking” refers generally to banking operations conducted under Sharia law, which mandates banking transactions be subject to three sets of constraints. First, payments or receipts of interest ( Riba ), whether nominal or real, are prohibited. In this sense, Islamic banking is basically an interest-free model. Thus, because money cannot reward money, Islamic transactions must be backed by tangible assets. Second, Gharar and Maysar , speculation and excessive risk-taking or betting, respectively, are prohibited. In practice, this means, for example, that Islamic banks cannot trade derivative products. 2 Third, Islamic banks are prohibited from financing activities that are illegal under Islamic law, or that are viewed as having a negative impact on society, such as those involving alcohol or gambling.

In this chapter, we provide an overview and assessment of the practice of Islamic banking around the world. Section 12.2 provides a brief review of the growth of Islamic banking. In section 12.3 , we discuss its primary characteristics, including its underlying principles and common financial products. In sections 12.4 and 12.5 , we review key findings in the empirical literature on the differences between Islamic and conventional banking at the micro and macro levels. We conclude in section 12.6 with avenues for future research.

12.2 Growth of Islamic Banking around the World

Modern Islamic banking dates to the 1970s. The first international Islamic bank, the Islamic Development Bank (IDB), was founded in 1975 by members of the Organisation of Islamic Cooperation. IDB’s aim was to cater to the Muslim population’s needs while fostering economic and social development in accordance with the principles of Sharia law, a set of Islamic principles derived from the Koran.

The first modern (private) Islamic bank, Dubai Islamic Bank, was also established in 1975. Although privately owned and operated, it relied on a committee of religious Sharia advisors to conduct its operations. Next, the Kuwait Finance House was established in 1977. Unlike Dubai Islamic Bank, Kuwait Finance House was majority owned by government ministries. Two additional Islamic banks were founded by governments in 1977, Faisal Islamic Bank of Sudan and Faisal Islamic Bank of Egypt. 3

During the 1980s, reforms in Iran and Sudan removed all interest-based operations from the banking sector, resulting in the first fully Islamic national banking systems (Wealth Monitor, 2016 ; Hassan and Aliyu, 2018 ). Islamic banks were also introduced in other countries with large Muslim populations, such as Malaysia, Bangladesh, Mauritania, and Saudi Arabia (Imam and Kpodar, 2016 ).

The 1990s witnessed a greater acceleration in the establishment of Islamic banks “after the applications of Islamic finance functions were acknowledged by the International Monetary Fund (IMF) and the World Bank [in] the early 1990s (Iqbal and Molyneux, 2005 )” (Alandejani, Kutan, and Samargandi, 2017 ). The pace quickened again after the global financial crisis (GFC), 4 because it cast doubts on the proper functioning of conventional banking, which, in turn, created interest in alternative models such as Islamic banking (Beck, Demirgüç-Kunt, and Merrouche, 2013 ; Hassan and Aliyu, 2018 ).

Zaher and Hassan ( 2001 ) argue that the liberalization of capital markets, the global integration of financial markets, structural macroeconomic reforms, and the introduction of innovative Islamic products also contributed to the growth of Islamic banking. The substantial rise in consumer demand for Sharia -compliant contracts has led multinational banks such as Chase Bank, Citibank, ABN Amro, and HSBC to establish Islamic finance branches while conducting separate conventional banking operations.

In 1991, to support this growth, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was created to set accounting, auditing, and Sharia standards for Islamic financial institutions. In 2002, the AAOIFI was complemented by the Islamic Financial Services Board (IFSB), which sets prudential standards and regulates the industry, and the International Islamic Financial Market (IIFM), which focuses on developing a robust, transparent, and efficient Islamic financial market. 5

As we note in the Introduction, today there are more than 350 Islamic banks worldwide, operating in countries as diverse as Switzerland, the US, France, Germany, Thailand, Singapore, India, China, and Australia. In January 2018, Islamic banking was also present in South America, where a conventional bank in Suriname was recently converted to a Sharia -compliant Islamic bank (IFSB, 2018 ). Despite the wide reach of Islamic banking, however, industry assets are highly concentrated in a small number of countries. In particular, the oil-exporting Gulf Cooperation Council (GCC) countries, Malaysia, and Iran together account for more than 80 percent of the industry’s assets (Islamic Finance Outlook, 2018 ). 6

At a country level, as shown by Figure 12.1 , Iran has the largest share of the Islamic banking market with 34.4 percent of global Islamic banking assets, followed by Saudi Arabia (20.4 percent), United Arab Emirates (9.3 percent), Malaysia (9.1 percent), Kuwait (6 percent), and Qatar (6 percent) (IFSB, 2018 ). Within countries, the share of Islamic banking has been growing as well. For example, Islamic banking now accounts for 61.8 percent of the domestic market in Brunei, followed by Saudi Arabia at 51.5 percent of the domestic market (IFSB, 2018 ).

Shares of Global Islamic Banking Assets (1H2017).

Looking at different sectors of the Islamic banking industry, the IFSI Stability Report (IFSB, 2018 ) shows that assets and financing each grew at a compounded rate of 8.8 percent between 2013 and 2017, while deposits grew at a compounded rate of 9.4 percent over the same period. In countries with a smaller Islamic base, these growth rates have been even more notable. Oman, for example, saw increases in Islamic banking assets, financing, and deposits of more than 30 percent each in 2Q2017. In the United Arab Emirates, both Islamic banking assets and financing grew by 7.4 percent, exceeding the average asset growth of 4.9 percent for conventional banks over the 2Q2016-2Q2017 period.

To provide further evidence on the worldwide growth of Islamic banking, we turn to Bankscope, 7 which contains detailed information about Islamic banking over the 1999–2014 period, and is widely viewed as an excellent source of information on Islamic finance. Figure 12.2 plots the number of Islamic banks between 1999 and 2014. As can be seen, the number reporting to Bankscope increased from thirty-six in 1999 to 104 in 2014, with a peak of 116 in 2011.

Figure 12.3 plots the total assets of Islamic banks. The figure shows that total assets increased dramatically, from around $18 billion in 1999 to $262 billion in 2014, with the level more than doubling after the GFC. In Figure 12.4 , we note that Islamic banks account for a small share of total bank assets globally—less than 3 percent of total banking sector assets in 2014—but, in Figure 12.5 , we see the share has been increasing. For example, in the twenty-eight countries with at least one Islamic bank over the 1999–2014 period, the proportion of Islamic bank assets increased from less than 1 percent in 1999 to a peak of more than 3 percent in 2013. Figure 12.5 shows that, in a large number of countries, and mainly in GCC countries, Islamic banks account for a significant share of assets in the domestic market. Note that the entire banking systems of Iran and Sudan are Islamic, while in Brunei they account for more than 57 percent, followed by Saudi Arabia (51.1 percent), and Kuwait (39 percent).

Number of Islamic Banks Reporting to Bankscope.

Islamic Banks’ Total Assets (million $).

Share of Islamic Banks’ Assets in Total Banking Sector Assets (%).

Share of Islamic Banks’ Assets in Total Banking Sector by Country (1H2016).

Looking ahead, Islamic banking is expected to continue growing. Imam and Kpodar ( 2013 ) show that factors contributing to the development of Islamic banking in a given country include the size of the Muslim population, income per capita, the level of interest rates, whether the country is a net exporter of oil, the size of trade with the Middle East, the level of economic stability, and proximity to Malaysia and Bahrain (two Islamic financial centers). However, while important for conventional banking, they find that the quality of a country’s institutional environment does not matter for the diffusion of Islamic banking. 8 As Figure 12.6 shows, the Muslim population is projected to increase from 1.3 billion in 2010 to over 1.6 billion in 2030. Because people in countries where the majority of residents identify as Muslim tend to have at least some familiarity with Islamic banking (PricewaterhouseCoopers, 2014 ), growth in the world’s Muslim population alone supports an increase in Islamic banking over time. The fact that Islamic banks are regarded as following an ethically and socially responsible business model and are perceived to show higher resilience during times of economic distress are likely to further contribute to the growth.

World Islamic Population 1990, 2010, and 2030 (millions).

12.3 Characteristics of Islamic Banking

12.3.1 islamic banking: underlying principles.

Islamic banks follow the religious principles of equity, participation, and ownership as embedded in Sharia law. Accordingly, as we discuss above, Islamic banks cannot charge predetermined interest rates ( Riba ), take excessive risk, speculate ( Gharar ), or bet ( Maysar ), and they are prohibited from trading in asset classes associated with illegal activity or negative social outcomes, such as alcohol, drugs, and weapons. As Zaher and Hassan ( 2001 , p. 158) put it, “exploitative contracts based on Riba (interest or usury) or unfair contracts that involve risk or speculation” are prohibited.

To elaborate, Riba —an important feature of conventional banking—corresponds to the “fixing in advance of a positive return on a loan as a reward for waiting to be repaid” (Zaher and Hassan, 2001 , p. 156). The prohibition of Riba , which is an increase in money not connected to a tangible real economic increase, is consistent with the principle of equity. Thus, the weaker contracting party in a financial transaction is protected from an increase in wealth that is not related to a productive activity (Hussain, Shahmoradi, and Turk, 2015 ). Moreover, the prohibition of Riba is consistent with the principle of participation, which ensures both borrower and lender share in the risk of a project (Zaher and Hassan, 2001 ). The prohibition of Gharar , or excessive risk-taking, is similarly in line with the equity principle, as it decreases information asymmetry and contract ambiguity. Instead, Islamic banks rely on the idea of risk sharing on both the liability and asset side. They also follow the idea “that all transactions have to be backed by a real economic transaction that involves a tangible asset” (Beck, Demirgüç-Kunt, and Merrouche, 2013 , p. 433), which is in line with the participation and ownership principles. For example, profit-and-loss sharing involve providing financing to anyone with a productive business venture idea. The borrower and the lender work closely together and share the risk of the venture, which is selected based on its projected returns. The return earned on capital is thus associated with productive activity, is backed by an asset (i.e., the requirement of asset ownership before a return can be earned), and is determined only ex post by the asset’s performance and not the passage of time (Hussain, Shahmoradi, and Turk, 2015 , p. 6). This idea of “zero risk entails zero return,” where risk relates “primarily to the real-sector uncertainties, not the risk of borrower delinquency” (Ariff, 2014 , p. 734), is a key feature of Islamic banking. Under this framework, Zaher and Hassan ( 2001 ) argue that depositors in Islamic banks can be viewed as “shareholders,” because they earn dividends when the bank makes a profit and lose money when the bank records a loss.

The principles above are at the core of the differences between Islamic and conventional banking systems, as summarized by Errico and Farahbaksh ( 1998 ) and illustrated in Table 12.1 .

12.3.2 Islamic Banking: Financial Products

Islamic scholars have developed several Sharia -compliant financial instruments that not only avoid the payment or receipt of interest at a predetermined rate (Čihák and Hesse, 2010 ), but also include risk sharing. These Islamic financial contracts fall into two asset categories: equity and debt. Table 12.2 summarizes the six basic Islamic finance instruments, which are discussed in more detail next.

On the equity side, Islamic banks offer Mudaraba (silent partnership) and Musharaka (joint partnership) contracts. A Mudaraba contract is structured as a profit-sharing and loss-bearing contract, whereby a principal (the bank or investor) provides funds to an agent (entrepreneur), who in turn provides effort and management expertise for the project. Under this contract, although the entrepreneur controls and runs the business, the bank that provides the capital can participate in the decision-making. In this case, losses are borne exclusively by the bank, while profits are shared at a pre-agreed percentage. This structure is comparable to conventional limited partnerships.

A Musharaka contract is an alternative profit-and-loss partnership arrangement. Under this type of agreement, two parties (the bank and the client) provide the capital needed to finance a project, so profits as well as losses are shared by both parties. Here, profits are shared based on a pre-agreed percentage, while losses are shared in proportion to each party’s equity participation. This type of contract comes closest to the principles of equity and participation that form the basis of Sharia law, since it involves risk sharing, asset ownership, and no interest. It is most suitable for financing long-term projects.

On the debt side, Islamic banks offer Murabaha, Ijara, Salam , and Istisna . A Murabaha contract is a cost-plus-profit transaction commonly used for consumer loans, trade finance, corporate credit, real estate, and project financing. Under this type of contract, the Islamic bank purchases goods on behalf of the customer and then resells them to the customer at a mark-up. This type of contract is essentially an asset-backed loan plus a deferred payment sale transaction. The contract terms cannot be altered during the life of the contract, even if the client defaults or is late making payments. The mark-up is determined based on LIBOR, the type of good being financed, the overall amount of the transaction, and the client’s credit history. Under this type of contract, the benefits and risks of asset ownership are transferred to the client along with ownership, but the bank shares in the project’s risk because it assumes liability if the goods it purchased were defective. In case of default, however, the ownership rights of the asset return to the bank.

Under an Ijara contract, the bank retains ownership of the goods, leasing them out for pre-agreed payments (to avoid speculation) over a pre-agreed period of time, just as in a conventional leasing contract. Because the bank owns the asset, it assumes responsibility for its maintenance and insurance. Ijara payments can be changed during the contract period, unlike Murabaha payments.

A Salam contract is a forward agreement whereby delivery occurs at a future date in exchange for spot payments. According to Hussain, Shahmoradi, and Turk ( 2015 , p. 9), “Such transactions were originally allowed to meet the financing needs of small farmers as they were unable to yield adequate returns until several periods after the initial investment.” To be Sharia -compliant, payment under these contracts must be made in full at the beginning of the contract period. This type of contract thus entails a spot obligation for the client and a future obligation for the bank.

Under the last type of debt contract, Istisna , both payment and delivery occur in the future. This type of contract is effectively a pre-delivery financing and leasing contract. It is used primarily to finance large-scale, long-term projects (Zaher and Hassan, 2001 ). Notably, Istisna is a three-party contract. The bank acts as an intermediary between the client, from which it receives payments, and the manufacturer, to which it makes installment payments, because it is the bank that commits to buying the assets. Of the various types of debt instruments in Islamic banking, the last two types, Salam and Istisna , are used least often.

In practice, several of these Sharia -compliant products do not appear to differ that much from conventional products. This is because of the “close alignment of the competitive rates paid by Islamic banks on investment deposits with deposit rates at conventional banks, as well as with the benchmarking of Islamic financing rates on the asset side of the balance sheet to the LIBOR” (Hussain, Shahmoradi, and Turk, 2015 , p. 12). 9 Moreover, in terms of their business models, Beck, Demirgüç-Kunt, and Merrouche ( 2013 ) and Čihák and Hesse ( 2010 ) find few significant differences in business orientation, asset quality, efficiency, or stability between Islamic and conventional banking. However, a closer look at the two sets of products reveals major differences in terms of asset ownership, 10 interest, equity, and risk sharing, as explained above. Moreover, there are differences in the degree of permissibility of some Sharia -compliant products from one country to another (Song and Oosthuizen, 2014 ). For example, Tawarruq , instruments used by Islamic banks to fulfill clients’ demands to extend personal loans, are permitted in the UAE but not in Iran.

The most recent Stability Report (IFSB, 2018 , p. 88) reports that household and personal financing constitute the main financing activities of Islamic banks (42 percent of total Islamic bank financing in 2017) (p. 94), followed by manufacturing and retail trade with 21 percent. In terms of contracts, Murabaha and Ijara dominate Islamic banking transactions, accounting for up to 7 percent. In comparison, profit-and-loss-sharing contracts represent only 5 percent of transactions with Islamic banks (Hassan and Aliyu, 2018 ). In Oman, where Islamic banking is growing at the fastest rate, Musharaka and Ijara account for 76.5 percent of total financing by Islamic banks, with these contracts used largely for real estate purchases and consumer financing (IFSB, 2018 ).

12.3.3 Islamic Banking versus Conventional Banking Balance Sheets

Van Greuning and Iqbal ( 2007 ) provide a detailed comparison of the balance sheets of a conventional bank (Table 12.3 ) and an Islamic bank (Table 12.4 ), highlighting differences in terms of risk. For a conventional bank, the liability side includes demand and savings deposits, term certificates, and capital. The asset side includes marketable securities, lending to consumers (individuals/households) and corporations, and trading accounts. According to van Greuning and Iqbal ( 2007 , chapter 2 , pp. 16–21), this structure (1) generates an asset-liability mismatch, because “the deposits create instantaneous pre-determined liabilities irrespective of the outcome of the usage of the funds on the asset side,” and (2) exposes the bank to maturity mismatch risk, reducing their incentives to fund long-term non-liquid projects because “medium- to long-term assets are financed by the stream of short-term liabilities.” Because they do not typically have access to traditional money markets, managing short-term liquidity positions in Islamic banks can be challenging.

In contrast, for an Islamic bank, the use (by entrepreneurs) and mobilization (by depositors) of funds intermediated by the bank are structured as profit-sharing contracts among depositors, the bank, and entrepreneurs. In other words, unlike conventional banking, Islamic banking is viewed as a “pass-through” financial intermediation arrangement, whereby profits and losses are passed to depositors and investors (van Greuning and Iqbal, 2007 ). More specifically, on the liability side of an Islamic bank’s balance sheet, we find demand deposits and (risk-free) investment accounts from customers. These investment accounts are linked to either the Islamic bank’s profits or to a specific investment account on the asset side of the bank’s balance sheet, and they share in the bank’s profits (depositors receive dividends) and losses. In comparison, savings and time deposits on the liability side of conventional banks earn interest on the spot, even if the funds are not deployed to productive use by the bank. In Islamic banks, demand deposits ( Amanah ) are entrusted to the bank. If these funds are used by the bank and generate returns, only then are they shared with depositors (Hassan and Aliyu, 2018 ).

On the asset side, we find Islamic financing and investing accounts. As shown in Table 12.4 , while non-profit-and-loss-sharing debt-based contracts such as Murabaha and Ijara dominate the asset side, the Mudarabah contract on the liability side is the basis of Islamic banking. Alzahrani and Megginson ( 2017 ) argue that risk sharing in Islamic banks allows for a better matching of assets and liabilities because investment accountholders on the liability side absorb any losses on the asset side. Indeed, because Islamic bank depositors’ returns are linked to the bank’s return on assets, the bank’s exposure to the asset–liability mismatch, typical in conventional banks, disappears. Furthermore, in line with the principle of risk sharing, an Islamic bank is exposed to the liability of the assets it purchases and sells to clients. This is not the case in conventional banks that finance an asset by extending a loan to the customer, regardless of the asset. Because an Islamic bank’s assets comprise real asset-based investments, “the lending capability of the [Islamic banking] sector is bound by the availability of real assets in the economy. Thus there is no leveraged credit creation” (van Greuning and Iqbal, 2007 , chapter 2 ). Finally, because interest is prohibited, Islamic banks cannot issue debt to finance assets, which also mitigates the creation of leverage. Because Islamic banks are unlevered, they are considered to be less risky during crises. Note further that conventional banks are allowed to trade in complex derivatives that appear on their balance sheets, while Islamic banks are prohibited from doing so (Hassan and Aliyu, 2018 , p. 28). These features of financial intermediation, together with better monitoring incentives of assets and borrowers in the risk-sharing partnership contracts that characterize Islamic banking, contribute to the stability of Islamic banking systems.

Doumpos, Hasan, and Pasiouras ( 2017 ) note that the differences between the balance sheets of Islamic banks and conventional banks have several operational implications. For example, while conventional banks are able to use both debt and equity to finance their asset portfolios, Islamic banks can only use equity financing and deposits, which limits their liquidity on the asset side. In addition, because Islamic banks engage in risk-sharing partnership contracts, they are not allowed to require collateral to reduce credit risk, as conventional banks do. This puts an additional burden on Islamic banks in terms of appraising and assessing which projects to finance. Beck, Demirgüç-Kunt, and Merrouche ( 2013 ) argue that such complexities in Islamic banking products, including legal and compliance risks, increase the overall operational risk of Islamic banks compared to conventional banks. However, the fact that they are restricted to certain asset classes, do not trade in risky securities such as derivatives, and do not engage in excessive risk-taking may also increase their relative stability compared to conventional banks.

12.4 Review of the Literature Comparing Islamic and Conventional Banks: Micro-Level Evidence

In this section, we review the literature on the financial characteristics of Islamic banks in comparison to conventional banks, their relative performance and efficiency, stability during crises, and other micro-level outcomes such as liquidity, corporate social responsibility, and transparency. 11 Appendix 12. A provides an overview of the studies.

12.4.1 Profitability and Efficiency

Despite being guided by such principles as justice, fairness, and concern for the general welfare of the people, Islamic banks are nevertheless also profit-seeking entities, just like conventional banks. Extensive research on the relative performance of Islamic and conventional banks has found mixed results thus far. Some authors find that Islamic banks are not distinguishable in practice from conventional banks (Siddiqi, 2006 ; Bourkhis and Nabi, 2013 ); others find that Islamic banks outperform their conventional bank counterparts in terms of profitability and efficiency. Baele, Farooq, and Ongena ( 2014 ), for example, find that loans from Islamic banks are less likely to be overdue or in default, suggesting that individual and systemic risk from loan defaults may be less likely to materialize for Islamic banks. Beck, Demirgüç-Kunt, and Merrouche ( 2013 ; Tables 12.5 and 12.6 ) show that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality, and are better capitalized. These findings broadly confirm prior literature (e.g., Olson and Zoubi, 2008 ; Turk-Ariss, 2010 ; Hasan and Dridi, 2011 ; Abedifar, Molyneux, and Tarazi, 2013 ). Some authors argue that it is because of their higher capitalization and asset quality that Islamic banks were able to outperform their conventional counterparts during the GFC (e.g., Bourkhis and Nabi, 2013 ).

Note : **significance at the 5% level; ***significance at the 1% level.

Note : *significance at the 10% level; **significance at the 5% level; ***significance at the 1% level.

Regarding the relative efficiency of Islamic versus conventional banks, the evidence is also inconclusive. An early study by Bader et al. ( 2008 ) found no significant differences in efficiency. And, according to Yahya, Muhammad, and Hadi ( 2012 ) and di Mauro et al. ( 2013 ), there was no efficiency gap between Islamic banks and conventional banks before the GFC. Instead, Srairi ( 2010 ) shows that Islamic banks are, on average, less cost- and profit-efficient than conventional banks. However, a more recent study by Doumpos, Hasan, and Pasiouras ( 2017 ) showed that Islamic banks outperformed conventional banks in the Middle East and North Africa (MENA) region, but underperformed in the GCC and Asian countries. The international comparison of Islamic and conventional banks in terms of cost and profit efficiency shows that Islamic banks in advanced economies “seem to be more efficient than those in other countries. This could be partly explained by well-established regulatory frameworks, more advanced human capital, and better risk management practices in these countries (Tahir and Haron, 2010 )” (Hussain, Shahmoradi, and Turk, 2015 , p. 17).

These mixed results in the literature have led to a debate over the appropriateness of using separate indicators of performance and efficiency. Bitar, Hassan, and Walker ( 2017 ), for example, argue that conventional bank accounting indicators used in the literature are relatively one-dimensional, and may lead to contradictory results. Some authors use them to assess risk, loan-loss reserves to gross loans, or the standard deviation of return on assets, while others may use the net interest margin or the z-score. The authors therefore propose using a principal component analysis that encompasses twenty indicators of bank financial strength. Using a sample of 8,615 banks (including 123 Islamic banks), they show that capital, volatility of returns, liquidity, and profitability capture most of the variance of the financial indicators of bank characteristics. They also show through Logit and Probit regressions that Islamic banks are more highly capitalized, more liquid, and more profitable, but have more volatile earnings relative to conventional banks in Europe and the US. They then focus on the sample of countries where dual banking systems exist, and find that Islamic banks and conventional banks are indistinguishable in terms of liquidity and volatility of earnings.

Doumpos, Hasan, and Pasiouras ( 2017 ) further emphasize the mixed results in the literature in their focus on the relative financial strength of Islamic and conventional banks. They build a multi-criteria index that aggregates various dimensions of bank capital strength, asset quality, earnings, liquidity, and management quality in controlling expenses. The authors argue that Islamic banks may have more financial strength, given their reliance on profit-and-loss sharing, which allows them to transfer risks from the asset to the liability side. However, they also counterargue that Islamic banks may have less financial strength, given their restrictions to certain asset classes, prohibition from using derivatives as hedging instruments, and the moral hazard issues embedded in Islamic contracts. Their results show that banks are substantially different when using individual financial ratios; however, they find no significant difference in overall financial strength between Islamic and conventional banks. When considering geographic location, Doumpos, Hasan, and Pasiouras ( 2017 ) observe that conventional banks perform better than Islamic banks or banks with Islamic branches in Asia and the GCC. The reverse is true in MENA. Control of corruption and government effectiveness are two institutional characteristics that affect financial strength.

Alandejani, Kutan, and Samargandi ( 2017 ) adopt a different approach, and focus on bank failure risk. To conduct their analysis, they focus on Islamic and conventional banks in GCC countries, and examine the explanatory power of bank-level and macro-level determinants using hazard and survival functions. They find that Islamic banks have a shorter survival time, and a higher incidence rate of failure, than conventional banks. They also show that the hazard rate of Islamic banks (conventional banks) increases (decreases) with higher net interest margin ratios, suggesting that Islamic banks and conventional banks obey different dynamics. The authors contend that the higher government ownership associated with conventional banks, which provides them with an implicit bailout guarantee in cases of distress, may explain why their failure rate is lower than that of Islamic banks.

12.4.2 Stability and Performance around the GFC

Several theoretical arguments suggest that Islamic banks should be more resilient to crises. First, the use of leveraged transactions, as well as complex securitization products and derivatives, in the conventional banking system have often been cited as the main cause of the GFC (Sorwar et al., 2016 ). Since excessive risk-taking (i.e., Gharar ) and trading in derivatives are strictly prohibited in Islamic banks (as discussed above), one would expect lower risk exposure for the latter than for conventional banks (Čihák and Hesse, 2010 ; Pappas et al., 2017 ). Second, short-selling is not permissible in Islamic banks. Third, Islamic banks “are able to pass through a negative shock from the asset side (e.g., a Musharaka loss) to the investment depositors (a Mudaraba arrangement),” resulting in less vulnerability to risk (Čihák and Hesse, 2010 , p. 98). In effect, the profit-and-loss-sharing banking instruments, and the asset-backed financing of Islamic banks’ operations linking financing to production, contribute to “curb excessive leverage” (Hussain, Shahmoradi, and Turk, 2015 ; Alzahrani and Megginson, 2017 ). Fourth, the enhanced monitoring of investment accountholders, who are also less likely to withdraw their funds because of their religious beliefs, suggest that Islamic banks are less vulnerable to downturns compared to their conventional bank counterparts. In addition, their superior asset quality and higher capitalization ratios provide Islamic banks with a buffer during downturns.

However, other arguments in the literature suggest the contrary. For example, Sorwar et al. ( 2016 ) suggest that the prohibition against using derivatives means Islamic banks cannot manage or hedge against risk effectively. In addition, Islamic banks cannot access the interbank market for liquidity because of its interest-bearing features. In this vein, Wiyono and Rahmayuni ( 2012 ) observe that, unlike conventional banks, Islamic banks are more exposed to liquidity risk. This is because they cannot benefit from central banks’ liquidity provisions during liquidity shortages because they are based on interest lending (Alqahtani, Mayes, and Brown, 2017 ). Moreover, the complexity of Islamic financial instruments, combined with their regulatory and compliance risk, increase their exposure to overall operating risk (Beck, Demirgüç-Kunt, and Merrouche, 2013 ). Finally, and as shown by Khan ( 2010 ), there is a high correlation between the profit-sharing ratios in Islamic banks’ instruments and standard interest rate proxies, such as LIBOR rates. This suggests that Islamic banks are as exposed to market risk as conventional banks (Sorwar et al., 2016 ). Beck, Demirgüç-Kunt, and Merrouche ( 2013 ) conduct a comparative analysis of Islamic banks and conventional banks during crises (Table 12.7 ). Using several indicators of asset quality and stability, they show that Islamic banks are more likely to be negatively affected during times of distress. They find evidence of higher capitalization during local crises, and a stronger negative trend in the capitalization of Islamic banks than in conventional banks. They observe no significant difference in z-score, profitability, or maturity mismatch. Islamic banks, however, have higher loan-deposit ratios, lower non-performing loans, and lower loan-loss provisions than conventional banks.

Several authors have tried to disentangle these effects, and to examine the validity of these arguments around the GFC, which is considered an ideal setting given its exogeneity. The results to date remain mixed. In a seminal work focused on Islamic banks in the GCC, Olson and Zoubi ( 2008 ) observe a higher profitability of Islamic banks versus conventional banks based on profitability ratios, efficiency ratios, asset quality, and cash/liquidity ratios. Prior to the GFC, Islamic banks held more cash and had fewer loan-loss provisions. In a follow-up study, Olson and Zoubi ( 2016 ) explored the recovery period, and observed a convergence toward the mean for Islamic and conventional banks alike in terms of profitability (measured by return on assets (ROA) and return on equity (ROE)). They show that the speed of convergence was relatively slower for Islamic banks, although they also performed better prior to the crisis. Rosman, Wahab, and Zainol ( 2014 ) find that Islamic banks in Middle Eastern and Asian countries were able to maintain their technical efficiency during the GFC due to their capital buffers and higher profitability. Johnes, Izzeldin, and Pappas ( 2014 ) report lower efficiency for conventional banks in the GCC prior to the crisis (2006–8), and a slight decline in the level of Islamic banks’ revenue and profit efficiency during the GFC. They attribute these results to Islamic banks’ superior asset quality, confirming findings in Hasan and Dridi ( 2011 ) and Pappas et al. ( 2017 ). Alqahtani, Mayes, and Brown ( 2017 ) add to this evidence by examining the pre-crisis, crisis, and recovery periods. They show that, during the GFC, Islamic banks were more cost-efficient than conventional banks. After the crisis, however, Islamic banks underperformed conventional banks, and lost their cost-efficiency superiority. The authors interpret this evidence as follows: Islamic banks were less exposed to the GFC because, unlike conventional banks, they were constrained from trading in risky, highly leveraged asset classes. In the aftermath, when the shock spilled over from the financial to the economic sector, and given that Islamic banking is asset-backed, Islamic banks suffered more heavily from the repercussions of the GFC (p. 60).

Hasan and Dridi ( 2011 ) focus on the GCC countries, as well as on Jordan, Malaysia, and Turkey, to examine the effect of the GFC on the profitability, credit, and asset growth of Islamic versus conventional banks. Their results suggest that large Islamic banks were more profitable than conventional banks during the crisis, but small Islamic banks were not. Čihák and Hesse ( 2010 ) provide supporting evidence that there is a size effect in the relative stability between Islamic and conventional banks. However, their results show that small Islamic banks actually seem more stable than similarly sized conventional banks. Using default rates on loans, Baele, Farooq, and Ongena ( 2014 ) observe that the default rate on Islamic loans is less than half that on conventional bank loans. Farooq and Zaheer ( 2015 ) add supporting evidence from Pakistan, where Islamic banks had lower withdrawals, attracted more deposits, and disbursed more loans than conventional banks during the crisis. The higher liquidity buffers insulated Islamic banks from some of the most negative impacts.

Based on return dynamics, Fakhfekh et al. ( 2016 ) examine the volatility of Islamic and conventional banks during the crisis for banks in GCC countries over the 2006–13 period. They find that Islamic banks were more resilient than conventional banks, and exhibited lower return volatility. Sorwar et al. ( 2016 ) further re-examine the market risk profile of Islamic banks. Their univariate analysis shows that the market risk profile of Islamic banks is no different, on average, from that of conventional banks. However, when they use a VaR multivariate analysis, they find that Islamic banks exhibit lower market risk on average, and that the difference is more pronounced during the crisis period. In addition, they observe that Islamic banks exhibit lower leverage across different sub-periods around the GFC.

Overall, these studies suggest that the asset-based and risk-sharing nature of Islamic contracts limited their exposure to the crisis (Alzahrani and Megginson, 2017 ). Their higher capitalization and asset quality also contributed to their relative resilience (Hasan and Dridi, 2011 ; Bourkhis and Nabi, 2013 ). In addition, Islamic banks may have been less affected by the crisis because they do not hold or trade in conventional securitized assets.

Nevertheless, these positive facets of Islamic banking have been contested by several other authors. For example, Abedifar, Molyneux, and Tarazi ( 2013 ) compare the credit risk and stability (z-score) of Islamic and conventional banks (as well as of conventional banks with Islamic branches). They find no significant differences in insolvency risk or stability, and suggest this is because Islamic banks mostly apply non-profit-and-loss-sharing contracts, which are technically similar to conventional bank practices.

In the same vein, Pappas et al. ( 2017 ) conduct a comparative study of the risk of failure of Islamic and conventional banks using a sample of 421 banks from twenty countries between 1995 and 2010. Their findings suggest that conventional banks have a higher failure rate than Islamic banks. Alandejani, Kutan, and Samargandi ( 2017 ) complement this evidence by including the impact of the GFC. They examine the hazard and survival functions of Islamic and conventional banks over the 1995–2011 period for banks in GCC countries. They show that, during the crisis, Islamic banks had a higher rate of failure, and therefore shorter survival times, than conventional banks, contradicting Pappas et al. ( 2017 ).

Regarding resilience, the IFSI Stability Report 2018 (IFSB, 2018, p. 4) indicates that: “Global Islamic banking has sustained its resilience, and most of its stability indicators are in comfortable compliance with the minimum international regulatory requirements. However, global Islamic banking can no longer claim to be superior to conventional banking in all the stability dimensions. For example, Islamic banks clearly outperform European Union (EU) banks in terms of return on assets (ROA), return on equity (ROE) and cost-to-income, but the capitalisation of EU banks is now stronger than that of Islamic banks and the non-performing loans ratio of EU banks is better than the non-performing financing (NPF) ratio of Islamic banks.”

Thus, the impact of the GFC and the resilience of Islamic banks during economic downturns remains somewhat unclear. Evidence seems to vary with geographic region, bank size, and sample size. Further studies in this area could be enlightening, particularly by exploring the differential impact of Islamic and conventional banks during various banking crises across countries.

12.4.3 Sharia Supervisory Board Corporate Governance and Risk-Taking

Islamic banks have a particular governance structure that involves an additional layer of monitoring of their activities. The Sharia supervisory board (SSB) is the highest corporate governance authority in an Islamic bank (Dusuki, 2012 ). The Sharia board’s role is to advise Islamic banks and to supervise their operations and performance. Abdul Rahman and Bukair ( 2013 ) and Mallin, Farag, and Ow-Yong ( 2014 ) find that SSB size is positively related to a bank’s corporate responsibility disclosure index, suggesting that the larger the board, the stronger its effect on social commitment to society. The SSB’s characteristics are also associated with Islamic banks’ credit ratings (Grassa, 2016 ). In a recent study, Mollah et al. ( 2017 ) examine a sample of Islamic and conventional banks to assess whether their respective governance/organizational structures affect their risk-taking and performance. The authors find that Islamic banks take higher risks and achieve higher performance than conventional banks.

Interestingly, Hussain, Shahmoradi, and Turk ( 2015 ) note that Sharia board size can be costly to the bank, because it can create gridlock and divergence of opinions “among religious scholars regarding the Sharia compliance of specific financial arrangements.” This is particularly true for banks that expand beyond their borders. As mentioned earlier, Sharia compliance in one country does not necessarily apply in another. The AAOIFI and IFSB work toward setting standards and regulatory requirements for the global Islamic finance industry.

12.4.4 Transparency, Earnings Management, and Earnings Quality

Evidence in the literature to date on a link between religion and earnings quality is mixed. For example, McGuire, Omer, and Sharp ( 2011 ) and Dyreng, Mayew, and Williams ( 2012 ) conclude “that religion-influenced firms are less involved in aggressive financial reporting and have higher accrual quality, lower restatements of financial statements, lower risk of fraudulent accounting, and lower forecast errors” (p. 646). Meanwhile, Callen, Segal, and Ole-Kristian ( 2010 ) find no association between religion and earnings management.

The religious principles that govern Islamic banks’ transactions and activities may also serve to mitigate managers’ opportunistic behavior. The mechanisms of enhanced monitoring by investment accountholders in profit-and-loss-sharing contracts, for example, could lead to better earnings quality in Islamic banks. To the best of our knowledge, however, only Abdelsalam et al. ( 2016 ) directly address this issue.

Alsaadi, Ebrahim, and Jaafar ( 2017 ) focus on the relation between Sharia -compliant investments and the quality of financial reporting. They show that firms engaged in CSR activities are less likely to manipulate earnings, and that being included in a Sharia index does not play an important role in determining earnings quality. This latter result suggests there is no significant relation between Sharia compliance and earnings quality. In fact, the authors posit that this is due to managerial opportunism, because managers seem to “use an ethical practice as a label to create the perception of transparency, thereby avoiding scrutiny from stakeholders” (Alsaadi, Ebrahim, and Jaafar, 2017 , p. 170). This evidence goes against the expectation that Sharia compliance with religious norms and moral accountability constraints provides a moral obligation to maintain high quality and transparent standards in reporting financial information.

Abdelsalam et al. ( 2016 ) provide contrasting evidence by focusing on the earnings quality of listed banks in the MENA region. Over the 2008–13 period, their evidence suggests that Islamic banks are more conservative and less likely to manage earnings. Islamic banks are also more likely to employ a Big Four audit firm, suggesting higher quality of financial information. The authors conclude that Islamic banks “operate within a governance framework that enhances financial reporting quality” (p. 156). Abdelsalam et al. ( 2016 ) link this evidence to the extent of agency costs in Islamic banks compared to that in conventional banks. Because Islamic banks are subject to an extra monitoring layer by the SSB, which ensures compliance with moral values, and because of the overall moral accountability of the managers and board members, one would expect fewer agency problems and hence higher earnings quality. However, investment accountholders in Islamic banks tend to give more leeway to managers, potentially increasing agency problems, and hence managerial opportunistic behavior and lower earnings quality as well.

Clearly, there remains great potential in this area of research. Assessing the earnings quality of banks worldwide would be useful to exclude geographically determined results. One could also explore whether the quality of financial information reporting is comparable for Islamic banks across time, including during crises.

12.4.5 Corporate Social Responsibility

With its principles of equity and participation, Islamic banking is viewed as a type of ethical banking. As such, it is supposed to embed ethics and social responsibility in Islamic banks’ activities (Abdelsalam et al., 2016 ). The Islamic Finance Outlook ( 2018 , p. 4) outlines the “natural connection between Islamic finance principles, responsible finance, Sustainable Development Goals (SDGs), and impact investing. All aim to create a more equitable financial system that has a positive tangible impact on the economy and population.”

A recent study on corporate social responsibility (CSR) disclosures of Islamic banks provides interesting insights. Platonova et al. ( 2018 ) show that the CSR activities of Islamic banks in GCC countries are positively related to their long-term performance, confirming earlier evidence on the positive value-enhancing effect of CSR for non-financial firms. Mallin, Farag, and Ow-Yong ( 2014 ) show that Islamic banks with larger SSBs tend to have higher CSR disclosures, thus establishing a link between CSR and corporate governance. However, in a study on UAE banks, Nobanee and Ellili ( 2016 ) find no evidence of a relation between Islamic banks’ performance and CSR disclosure. Note there is a positive relation for conventional banks. Therefore, another future stream of research could focus on assessing the capabilities of Islamic banks to engage in CSR activities. One challenge, however, would be the availability of CSR data on Islamic banks in existing datasets, such as Thomson Reuters’ ASSET4. Field research to collect such data on Islamic banks, identifying all aspects of engagement toward the community, could assist in this endeavor.

12.4.6 Liquidity Creation

Banks provide two overlapping functions in the economy: (1) creating liquidity to provide the non-bank public with access to liquid funds, and (2) transforming risk to provide safer investments. Banks create liquidity “on the balance sheet” by transforming illiquid assets (e.g., small business loans) into liquid liabilities (e.g., transaction deposits), and “off the balance sheet” by providing loan commitments and other guarantees of liquid funds. To transform risk, banks issue riskless deposits to finance risky loans.

The literature on bank liquidity creation has grown extensively since Berger and Bouwman ( 2009 ) developed an appealing measure that captures total bank output.

Based on this measure, and building on the key differences between Islamic and conventional banks’ balance sheets, Berger et al. ( 2017 ) compare the effects on total liquidity creation and its various components, as well as on the financial stability implications of Islamic banking. The authors anticipate two conflicting effects of Islamic banking on liquidity creation. First, Islamic banks create more liquidity because they are generally better at absorbing risk, they are more highly capitalized, and they are less exposed to bank runs than conventional banks. Second, the reduced inclination of Islamic banks to undertake risk, combined with Sharia ’s limits on Islamic bank assets and off-balance-sheet activities, may cause Islamic banks to create less liquidity. In terms of the financial stability implications, Berger et al. ( 2017 ) also provide two conflicting predictions.

First, because Islamic banks may exhibit a greater capacity to withstand negative shocks that could contribute to financial instability, liquidity creation by Islamic banks may contribute less to financial instability than conventional banks. Second, Islamic bank liquidity creation may contribute more to national financial instability because of higher credit risk (e.g., Islamic banks typically do not require collateral from borrowers, exacerbating losses in the event of borrower default).

Using 2000–14 data on twenty-three countries and constructing liquidity creation following Berger and Bouwman ( 2009 ), Berger et al. ( 2017 ) find that Islamic banks create more liquidity per unit of assets than conventional banks after controlling for other bank and country characteristics. They also show that Islamic banks create more liquidity per unit of assets on the asset side of the balance sheet, and less on the off-balance-sheet side, than conventional banks (Table 12.8 ). The authors note that conventional bank liquidity creation contributes to financial instability, while that of Islamic banks has no significant impact. Focusing on banks in the GCC, Mohammad and Asutay ( 2015 ) similarly find that Islamic banks create more liquidity than other banks in a region. Overall, these findings point to the many favorable effects of Islamic banking.

Note : This table shows estimates from regressions analyzing the effect of Islamic banks on bank liquidity creation using ordinary least squares (OLS) analysis. The dependent variable in column (1) is LC (total)/GTA , which is total bank liquidity creation normalized by corresponding gross total assets. The dependent variable in column (2) is LC(asset)/GTA , which is asset components of bank liquidity creation normalized by corresponding gross total assets. The dependent variable in column (3) is LC(liability)/GTA , which is liability and equity components of bank liquidity creation normalized by corresponding gross total assets. The dependent variable in column (4) is LC(off)/GTA , which is off-balance-sheet components of bank liquidity creation normalized by corresponding gross total assets. The key explanatory variable is IB , an indicator that equals 1 if a bank is an Islamic bank. We include country controls such as Interest (lending interest rate), Inflation (country’s rate of inflation), Lerner (Lerner Index), and a broad set of bank-level controls such as Ln_Asset (natural logarithm of bank total assets), Capital (bank capital ratio). All controls are lagged one year, and all columns include year and country fixed effects. Standard errors are clustered at bank level.

***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.

12.4.7 Stock Liquidity

Stock liquidity is an important determinant of financial market development and hence economic growth (Levine, 2005 ). Yet, to date, this remains an underexplored area in relation to Islamic banks. Some recent insights appear in Boubakri et al. ( 2019 ), who examine the comparative stock liquidity of Islamic banks and matching conventional banks in an international cross-country study. The preliminary findings show that Islamic banks have higher stock liquidity than conventional banks (Table 12.9 ). The liquidity effects are particularly important for small Islamic banks, and tend to persist during the GFC in countries with better market development and weaker regulations and supervision. These results suggest that faith-driven investors prefer Islamic banks’ stocks, and disregard what they consider to be “sin stocks” (i.e., some of those offered by conventional banks), which do not conform to their religious beliefs. These findings support the segmentation hypothesis by Merton ( 1987 ). During periods of uncertainty, faith-driven investors find refuge in norm-confirming investments (i.e., Islamic banks). Further investigation is warranted on the determinants of stock liquidity of Islamic banks, and the outcome of such liquidity on the cost of financing of both Islamic and conventional banks.

Note : This table shows regression results relating Islamic banks to stock liquidity. The sample comprises firm–year observations between 1992 and 2014. The dependent variable in Models 1–4 is Amihud illiquidity , which is the average stock return over trading volume. The dependent variable in Model 5 is the logarithm of bid–ask spread. We winsorize all financial variables at the 1% level in both tails of the distribution. t -statistics based on robust standard errors clustered at the firm level are in parentheses below each coefficient.

12.5 Review of the Literature Comparing Islamic and Conventional Banks: Macro-Level Evidence

In this section, we review the literature on the macro-impact of Islamic banking. We particularly examine the link between Islamic banking, on the one hand, and financial development and economic growth on the other. We also review the scarce literature on the impact of Islamic banking on financial inclusion and entrepreneurship, as well as on market competitiveness and power.

12.5.1 Islamic Banks, Financial Development, and Economic Growth

The main functions of financial intermediaries are to mobilize savings and efficiently allocate funds. While doing so, financial intermediaries “mitigate the effects of information and transaction costs and improve the allocation of resources, thus influencing saving rates, investment decisions, technical innovation, and ultimately long-run growth rates” (Imam and Kpodar, 2016 , p. 389). The literature has confirmed how important well-functioning financial markets and institutions are to productive efficiency and economic growth (Levine, 2005 ; Beck, Demirgüç-Kunt, and Merrouche, 2013 ; Abedifar, Hasan, and Tarazi, 2016 ). The spread of Islamic banking as an alternative model to conventional financial intermediation thus raises the question of its impact on the development of the banking system, as well as on overall economic growth.

The following theoretical arguments, discussed at length in Imam and Kpodar ( 2016 , p. 389–91), suggest that Islamic banking is positively related to banking sector growth and economic growth in general. First, Islamic banking provides financing to individuals with no assets. Unlike conventional banks, which require guarantees and collateral to extend loans, Islamic banks are prohibited from engaging in those activities. Instead, the risk-sharing structure of Islamic contracts makes the borrower a partner of the bank. This is likely to encourage entrepreneurs to seek financing, even if they have no collateral or guarantee to offer. Second, Islamic banking mobilizes the savings of Muslims who do not want to use conventional banks, and channels them into the formal sector. Third, Islamic banking principles increase financial stability, because of their reliance on profit-and-loss-sharing and their asset-liability matching. Similarly, their higher capitalization and the prohibition against trading in derivatives are likely to enhance stability and performance during crises. Overall, Islamic banks cater to the needs of Muslim individuals and entrepreneurs, increasing their financial inclusion, alleviating poverty, increasing savings, and, ultimately, enhancing economic growth.

The literature provides us with ample empirical evidence to support these arguments. For example, Gheeraert ( 2014 ) uses a sample of twenty Muslim countries for the 2000–5 period, and shows that the introduction of Islamic banks contributed to the development of the entire banking system as measured by the amount of private credit or bank deposits scaled to GDP. Gheeraert ( 2014 ) argues that this positive effect suggests that a nascent Islamic banking industry does not crowd out conventional banking. In fact, the Islamic banking sector acts as a complement to conventional banking. The author identifies several channels by which Islamic banking can impact financial sector development (p. S5). First, by appealing to devout unbanked individuals through Sharia -compliant instruments, Islamic banking mobilizes more capital. Second, Islamic finance fosters financial innovation to attract more depositors, and increases participation in the banking system. It, therefore, creates incentives for other banks to innovate in order to increase their competitiveness. Third, the banking market structure can be affected by the creation of new Islamic banks or the transformation of existing conventional banks into Islamic banks.

Based on the premise that productivity growth plays a more important role than factor accumulation in explaining countries’ growth differences (Easterly and Levine, 2001 ; Caselli, 2005 ), Gheeraert and Weill ( 2015 ) employ a stochastic frontier approach to estimate country-level technical efficiency using a sample of Islamic banks from seventy countries over the 2000–5 period. They detect a non-linear relationship between the development of Islamic banking and macroeconomic efficiency, which means the benefits of expanding Islamic banking beyond a certain threshold will be detrimental to macroeconomic efficiency. The authors posit that this may be because Islamic banking is interest-free, which eliminates the monitoring and corporate governance role of financial intermediaries. Debt financing can play a disciplinary role through interest payment obligations, inducing managers to perform and improve productivity. However, “[t]his incentive scheme can be less efficient in the context of the profit-and-loss-sharing instruments that are proposed by Islamic banks because the replacement of interest-payment obligations by a share of profits reduces the threat of bankruptcy for managers” (Gheeraert and Weill, 2015 , p. 33).

In a more extensive approach, Abedifar, Hasan, and Tarazi ( 2016 ) focus on a sample of twenty-two Muslim countries with dual banking systems over the 1999–2011 period (i.e., where both Islamic and conventional institutions operate). They first examine whether the efficiency of conventional banks is impacted by the competition of Islamic banks, and then examine the overall impact on financial development, economic growth, and poverty. The authors show that the market share of medium-sized Islamic banks is positively associated with the efficiency of conventional banks, suggesting that the introduction of Islamic banking enhances healthy competition. In addition, Islamic bank market share is positively related to fund mobilization, credit allocation, economic growth, and poverty alleviation in countries with relatively greater proportions of Muslims in their populations, countries with higher uncertainty avoidance indices, and countries with lower GDP per capita. The results indicate that, in “more religiously diverse Muslim countries, the market share of conventional banks with Islamic window/branches is positively linked to the efficiency of purely conventional banks” (Abedifar, Hasan, and Tarazi, 2016 , p. 199).

Imam and Kpodar ( 2016 ) assess the relationship between Islamic banking development and economic growth for a sample of fifty-two countries over the 1990–2010 period. They also conclude that Islamic banking is positively associated with economic growth. The authors note that the main channels of transmission through which Islamic banking affects economic growth are capital accumulation and superior financial inclusion.

12.5.2 Islamic Banks, Financial Inclusion, Microfinance, and Entrepreneurship

Given their profit-and-loss-sharing contracts, one would expect Islamic banks to contribute to financial inclusion and to provide needed funds to the unbanked. In Turkey, Aysan, Disli, and Özturk ( 2018 ) observe that most activities of Islamic banks are associated with a greater tendency toward small to medium-sized enterprise (SME) financing than conventional banks. Evidence in Abedifar, Hasan, and Tarazi ( 2016 ) shows that, in Muslim countries, Islamic banks have contributed to reducing poverty and inequality despite their relatively small size compared to conventional banks. Their evidence also suggests that Islamic banks were able to mobilize the savings of Muslim individuals. However, because Islamic financial institutions are more risk-averse than conventional banks, this “might limit entrepreneurship by encouraging borrowers to select low-risk projects or to invest excessively in tangible assets. Furthermore, Islamic financiers may prefer to allocate funds to the real economy, because they are not authorized to allocate financial resources to speculative activities” (Abedifar, Hasan, and Tarazi, 2016 , p. 200). In turn, this can adversely affect entrepreneurship and innovation. Aggarwal and Yousef ( 2000 ) provided supporting evidence in a study conducted two decades ago. They find that Islamic banks’ financing is somewhat biased against agriculture and industry, and that long-term financing is rarely extended to entrepreneurs.

Another fruitful avenue of future research could be to assess the extent to which Islamic banks contribute to project financing. On a related note, a further area of investigation would be to explore how firms make financing choices. Why, and under which conditions, do entrepreneurs or firms choose Islamic bank financing over conventional bank financing in religiously diverse countries? Such an analysis in both Muslim and non-Muslim countries would certainly provide vital insights for regulators and bankers alike to better cater to the needs of borrowers, whether individuals or corporations.

12.5.3 Islamic Banks, Market Discipline, and Market Power

Aysan et al. ( 2017 ) empirically test the claim that “Islamic banks are subject to more market discipline.” To test this conjecture, that “Islamic bank depositors are indeed able to monitor and discipline their banks,” the authors use the natural setting of deposit insurance reform in Turkey in December 2005. 12 According to the market discipline theory, during periods of greater risk, depositors will either require higher returns on their deposits or withdraw their funds from the bank. The results suggest that Islamic bank depositors increased their sensitivity to bank risk after the reform, and hence increased market discipline in the Islamic banking sector.

Aysan et al.’s ( 2017 ) findings suggest that Islamic bank depositors indeed behaved differently than their conventional peers. In the pre-deposit insurance reform period, they find that depositors of conventional banks were sensitive to bank risk, while they did not observe this phenomenon for Islamic depositors. In the post-reform period, however, the authors note that Islamic bank depositors increased their sensitivity to bank-specific risks. Overall, they find that deposit insurance reform resulted in greater market discipline in the Turkish Islamic banking sector, most likely due to increased competition among Islamic banks.

In a study precisely dedicated to addressing the market power issue, Weill ( 2011 ), using a sample of Islamic and conventional banks in seventeen countries over the period 2000–7, observes that Islamic banks have lower levels of market power than conventional banks. This runs against his initial expectation that Islamic banks should have more market power since they benefit from “a captive client base,” with a more inelastic demand driven by religious principles. Weill ( 2011 ) defines market power as “the ability of a firm to influence the price of products and is therefore directly linked to competition since greater competition reduces market power” (p. 292). It is measured by the Lerner index. A comparison of the market power of Islamic and conventional banks is a fundamental issue, because greater bank competition decreases the cost of credit to investors, leading to higher borrowing costs to finance investments. This, in turn, has implications for economic development (Petersen and Rajan, 1995 ; Jayaratne and Strahan, 1996 ; Cetorelli and Gambera, 2001 ) and financial development (Levine, 2005 ).

12.6 Conclusion and Directions for Future Research

To conclude, we first survey recent empirical literature on the micro and macro impact of Islamic banking. We then outline further instructive research directions.

The Sharia principles of profit-and-loss sharing, and the prohibitions on paying and receiving interest and taking excessive risk (e.g., investing in derivatives products) help buffer Islamic banks during financial crises. However, Islamic banks suffer from certain structural weaknesses that can affect their performance, although these weaknesses should resolve organically as the industry matures. For example, the fact that Islamic banks are not permitted to trade complex financial products leaves them with few hedging and diversification opportunities, which increases operating risk. In addition, as Weill ( 2011 ) shows, Islamic banks have lower market power than conventional banks, cannot benefit from liquidity provisions from central banks, and are generally smaller than conventional banks, which puts them somewhat at a disadvantage. As the industry develops, innovative Sharia -compliant products should emerge to help Islamic banks better manage liquidity. Since we focus on Islamic banking in this chapter, we do not discuss early developments along these lines, such as Islamic bonds (or Sukuks ), nor do we cover Islamic funds or insurance.

The Islamic finance and banking sector faces momentous opportunities thanks to a fast-growing Muslim population (which points to increasing demand for Islamic banking services), increased awareness of Islamic banking as an alternative banking model, and the internationalization of Islamic banks in Western countries. The fact that Islamic banking financial intermediation is based on profit sharing rather than lending, and thus helps stabilize financial markets, is drawing increased interest from non-Muslim communities. Nevertheless, major efforts remain to be made to standardize Islamic banking instruments across countries, develop a unified regulatory environment, and further increase awareness of Islamic banks’ activities and instruments.

In its most recent report (Islamic Finance Outlook, 2018 ), S&P notes that the lack of standardization in Sharia boards across banks and countries has been a major hindrance to greater global integration of Islamic finance. SSBs typically issue recommendations based on their own interpretation of Sharia law. A host of other issues regarding regulation also need to be tackled. A recent multi-country report (IMF, 2017 ) identifies persistent differences in the extent to which different countries adapt their prudential, consumer protection, liquidity management, safety nets, and resolution frameworks to the specificities of Islamic banking and the standards issued by IFSB and AAOIFI. The report highlights some weaknesses in Islamic banking licensing policies, whereby the approval process is “conditioned upon proof of ex-ante and ex-post robust Shari’ah governance framework and internal controls tailored to address risks specific to [Islamic bank] operations” (p. 10). The report notes the lack, or partial adoption, of IFSB applicable prudential standards across countries, which undermines comparability of solvency risks.

The academic side has lagged as well. At the micro level, more work is needed on corporate governance mechanisms in Islamic banking, and the extent to which they complement other internal and external governance mechanisms. In addition, questions related to identifying and measuring the specific risks associated with Islamic banking remain to be explored. The cost of debt financing under Islamic banking is also worth investigating empirically, in light of the fact that Islamic bank financing is often argued to be costlier than conventional bank financing.

Moreover, while the literature as reviewed here has been expanding rapidly since the onset of the GFC, the implications of Islamic banking for country-level financial stability remain unclear. One interesting avenue could be to explore the differential effects of banking crises on Islamic versus conventional banks. Given the link between financial system stability and economic growth, this question is very timely. Our survey also identifies a lack of evidence on the corporate social responsibility of Islamic banks. Since Islamic banking is often referred to as ethical banking, and its underlying model is based on principles of social justice, participation, and fairness, this lack is surprising. We thus call for more research on the social implications of Islamic banking.

Intensive research efforts could also be undertaken at the macro level, which, compared to the micro evidence surveyed here, remains understudied. While most macro studies focus on the beneficial effect of Islamic banking on economic growth and the real economy, the evidence is far from conclusive. Similarly, we lack an understanding of how Islamic banking affects financial market development. For example, what are the liquidity implications of Islamic banks, and how do conventional banks compare in terms of stock liquidity?

How Islamic banking is conducted in practice also raises a number of questions. For example, why are Islamic debt instruments more prevalent than equity instruments? What factors drive firms’ choice between Islamic and conventional bank financing? And what is the optimal regulatory framework in dual banking systems, where both Islamic and conventional banks co-exist? An assessment of the practice and implications of Islamic banking in developed countries represents an interesting direction for future research.

Given the growth prospects for Islamic finance, we expect the literature to continue to expand, extending to other aspects of Islamic finance such as Islamic bonds ( Sukuk ), Islamic insurance ( Takaful ), and asset-pricing of Islamic finance instruments. These and other important questions will need to be addressed as Islamic banking and finance instruments spread across the globe. For this to happen, however, a significant hurdle in terms of data compilation needs to be overcome. More interest by major academic journals in the field should encourage researchers to dive into this relatively unexplored area of investigation.

Appendix 12. A: Summary of Islamic Bank Literature

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Abedifar, P. , Ebrahim, M. S. , Molyneux, P. , and Tarazi, A. ( 2015 ). “ Islamic Banking and Finance: Recent Empirical Literature and Directions for Future Research, ” Journal of Economic Surveys , 29, 637–70.

Abedifar, P. , Hasan, I. , and Tarazi, A. ( 2016 ). “ Finance–Growth Nexus and Dual Banking Systems: Relative Importance of Islamic Banks, ” Journal of Economic Behavior and Organization , 132, 198–215.

Abedifar, P. , Molyneux, P. , and Tarazi, A. ( 2013 ). “ Risk in Islamic Banking, ” Review of Finance , 17, 2035–96.

Aggarwal, R. K. and Yousef, T. ( 2000 ). “ Islamic Banks and Investment Financing, ” Journal of Money, Credit and Banking , 32, 93–120.

Alandejani, A. , Kutan, A. , and Samargandi, N. ( 2017 ). “ Do Islamic Banks Fail More Than Conventional Banks? ” Journal of International Financial Markets, Institutions and Money , 50, 135–55.

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Alsaadi, A. , Ebrahim, M. S. , and Jaafar, A. ( 2017 ). “ Corporate Social Responsibility, Shariah-Compliance, and Earnings Quality, ” Journal of Financial Services Research , 51(2), 169–94.

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Gheeraert, L. ( 2014 ). “ Does Islamic Finance Spur Banking Sector Development? ” Journal of Economic Behavior and Organization , 103, S4–S20.

Gheeraert, L. and Weill, L. ( 2015 ). “ Does Islamic Banking Development Favor Macroeconomic Efficiency? Evidence on the Islamic Finance–Growth Nexus, ” Economic Modelling , 47, 32–9.

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Hasan, M. and Dridi, J. ( 2011 ). “ The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study, ” Journal of International Commerce, Economics and Policy , 2, 163–200.

Hassan, K. and Aliyu, S. ( 2018 ). “ A Contemporary Survey of Islamic Banking Literature, ” Journal of Financial Stability , 34, 12–43.

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Iqbal, M. and Molyneux, P. ( 2005 ). “Thirty Years of Islamic Banking: History, Performance and Prospects, ” Prospects , 19, 190, available at: http://dx.doi.org/10.1057/9780230503229 .

Islamic Finance Outlook (2018). S&P Global Rating, available at: https://www.spratings.com/documents/20184/4521646/Islamic+Finance+2018+Digital-1.pdf/cf025a76-0a23-46d6-9528-cecde80e84c8 .

Islamic Financial Services Board (IFSB) (2018). “Islamic Financial Services Industry Stability Report,” available at: https://www.ifsb.org/ .

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In motivating their setting, the authors note that “Turkey was the first country in the world that had adopted a dual deposit insurance framework in 2001, in which the Islamic deposit insurance scheme operated alongside its conventional counterpart. Unlike the conventional scheme, which was administered by the government, the Islamic scheme was organized and managed by Islamic banks. However, in December 2005, the dual deposit insurance framework was revised and the Islamic scheme was absorbed by the conventional scheme” (p. 259).

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A systematic literature review on Sharī'ah governance mechanism and firm performance in Islamic banking

Islamic Economic Studies

ISSN : 1319-1616

Article publication date: 14 February 2020

Issue publication date: 8 June 2020

This paper aims to systematically review the existing studies on the relationship of Sharī'ah governance (SG), as represented by the Sharī'ah supervisory board (SSB), with firm performance of Islamic banks (IBs), to suggest opportunities for future research in this field.

Design/methodology/approach

By adopting a systematic literature review, 21 empirical and theoretical papers published in Scopus concerning the relationship between SSB and performance of IBs were selected for review and analysis.

In light of the existing research studies' limitations, this paper suggests that the effect of SSB on IBs' performance still requires more empirical analyses using alternative analytical methods, alternative measures, and different periods (during crisis and non-crisis). Besides that, these studies should take into account the differences across jurisdictions in their SG models, the degree of agencies' intervention in SG practices, the control over cross-memberships of scholars, and the differences across IBs in the position of SSB in the organization structure.

Practical implications

The analysis undertaken in this paper would address the literature gaps on the effect of SSB on IBs' performance as this study serves as a guide for the researchers, academicians, and interested researchers from Islamic international autonomous non-for-profit organizations, e.g. AAOIFI and IFSB in research related to this important area. Importantly, the findings of this study would support regulators and related authorities across jurisdictions with suggestions on improving the current SG practices.

Originality/value

This paper presents a critical review of the existing research on SSB and IB performance and suggests new variables, measurements, analytical methods, and new issues for researchers in this area. Thus, it identifies the literature gap that still needs further empirical investigation and a suitable way to close it.

• Sharī'ah governance
• Sharī'ah supervisory board
• Performance
• Islamic banks
• Systematic literature review

Nomran, N.M. and Haron, R. (2020), "A systematic literature review on Sharī'ah governance mechanism and firm performance in Islamic banking", Islamic Economic Studies , Vol. 27 No. 2, pp. 91-123. https://doi.org/10.1108/IES-06-2019-0013

Emerald Publishing Limited

Copyright © 2020, Naji Mansour Nomran and Razali Haron

Published in Islamic Economic Studies . Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

1. Introduction

The Islamic banking industry has grown rapidly since the early 2000s ( Safiullah and Shamsuddin, 2018 ). Islamic banks (IBs) differ from their conventional counterparts in their functions, structure, and objectives ( Mohammed and Muhammed, 2017a ). The main difference distinguishing the IBs from conventional banks (CBs) is the absolute prohibition of interest ( riba ) ( Ghayad, 2008 ) and business relating to alcohol, gambling, and excessive speculation ( Zirek et al. , 2016 ). Basically, IBs must guarantee that all of their products and operations are compliant with the Sharī'ah rules and principles ( Grais and Pellegrini, 2006a ). Thus, the governance structure of IBs requires them to establish Sharī'ah supervisory boards (SSBs) besides the usual boards of directors (BoDs) ( Alnasser and Muhammed, 2012 ; Nomran et al. , 2018 ). This extra layer of governance, as represented by the SSB, aims to monitor, approve, and report on IBs' compliance with moral values ( Abdelsalam et al. , 2016 ; Shibani and De Fuentes, 2017 ).

It is the main responsibility of the SSB to closely supervise the implementation of the Sharī'ah principles throughout the operations of IBs ( Nomran et al. , 2017 ). As a result of non-compliance with Sharī'ah rules, depositors may withdraw their deposits and investors may cancel their investment agreements, which would decrease the IBs' profitability and increase bank risk [1] ( Hamza, 2013 ; Grassa, 2015 ). In brief, if the IBs become non-Sharī'ah compliant, their position in the market will be negatively affected due to lack of customers' confidence ( Alnasser and Muhammed, 2012 ; Hamza, 2013 ; Grassa, 2015 ) and consequently decreasing these banks' profitability and increasing their risks ( Hamza, 2013 ; Grassa, 2015 ). Given that SSB supervises bank investment, banks cannot invest beyond the SSB-approved investments even if they can earn a higher rate of returns ( Ullah and Khanam, 2018 ).

Generally speaking, the importance of corporate governance (CG) implementations has increased in the business environment especially after the financial crises, i.e. the Asian financial crisis of 1997 and the global financial crisis of 2008. There is no doubt that good CG has a positive impact on performance, where most of the studies confirm that good governance improves firms' profitability, productivity, and competitiveness and decreases risk ( Claessens, 2006 ; Todorovic, 2013 ; Riwayati et al. , 2016 ; Ciftci et al. , 2019 ).

In the Islamic banking context, IBs have “multi-layer” governance [2] , i.e. SSBs besides the BoDs, which acts as dual internal governance mechanisms affecting IB performance [3] . As the BoD is a powerful internal governance mechanism affecting IB performance, the SSB is also an important stakeholder that affects their performance ( Mohammed and Muhammed, 2017a ). The decision-making of management in the IBs is indeed constrained by an SSB that rejects any proposals in light of the Sharī'ah principles ( Ghayad, 2008 ); therefore, BoD is obliged to obey the SSB decision ( Alnasser and Muhammed, 2012 ). The nature of the SSB decision may influence the acceptance of one product over another, hence; the SSB certification of approval could increase or decrease the volume of banking business, especially when no rights are given for the management to involve in the SSB decision ( Mohammed and Muhammed, 2017a ). In addition, the SSB role means that products are likely to be Sharī'ah compliant and less risky, and then, it ameliorates the negative effects of excessive risk-taking, thus contributing to better performance of IBs ( Mollah and Zaman, 2015 ; Nomran and Haron, 2020 ).

However, as most studies on Islamic banking are normative and/or theoretical in nature, thus the need for more empirical studies, especially on the CG of IBs, is imperative ( Mollah and Zaman, 2015 ; Ajili and Bouri, 2018 ). More precisely, there is a lack of studies on the impact of Sharī'ah governance (SG), as represented by SSB, on IB performance across jurisdictions ( Hasan, 2011 ; Musibah and Alfattani, 2014 ; Grassa, 2016 ). The majority of these studies are theoretical, and they have been carried out to examine the function of SSB and the issues surrounding its function. In contrast, the empirical studies on the SG issues are limited in general and focus on the relationship between SSB and performance of IBs in particular. Therefore, the main objective of this paper is to review the existing studies on the relationship of SG mechanism, as represented by SSB, with firm performance of IBs, to suggest opportunities for future research in this field. A systematic literature review is used to achieve this objective.

The paper is organized into eight sections. The second section deals with the theoretical background of this paper. The third section explains the methodology employed, followed by the fourth section which presents the main findings from the systematic literature review. The fifth section suggests some recommendations for future research developments, while the sixth one concludes the paper. Lastly, the seventh section discusses implications for research and practice.

2. Theoretical background

This section summarizes the theoretical predictions on the effects of SSB on IB performance. Agency theory (AGT) and stakeholder theory (SKT) are the two popular CG-related theories of boards and governance mechanisms that can justify the impact of SSB on IB performance. From the AGT perspective, governance mechanisms aim to guarantee agent–principal benefits alignment, safeguard shareholder benefits, mitigate agency costs ( Davis et al. , 1997 ), and hence improve the companies' performance ( Demsetz and Lehn, 1985 ).

As mentioned above, IBs are subject to two internal mechanisms of CG, the BoD and the SSB, as a necessary alteration has been made by adding into another layer to the governance from “single layer” as in the conventional ones into “multi-layer” governance ( Mollah and Zaman, 2015 ; Abdelsalam et al. , 2016 ; Almutairi and Quttainah, 2017 ; Shibani and De Fuentes, 2017 ; Safiullah and Shamsuddin, 2018 ). While BoD represents the first layer of governance mechanism that provides legal oversight, SSB represents the second layer of governance mechanism that provides moral oversight (see, e.g., Abdelsalam et al. , 2016 ; Shibani and De Fuentes, 2017 ). Indeed, BoD gives more attention to the conventional legal liability compared to the moral liability [4] . It has been found that SSBs of IBs affect and shape managerial behavior and mitigate agency problems ( Quttainah and Almutairi, 2017 ). SSB plays an important role in mitigating agency problems by acting as an additional monitoring mechanism (see, e.g., Abdelsalam et al. , 2016 ; Shibani and De Fuentes, 2017 ; Quttainah and Almutairi, 2017 ).

From the SKT perspective, Mohammed and Muhammed (2017b) argue that the SSB plays an important role in influencing the performance of IBs as it has been selected among the four key stakeholders that affect the financial performance of IBs besides the management (BoD and CEO), the ownership, and the external auditor based on the Islamic stakeholder model. SSB is an important stakeholder in Islamic banking due to its role of ensuring that the operations of IBs are Sharī'ah compliant through approving their transactions and activities ( Mohammed and Muhammed, 2017b ). However, it is important to mention that the stakeholders of IBs are not restricted to these key groups. As Dusuki (2008) indicates, the stakeholders' groups for IBs involve clients, depositors, employees, IB managers, Sharī'ah scholars, local communities, as well as the regulatory authorities.

3. Methodology

Given the objective of this paper, the matter that has been taken into consideration for the subsequent systematic literature review is the relationship between SG mechanism, SSB, and performance of IBs. The adopted methodology in this paper, i.e. a systematic literature review, is inspired by the previous studies (see, e.g., E-Vahdati et al. , 2019 ; Le et al. , 2019 ).

3.1 Information sources and period

The systematic literature review was conducted for the relevant papers on Scopus published during the period 1999–2018 in English. The rationale for the year 1999 selection to start the review is to ensure reviewing most of the related literature. This is due to the increased importance of CG implementations, in general, in the business environment, especially after the Asian financial crisis of 1997.

3.2 Search strategy

To conduct the search, related key terms were used as shown in Appendix 1 . The authors combined each of the two keywords representing dependent (performance) and independent (SG mechanism) variables in the search field using Boolean search AND, and then they selected papers with these keywords in at least one of the following fields, namely, title, abstract, and keywords.

However, the data collection and analysis process is made up of five steps as implemented by E-Vahdati et al. (2019) . Following E-Vahdati et al. , (2019) first, 278 papers on Scopus were selected after filtering the results via a Boolean search AND based on the basis of their relevance to the purpose of this work using the related keywords [5] . Second, the duplicates were eliminated and store literature as per their respective keywords (see Appendix 1 ) in titles and abstracts besides introducing restrictions that would limit the search to only the relevant fields such as years and language, and this resulted in a total of 30 papers. Third, the collected papers' contents also were fully reviewed, and only the papers that highlighted the relationship between SG mechanism and performance of IBs were selected for the final analysis. Based on the additional filtering in this step, 21 papers were selected. Step four is related to the results as will be shown later, while the final step is related to the recommendations for future research and conclusion. Figure 1 provides a summary of the five steps mentioned that explain data collection and analysis process.

Table I summarized the final collection of papers based on authors, date of publication, nature of studies, and journals' names. As Table I shows, there are 17 refereed journals that published 21 papers on the relationship between SG mechanism, as represented by the SSB, and IB performance. Out of the 21 papers, 18 papers are empirical while three are theoretical and/or qualitative studies. These studies were published during the period (2014–2018) with the exception of one study which was published in 2008.

4.1 Empirical studies on the impact of SSBs on IBs' performance

Research on SG in Islamic banking is not only limited, but there is a lack of studies that investigate the impact of SSB on the performance of IBs ( Nathan, 2010 ; Mollah and Zaman, 2015 ; Hakimi et al. , 2018 ). Most of the empirical studies on SG examined the impact of SSB characteristics on disclosure (see, e.g., Farook and Lanis, 2007 ; Farook et al. , 2011 ; Rahman and Bukair, 2013 ; Abdullah et al. , 2014 ), on earnings management (see, e.g., Quttainah et al. , 2013 ; Quttainah and Almutairi, 2017 ) and on credit ratings of IBs ( Grassa, 2016 ). Nevertheless, literature shows that some empirical studies have been conducted to examine the impact of SSB characteristics on financial performance as presented in Table I . In order to provide a wide view regarding the impact of SSB on the IBs' performance, this section discusses these studies in the following part.

Abdel-Baki and Leone Sciabolazza (2014) examined CG on performance of IBs using CG index which was built based on a cross-country survey of 72 IBs in 14 Middle East and Asian countries while the financial data were collected from the website of the Thomson Reuters Eikon. The CG index consists of six core CG themes and 40 sub-themes. Among these 40 sub-themes, there are six sub-themes items related to SSB which are whether remuneration of SSB members solely decided by a BoD and approved by shareholders, and SSB size, SSB cross-membership, disclosure about the decisions of SSB, and whether Sharī'ah auditors countercheck decisions of SSB.

A study was conducted by Grassa and Matoussi (2014a) examining the impact of CG characteristics of IBs, including SSB characteristics, on the financial performance of 77 IBs and 85 CBs in GCC countries and Southeast Asian countries for the period 2000–2009. After controlling for bank age and size, the study examined many explanatory variables which can be divided into three groups. The first and second groups are related to the characteristics of the BoD and CEO. The third group shows the SSB characteristics which are SSB size, SSB cross-membership, SSB scholars with accounting/finance knowledge and the number of women on SSB. They found that BoD' fees and CEO duality and age positively affect the performance of IBs. SSB with accounting/finance knowledge have a positive and significant impact on the performance of IBs. Results indicated that SSB size and cross-membership negatively affect the performance of IBs in Southeast Asian countries. It has been found that there is no impact for SSB gender (women) on IBs performance. The study concluded that CG characteristics of IBs in GCC countries and Southeast Asian countries are different.

Musibah and Alfattani (2014) examined the impact of SSB effectiveness and intellectual capital on corporate social responsibility (CSR) of 36 IBs from GCC countries for the period 2007–2011. They also investigated the mediating impact of IB performance in the above relationship. The education level of SSB scholars ( shaikh , doctor, doctor shaikh ) was used as a measurement for SSB effectiveness, while ROA and ROE were employed as measurements for IB performance. The study found a positive impact for SSB effectiveness, capital employee, and structure capital on the CSR of IBs. It was found that the SSB education level affects IB performance positively. The study concluded that IB performance mediates the relationship between SSB effectiveness, capital employee, structure capital, and the CSR of IBs.

Another study on the same context is conducted by Mollah and Zaman (2015) . This study investigated the impact of SSB size, BoD structure, and CEO power on financial performance of 86 IBs and 86 CBs across 25 countries for the period of 2005–2011 including the 2008 crisis. The study aims to investigate if Sharī'ah supervisory functions, as measured by SSB size, improves IB performance and then enhances shareholders' value. The regression was conducted by employing random-effect GLS method based on secondary data collected from Bankscope and annual report of the banks. The researchers supported the results of Sharī'ah supervision from the regression tests by using a survey with response rate of almost 15% from 11 responses across six countries. The performance was measured by using five measurements, namely, ROIAE (operating profit divided by average equity), ROIAA (operating profit divided by total assets), ROAE (net income divided by average total equity), ROAA, and Tobin's Q. The study concluded that IB performance is affected by SSB, BoD, and CEO power. It is found that the impact of SSB on IB performance is positive, especially when SSBs have a supervisory role. The findings also revealed that SSB size influences IB performance positively during the crisis period. The study concluded that the “multi-layer” CG approach, as applied in IBs, helps them to have a better performance compared to the CBs.

Rahim and Mahat (2015) investigated the effects of risk management (RM) and CG on IB performance. Then they investigated the mediating effects of risk governance (RG) on the relationship between RG and CG and IB performance. They employed cross-sectional sample of 200 IBs across 21 countries for the year 2014. To measure RM, CG, and RG, they used many variables, namely, RM: loan loss provision (LLP), capital adequacy ratio (CAR), total deposit ratio (TDP), GDP, central bank lending rate (CBLR), and inflation (INF); CG: CEO, BoD size, remuneration meeting (REM), external audit (EA), accounting standard (AS), and credit rating agency (CRA); and RG: chief risk officer (CRO), risk committee member (RCM), and SSB member. They found that RM and RG affect performance, and RG has a mediating effect as expected.

Kusuma and Ayumardani (2016) analyzed the efficiency of the CG and its impacts on Indonesian IBs using quarterly data for the period between 2010 and 2014. They used a measurement of CG efficiency consisting of three variables, namely, BoD size, board commissioner size, and SSB size. The Data Envelopment Analysis (DEA) was employed to measure CG efficiency, while regression analysis was used to analyze the relationship between CG and IB performance. The study found that the efficiency level of CG of Indonesian IBs improved significantly during the study period. Additionally, it was found that CG efficiency significantly affects IB performance.

Almutairi and Quttainah (2017) conducted a study to investigate the effects of SSB characteristics on IB performance based on a sample of 82 banks from 15 countries over the period 1993–2014. They found that IBs with SSBs outperform IBs without SSBs and performed better in monitoring management behavior. It was also found that integrating SSBs into IB governance structures improves strategic design and implementation and offers more guidance to directors, managers, and employees. Furthermore, SSB characteristics (size, membership of AAOIFI, cross-membership, and education) are associated with better financial performance.

Mollah et al. (2017) conducted a study to examine whether the differences in CG structures of IBs and CBs have any impact on the risk-taking and performance of the banks by selecting 52 IBs and 104 CBs from 14 countries for the period between 2005 and 2013. Given that an SG system does not exist in the CBs, therefore, the authors developed CG index by combining the BoD and CEO characteristics that exist in the IBs and CBs. They assumed that IBs reflect the Sharī'ah-supervised governance structure as these banks have an SG system. The study found that CG structure in IBs enables them to take higher risks and have better performance compared to the CBs. The authors justified this result by arguing that IBs have different financial contracts than the SSBs and also a different CG structure which influences the risk-taking and performance of IBs. The study suggested that researchers should give more attention on the role of the SSB.

Nawaz (2017a) examined the impact of investments in human capital (HCI) and investments in structural capital (SCI) and CG attributes on market-based performance of 67 IBs during the period 2006–2009. Four CG attributes were investigated, namely, BoD size, BoD composition, the role of duality (CEO power), and SSB size. The findings indicated that HCI have a significantly positive impact on the market value of IBs. The results further reveal that IBs' strategy to rely on long-term human capital accumulation can be seen as idiosyncratic problem-solving knowledge capital. The paper found that both BoD size and role duality have significant positive impact on bank performance. In contrast, it is found that SSB has a negative impact on market value, indicating that the market does not favour larger SSB in the presence of a large-sized governing board.

Nawaz (2017b) also examined the effect of intellectual coefficient of IC (VAIC), human capital efficiency (HCE), structural capital efficiency (SCE), capital employed efficiency (CEE), and SG, as measured by SSB size, on performance of 47 IBs in the GCC region over the period 2006–2010. The study took into consideration the pre-crisis period (2006–2007) and post-crisis period (2009–2010). The findings indicated that higher IC efficiency helps IBs to improve their performance (ROA and Tobin's Q) both before- and after-crisis periods. The study concluded that knowledge resource, i.e. IC, is the main line of defense for IBs against negative shocks. Finally, the study asserted that SG alone may fall short in explaining the growth trends in the Islamic finance industry.

Similarly, Nawaz (2017c) examined the effect of HCI and CG features on the market performance of 47 IBs during the period 2005–2010. Five CG attributes were investigated, namely, BoD size, BoD independence, SSB size, CEO power, and audit committee size. The study found that HCI has a positive effect on the market performance in the pre- and post-financial crisis period. Further, it was found that BoD size and CEO power have a significant positive impact, while the SSB size has the opposite effect on market performance. Overall, the analysis suggested that the financial crisis may have further spurred the impact of investments in human capital on the market performance.

Quttainah et al. (2017) investigated the impact of CG on the financial performance of 34 IBs and 607 IB-year observations across 15 countries, with a specific focus on their SSB. They found that IBs with SSBs embedded into their governance structures outperform those without such integrated boards. Additionally, it was found that SSB characteristics, including size, interlocks, and education affect the financial performance of IBs with such boards. The study concluded that SSBs provide tighter monitoring and control, as well as more advising and counselling, compared with IBs without dedicated SSBs. In short, the study confirmed that SSBs benefit IBs' shareholders by complementing corporate boards and thus mitigating agency problems and agency costs.

Recently, Ajili and Bouri (2018) examined the impact of CG on the performance of 44 IBs from GCC countries for the period 2010–2014. The findings indicated that IBs in GCC countries give more attention to the effectiveness of SSB as compared to the other CG mechanisms. The study shows that there is no significant impact of CG on IB performance in GCC countries. As the authors argue, the potential reason is that good CG of IBs in the GCC countries was not oriented to maximize the performance of shareholders. Furthermore, they concluded that the role of most SSBs in GCC IBs is advisory as compared to those boards that have a supervisory role. However, the study suggested that regulatory authorities in the GCC countries should improve CG practices.

Farag et al. (2018) examined the impact of dual board structure (BoD and SSB) on the performance of 90 IBs from 13 countries. They also examined how BoD size and SSB size are determined. The authors employed a fixed effects model and GMM estimation to analyze the data. The findings indicated that SSB size is related positively to the performance of IBs. In addition, a weak positive impact for the BoD size on performance is recorded. On the other hand, the study concluded that IBs' size and age affect boards' size (BoD and SSB) positively.

Hakimi et al. (2018) examined the effects of BoD and SSB on the performance of 13 IBs from Bahrain for the period of 2005–2011. Based on panel data analysis and the GMM technique, they found that BoD duality, BoD size, and SSB size are the corporate boards' characteristics affecting the performance of Bahrain IBs positively. In contrast, the BoD independence and SSB expertise in finance and accounting do not have any significant impact on the performance.

Mezzi (2018) examined the impact of CG mechanisms on the performance of IBs by employing efficiency as the performance measurement. The study found a positive and significant impact of BoD size, BoD independence, and the existence of centralized SG model (CSGM) on the efficiency of IBs. A positive and significant relationship was also found between concentration of ownership and the efficiency of IBs although it is a weak relationship.

Nomran et al. (2018) examined the effects of SSB characteristics on IBs' performance in Malaysia being a country that applies the most extreme intervention of regulatory agencies (pro-active model). The study employed a sample of 15 Malaysian IBs for the period 2008–2015 using the GMM as estimator. The results revealed strong support for a significant association between SSB size, doctoral qualification, change in the SSB composition and performance. In addition, the study supports the view that SSB with cross-membership and reputation are crucial in improving the performance of IBs.

Lastly, Zeineb and Mensi (2018) examined the effect of CG on efficiency and risk of 56 GCC IBs during the period 2004–2013. They included five CG variables, namely, SSB size, CEO duality, institutional, private, and foreign ownership. The findings indicated that implementing rigorous CG structures correlate with higher efficiency levels. Moreover, it was found that the governance structure of IBs allows them to take higher risk to achieve a high efficiency level. Furthermore, the findings show that IB efficiency and risk are positively related.

4.1.1 Critical analysis of the above empirical studies

Table II provides a summary for the above-mentioned empirical studies that investigated the impact of SSB on IBs' performance. As Table II presents, most of these studies suffer from some limitations that suggest a need for more empirical analysis. Empirical studies in the field of SSB and performance of IBs is important as it would support regulators and related authorities across jurisdictions with suggestions on improving the current SG practices.

4.2 Theoretical studies on the impact of SSBs on IBs' performance

There are, however, at least two theoretical studies that provide a theoretical justification for the relationship between the SSB and IB performance (see, Ghayad, 2008 ; Mohammed and Muhammed, 2017b ), while the third study is conducted based on qualitative method (see, Ullah and Khanam, 2018 ).

Ghayad (2008) conducted a study to explore how CG can influence IB performance based on case studies from one country only (Bahrain) without providing any empirical evidence. The results revealed that managerial factors play an important role in affecting the performance of IBs besides internal factor such as the financial ratios. Moreover, IB directors are subjected to the governance of the BoD and additional crucial governance of the SSB. The study confirmed that it is necessary for the SSB members to be qualified in finance and economic fields. The study suggested that Investment Account Holder (IAH) should be given seats in the board of IBs in order to enhance the CG. The main limitation of the study is the absence of empirical evidence to support the argument.

Mohammed and Muhammed (2017b) also conducted a study to examine the AGT and the SKT from the perspective of the Islamic principles. To do so, they adopted a critical review method which takes into consideration presenting important theories and comparing those theories with an Islamic perspective. The paper highlighted the important discussion on the difference between ordinary theories to explaining CG and Islamic perspective. The paper browsed into whether the SSB fits with the AGT by explaining the AGT and how it differs from the Islamic banking concepts. The paper involved an analytical review on SKT and presented a critique and the rationale as to why there is ample room for the SSB to be considered fit with the SKT, as the SSB is an independent body influencing the IBs.

Finally, the study of Ullah and Khanam (2018) linked the SSB to the performance of IBs but based on qualitative method. They investigated the impact of Sharī'ah compliance on the financial performance of a bank, i.e. Islamic Bank Bangladesh Limited, as a case study. To address this question, the authors conducted interviews with related parties such as financial analysts and executives of regulatory bodies. The findings of the study asserted that the Sharī'ah compliance processing in the banks positively related to the outstanding financial performance as the level of Sharī'ah compliance is the dominant instinct in acquiring a leading position. However, the limitation of the study is that it focused only on one bank coupled with the absence of quantitative evidence.

However, the main limitation of the above theoretical studies is the absence of empirical evidence to support the argument.

4.3 General studies of Sharī'ah supervisory function, issues, and practices

The above section discussed the existing empirical and theoretical studies that linked SSB to IB performance based on the study objective. As explained above, the majority of these studies have some limitations that suggest a need for more empirical analysis and then can be recommended for future research. However, before suggesting the research areas for future studies in light of the above-mentioned critical review, it seems important to explore any other important related issues on SSB by reviewing the existing theoretical studies of Sharī'ah supervision in IBs as a whole. This would help in identifying important issues that require more empirical support for future research besides the weaknesses that have been discovered in the above-reviewed literature as explained in Table II . These studies are related to the Sharī'ah supervisory function, issues, and practices.

Several studies have discussed the CG from an Islamic perspective, current SG practices and issues, challenges of good SG, different SG models and systems across jurisdictions (see, e.g., Grais and Pellegrini, 2006a ; Grais and Pellegrini, 2006b ; Hasan, 2009 ; Nathan Garas and Pierce, 2010 ; Nathan, 2010 ; Hasan, 2011 ; Abdullah Saif Alnasser and Muhammed, 2012 ; Nathan Garas, 2012a , 2012b ; Grassa, 2013 ; Hamza, 2013 ; Grassa and Matoussi, 2014b ; Ayedh and Echchabi, 2015 ; Sulaiman et al. , 2015 ; Grassa, 2015 ).

However, some of these studies are descriptive (see, e.g., Hasan, 2011 ; Grassa and Matoussi, 2014b ), while some other studies are empirical (see, e.g., Nathan, 2010 ; Nathan Garas, 2012a ). Despite the last two studies being empirical, they only focused on the SSB performance and function, and they did not link the SSB to the bank performance. The following part discusses some of these studies, highlighting the most important issues on the SG practices.

Grais and Pellegrini (2006a) examined the challenges facing SG regulations in ensuring Sharī'ah compliance activities in IFIs across 11 countries. Particularly, the study focused on the challenges facing SSBs at institutional and national levels in conducting their roles. The findings revealed that SSBs are the most important CG instruments in ensuring Sharī'ah compliance in IFIs and enhance their stakeholders' confidence. In addition, SSBs suffer from many challenges that affect their performance such as the members' independence and the confidentiality of banks' information. Furthermore, there is a lack of qualified scholars who have enough knowledge in finance besides the Sharī'ah. The study suggested that it is better for the SSBs in IFIs to have consistent opinions.

Moreover, Grais and Pellegrini (2006b) provided another analytical study on the CG practices for 13 IFIs in 16 countries. By comparing the SSB disclosure score across the IFIs, the study concluded that IFIs have weak disclosure pertaining to SSB background, SSB fatwas , and responsibilities. The study also found that there is a need for more competent and independent SSBs in IFIs.

In an attempt to explore the differences in the SG regulatory systems across jurisdictions, Hasan (2009) examined the SG systems in Malaysia, GCC countries, and the UK as these countries reflect different legal environments (mixed, Islamic, and the Western). By comparing the different frameworks of SG in different environments, Hasan (2009) found that countries can be classified from SG regulatory perspective into regulated and unregulated. More specifically, countries can be classified based on the degree of intervention of regulatory agencies into five groups, namely, reactive, passive, minimalist, pro-active, and interventionist. The findings of the study revealed that the regulatory SG of Malaysia is very strong as compared to the other systems in the UK and GCC countries. It was recommended that countries should have a clear legal framework and a sound SG system.

Another study on SSB function of IFIs is by Nathan Garas and Pierce (2010) . This study investigated the significance, objectives, and roles of SSB in IFIs by reviewing many theoretical studies. The findings revealed that SSB is the most important instrument to ensure Sharī'ah compliance in IFIs. The study provided some suggestions which could improve the performance of Sharī'ah supervision. These suggestions include the issuance of specific regulations about the selection of SSB scholars and controlling the SSB cross-memberships by the regulatory authorities. Adding to that, the IFIs should apply the AAOIFI standards in their practice and operation. To ensure a more independent SSB, the authors suggested that the position of SSB should be located under the shareholders and not under the BoD. They confirmed that SSB should have more knowledge in financial, economic, and commercial fields.

Nathan (2010) empirically evaluated the function and performance of SSB in IFIs of the GCC countries. In undertaking his study, data were collected from 219 IFIs in 2009 through a questionnaire as his research tool. The study examined the impact of five explanatory variables on SSB performance. These five factors are the number of SSB meetings, the SSB qualification, the evaluation of SSB scholars, the performance of the Sharī'ah control department, and the position of SSB in the institution. The findings indicated that the first three variables affect the SSB performance positively, while the fourth variable affects it negatively. For the last variable, the study did not find any significant impact.

By using a survey as his research instrument, Hasan (2011) conducted a descriptive study in 2009 to investigate SG practices in the UK, Malaysia, and the GCC countries by taking into consideration the features of good CG that consist of independence, competency, transparency, disclosure, and consistency. The survey findings indicated that there are many differences in the SG practices across the countries such as only few IFIs adopt the AAOIFI standards. Most IFIs have male scholars in their SSBs. The findings revealed that Malaysia has a strong SG framework compared to the UK and the GCC countries. The study concluded that the current SG practices should be enhanced and improved in terms of the regulatory framework, independence, and competence of SSBs and disclosure practices.

Another empirical study on SSB function in IFIs is conducted by Nathan Garas (2012a) . This study examined the relationship between six explanatory variables and the conflicts of interest inside the SSB. These variables are the SSB executive position, the SSB reward, the relationship between the BoD and the SSB, and the SSB membership in Islamic funds, in issuers of Sukuk , and in capital markets. The researcher used a mail questionnaire which was distributed to 219 IFIs in the GCC countries in 2009. The study found that there is no significant impact of reward and SSB membership in capital markets on the conflicts of interest while the other variables have significant impact.

Grassa (2013) examined the SG systems in IFIs and attempted to explore the challenges affecting the implementation of sound SG practices. The study found many differences in the SG practices and models across jurisdictions. Furthermore, the degree of regulatory authorities' intervention differs from one jurisdiction to another. The study revealed that the current SG practices should be improved for a sound SG is important to enhance the credibility of the IFIs. The author concluded that the growth of the Islamic finance industry can be negatively affected if IFIs fail to apply strong SG.

By conducting qualitative analyses, Hamza (2013) examined how the differences in the SG models [Centralized (CSGM) and Decentralized (DSGM)] in Malaysia and the GCC countries can influence the effectiveness of SG. After comparing the CSGM and DSGM models, the study revealed that the CSGM is better for the IBs compared to the DSGM. The CSGM provides uniformity, consistency, and harmonization of the Sharī'ah opinions ( fatwas ) across IBs; therefore, it can enhance the independence of SSB and decrease the potential conflicts between scholars. In contrast, the study revealed that obtaining consensus in the Sharī'ah opinions and then controlling the conflict of interest is difficult with the DSGM for IBs. However, the study does not provide any empirical evidence to support the discussion.

Grassa and Matoussi (2014b) compared the CG characteristics and governance structure of IBs in the GCC and Southeast Asia countries by using descriptive analysis for 83 IBs for the period 2002–2011. They found several differences in the CG structure between the IBs in the GCC and the Southeast Asian countries. For example, blockholders dominate IBs in the GCC countries, and their number seems to be higher in the IBs of the GCC compared to those in Southeast Asia. IBs in Southeast Asian countries have higher SSB size and SSB women members as compared with the IBs in GCC countries. On the other hand, IBs in the GCC countries have higher SSB cross-membership and SSB members with experience in finance and economic fields than that of the IBs in Southeast Asia. The study concluded that such differences belong to the differences between the GCC and the Southeast Asian countries in their economies, cultures, legal, and regulatory frameworks. The findings of the study indicated that the current CG of IBs still needs more development and standardization.

More recently, Grassa (2015) conducted a critical analysis to examine the SG systems of IFIs across 25 Organization of Islamic Cooperation (OIC) countries. The study found that the majority of the OIC countries still have weak SG systems and regulatory frameworks. These weaknesses lie in the functions and the responsibilities of the SSBs at the national and institutional levels. To enhance the SG practices, the author suggested that it is very necessary for the central authorities to play a more important role in providing good SG practices.

The above section has thoroughly highlighted previous studies on the current SG practices, challenges of good SG, different SG models and systems across jurisdictions. Table III depicts the essence of each study and highlights the important issues on SG and the limitations of the studies. Since the most common and prominent setbacks of the studies reviewed is the absence of empirical investigations, future research should provide empirical evidence to examine the aforementioned issues.

5. Recommendations for future research

In light of the above discussion, there are some important points that can be recommended for future research on SSB and IB performance studies. These points are related to the SSB characteristics' variables, issues, analytical methods, and measurements of variables.

5.1 SSB characteristics' variables

The body of knowledge is in dire need for empirical evidence on how SSB independence can affect the performance of IBs. Adding to that, the question of how SSB remuneration [6] can affect the performance of IBs needs to be addressed together with its effect on that of the BoD (see Bakar, 2016 ).

Under the two different SG models (CSGM and DSGM).

In regulated and unregulated jurisdictions.

In jurisdictions that adopt extreme or slight degree of agencies intervention in SG practices.

In jurisdictions that control the cross-memberships for Sharī'ah scholars versus those that do not control it.

When the SSB position in the organization structure of a bank is located under the shareholders as compared to its position under the BoD or executive management.

There is also a need for more empirical studies to examine whether the effect of SSB and its characteristics on IB performance differ during crisis and non-crisis periods, especially the financial crisis of 2008. This would help IBs to adopt an appropriate SSB structure that will enhance their performance. Furthermore, there is a need for more empirical studies to examine the relationship between the BoD and the SSB in IBs and how such a relationship can affect the performance, risk-taking, and disclosure practices of the IBs. Highlighting this issue is very important as the relationship between the BoD and the SSB is still ambiguous [7] , requiring an in-depth analysis.

5.3 Analytical methods

Future studies should control for endogeneity issue. One of the recommended methods to solve this issue is using GMM estimator (see, e.g., Nomran et al. , 2018 ).

Future studies may employ Structural Equation Modeling (SEM) in the governance and performance studies in general. This method allows the inclusion of unobserved influence in the model through latent/unobservable variables which can be measured using many observed variables. In the SSB context, it would help in measuring the SSB influence, as unobserved variable, using the SSB characteristics that may determine how effective the SSB conducts its task, as observed variables. Roemer (2016) highlighted in details why SEM can be suitable for panel data studies.

5.4 Measurements of variables

The performance of IBs should be measured using the Sharī'ah approach, and Zakat ratios have been suggested as alternative measurements of performance, e.g. Zakat on assets and Zakat on equity (see, e.g., Mohammed and Muhammed, 2017a ; Nomran and Haron, 2019 ).

There is a need to create a suitable measurement for SSB independence as there is a lack of studies that have provided such measurement besides ignoring the impact of this variable on performance, risk, and CSR of IBs as a whole. Recently, however, Musleh Alsartawi (2019) measured SSB independence using a single proxy as binary variable: “zero” if the SSB member has direct or indirect relationship with the IB; “one” indicates otherwise. Despite this, it is believed that such measurement alone is not enough to measure the SSB independence, therefore this study suggests using a new score to measure SSB independence involving some important items that may reflect the independence of SSB [8] .

SSB total effect should be measured using an SSB measurement that can reflect the total effect of SSB based on the most important characteristics that affect SSB performance. This measure can be either a score/proxy [9] that can be used for studies which employ GMM and other panel data methods. Otherwise, a construct (latent variable) for studies which employ SEM model as discussed above can be employed. In both cases, the validity and consistency of the measurements have to be examined.

6. Conclusion

The purpose of this paper is to identify the literature gap in the study of SG, as represented by the SSB, and its impact on IB performance. Through a systematic literature review, 21 papers were selected and analyzed. It was found that although many studies have been conducted on the SG in IFIs, a majority of these studies are theoretical, and they have been carried out to examine the function of SSB. In contrast, the empirical studies on the SG are limited in general as well as on the relationship between the SSB and the performance of IBs in particular.

However, the existing research studies suffer from some limitations, suggesting an urgent need for more empirical analyses. Because of these limitations, the literature cannot provide meaningful and relevant suggestions to the related parties for the development of the SG practices.

Hence, this paper suggests that future research should empirically examine how the SSB independence and remuneration can affect the performance of IBs. There is a need for more empirical studies to examine whether the effect of SSB and its characteristics on IB performance can be moderated by the differences across jurisdiction in their SG models (CSGM and DSGM), the degree of agencies intervention in SG practices, controlling the cross-memberships of scholars, and SSB position in the organizational structure of IBs. Further, future research should examine whether the effect of SSB and its characteristics on IB performance differ during crisis and non-crisis periods, especially the financial crisis of 2008. This would help IBs to adopt the appropriate SSB structure that help in enhancing their performance, hence value creation.

In terms of the analytical methods, future studies should control for endogeneity issue by using a GMM estimator. In addition, they may employ SEM in the governance and performance studies in general due to its advantages. Finally, the performance of IBs should be measured by using a Sharī'ah approach such as Zakat ratios. SSB total effect should also be measured using SSB measurement that can reflect the total effect of SSB based on the most important characteristics affecting the SSB performance either using a score or proxy for studies that employ panel data methods or a construct (latent variable) for studies that employ the SEM model. Regarding the available databases, there are at least two important databases that can be used by researchers in this research area, i.e. Orbis Bank Focus (Orbis) database and Zawya database. Orbis database provides data about banking activities, while Zawya database provides data about firms including governance and Sharī'ah scholars in IFIs.

This study, however, has its limitation. First, it was restricted in the common features of Scopus search, e.g. the choice of number and type of keywords and the resulting selection of studies. Second, the review was limited to the peer-reviewed papers, meaning other materials such as books, magazines and working papers were excluded.

7. Implications for research and practice

Although many studies exist on CG in IBs, research on Sharī'ah supervision is still very limited, especially in investigating the impact of SG mechanism on IB performance. Thus, the analysis undertaken in this paper aims to address the literature gaps on the effect of SSB on IBs' performance and the important practical issues on SG practices. This study therefore serves as a guide for researchers and academicians in research related to this important area besides other research and regulatory authorities, e.g. Central banks and Islamic international autonomous non-for-profit organizations, e.g. AAOIFI and the Islamic Financial Services Board (IFSB).

Researchers and academicians may benefit from the attempt to prove that AGT can be used in analyzing how SG mechanism (SSB) mitigates agency problems through moral monitoring and then enhance IBs' performance. Additionally, they may benefit from the attempt to prove that many CG theories, e.g. AGT and SKT, can be used in analyzing how SSB characteristics can improve SSB effectiveness and then enhance IBs' performance.

This study reviews the existing literature on the relationship between SSB and IB performance. The authors suggested the important literature gap that still needs to be empirically examined in different themes of the topic. Thus, it is expected for academic research to benefit from the attempt to explore new related variables to SSB and its characteristics, e.g. SSB independence and remuneration which can enhance IBs' performance besides taking into account the differences in regulatory environments across countries. This would help in developing a SG framework based on the fact that SG practices differ across countries, and then, the strength of SSB performance relationship is affected by such differences.

Regarding the methodology, this study also encourages researchers to adopt more appropriate and robust analytical methods in analyzing the relationship between SSB and IBs' performance, e.g. controlling for endogeneity issue using GMM and employing SEM to construct latent variables. Furthermore, the study suggests using suitable measurements to measure the related variables such as Sharī'ah approach to measure IBs' performance and using score/proxy to measure the total effect of SSB, rather than the selective SSB variables as currently practice in SSB research. In addition, this study suggests a new score to measure SSB independence. Finally, the study suggests employing a new measurement for SSB remuneration which takes into account consumer price index (CPI) to reflect the differences in prices across countries.

In terms of practical implication, this study provides an important summary for shareholders of IBs, policy makers, regulators, and related authorities across countries, to understand how to enhance the performance of IBs with enhancement on SG. In addition, reviewing empirical studies in the field of SSB and performance of IBs are very important to these parties as it would provide them with suggestions on improving the current SG practices for the betterment of the IB industry worldwide.

Data collection and analysis process

Summary of the final papers collection based on authors, nature of studies, and journals

Summary and critical analysis of empirical literature on SSB effects on Performance of IBs

Notes: Based on the literature, the most common terms of each variable (dependent and independent) were used. Zakat terms also were used to measure IB performance based on the Sharī'ah approach (see Mohammed and Muhammed, 2017a ; Nomran and Haron, 2019 ); therefore two separate terms (Zakat and Zakah) were used as the literature uses both terms

Risk means a probability or threat of loss.

The duality of governance of firms is common in some countries, e.g. non-executive directors in Germany, the Netherlands, China, and Indonesia supervise executive directors in two-tier boards as mentioned by Bezemer et al . (2014) . However, there are different views regarding the effectiveness of this model. While some believe that such a model is good, some others such as Bezemer et al . (2014) argue that under this board model, challenges might be particularly difficult to address due to the formal separation of management boards' decision management from supervisory boards' decision control roles.

Performance of banks means a capacity to generate sustainable profit ( Ishtiaq, 2015 ).

According to Abdelsalam et al . (2016) , religiously oriented organizations apply strict moral constraints. They assert that the opportunistic behavior of managers may be suppressed within an environment that incorporates organizational moral values; hence the religious adherence of IBs implies a possible reduction in agency costs through organizational moral accountability constraints. As they mentioned, the concept of Islamic accountability extends the moral responsibility of the managers and board members of IBs beyond conventional legal liability.

Most papers were excluded in this stage as they are irrelevant.

It can be measured as log of annual SSB remuneration (see, e.g., Grassa and Matoussi, 2014b ). For robust check, especially if the study covers IBs across countries, SSB remuneration can be adjusted to reflect the differences across countries in prices and amenities by dividing total remuneration by the consumer price index in each country following literature (see, e.g., Winters, 2009 ).

To the best of our knowledge, to date, there are still no studies attempted to address this empirically.

“1” if the shareholders only appoint SSB scholars; “0” otherwise.

“1” if remuneration of SSB scholars is solely decided by shareholders; “0” otherwise.

“1” if the SSB position in the organization structure of a bank is located under the shareholders; “0” otherwise.

“1” if the SSB attends the BoD meetings to discuss the religious aspects of their decisions; “0” otherwise.

For example, the SSB score was used by many studies ( Farook et al ., 2011 ; Rahman and Bukair, 2013 ; Nomran and Haron, 2019 ). This score sums the value of the dichotomous characteristics of the SSB, which takes a score bounded by 0–1 (SSB size: “1” for banks with 5 or more members and “0” otherwise), (SSB cross-membership: “1” if at least one SSB scholar with cross-membership and “0” otherwise), (SSB educational qualification: “1” if at least one SSB scholar with PhD and “0” otherwise), (SSB reputation: “1” if at least one SSB scholar sits on the SSB of AAOIFI and at least two Sharī'ah board memberships and “0” otherwise) and (SSB expertise: “1” if at least one SSB scholar with experience and knowledge in the field of accounting/economic/finance and “0” otherwise).

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Corresponding author

About the authors.

Dr. Naji Mansour Nomran is a Lecturer at the Department of Finance and Banking, Faculty of Administrative Sciences, Thamar University, Yemen, since 2006. He obtained his PhD in Islamic Banking and Finance from the International Islamic University Malaysia (IIUM) in 2019 with Best Student Award for PhD (IIUM) besides Achievement Award for Excellence in PhD (IIiBF), and he holds a Master of Science in Finance from the same university in 2014. In 2005, he received his bachelor’s in Finance and Banking from Thamar University, Yemen, with excellent grade and was ranked as the first student of the batch. His research interests include Islamic banking and finance, corporate governance, risk management and performance. He has published several papers in international peer-reviewed journals.

Dr. Razali Haron is currently an Associate Professor at the International Islamic University Malaysia (IIUM) Institute of Islamic Banking and Finance, Director of IIUM Sharī'ah Advisory Services Sdn. Bhd., member of investment sub-committee at IIUM and former Deputy Dean (Research and Publication) of the Institute. Prior to joining the academic, he has acquired vast experience in the corporate sector for more than 13 years. His extensive experience in the corporate sector covered brokerage dealings, fund management, unit trust and capital market. His research areas mainly cover corporate governance, Islamic banking and finance and firm performance. He has published extensively in international peer referred journals and edited several books. His latest edited book on banking and finance is expected to be published in 2020. Currently he is the chief editor for Journal of Islamic Finance and associate editor for Capital Market Review. He was the guest editor for Al-Shajarah (WoS-indexed) Special Issue in Islamic banking and finance for 2017, 2018 and 2019.

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E-commerce and islamic finance: harmonizing traditions in the middle east.

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Benevolent by nature, Kartik is a serial entrepreneur and a pro skydiver. He lives life king-size. Founder & MD of Smartt.Studio .

A combination of Islamic finance principles and e-commerce practices has altered the way people do business in the geographic center of the Middle East, where tradition confronts invention. This combination reflects the region's dedication to preserving its history while adjusting to the emerging digital landscape.

Islamic finance is a system of financial principles guided by Shariah that prohibits certain activities, such as charging interest, known as "riba," and engaging in excessive uncertainty, known as "gharar." Instead, it is based on the principles of equity, participation and ownership, according to the International Monetary Fund .

As an entrepreneur who founded an e-commerce enablement business based in the Middle East, I'm familiar with the region's business landscape, and I have personally navigated the principles of Islamic finance in my ventures. This firsthand experience has provided me with insights into the intersection of tradition and innovation in the region's business practices.

The Union Of Tradition And Technology

The Middle East, often recognized for its long history and fundamental Islamic values, has embraced new technology, notably in the realm of internet commerce. In recent years, the region has experienced growth in the e-commerce industry. People are increasingly turning to internet platforms for purchasing, conducting transactions and accessing diverse services. From my perspective, this technology vault has not only simplified daily living but also created new opportunities for enterprises and entrepreneurs.

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But what I believe is more interesting is how Islamic banking principles are infused into the digital world. This method is consistent with the region's cultural and religious values, making sure modern achievements coexist with traditional beliefs.

Understanding Islamic Finance Principles

Because Islamic finance bans riba, or interest, this has significant consequences for financial transactions, and e-commerce is certainly not an exception. To comply with these ideals, some Shariah-biddable financing choices that avoid interest-based plans include:

• No-interest financing: In the Middle East, there's an interest-free financing structure known as " Murabaha " (or cost-plus financing). The seller completely reveals the pricing and markup of the product in this model, allowing customers to make sensible choices. This open approach is consistent with Islamic finance norms, which I believe can help increase consumer trust.

• Participation in profit and loss: Islamic finance stresses risk-sharing and profit-sharing . In the context of e-commerce, this could refer to the practice of entrepreneurs establishing partnerships with investors or financial institutions based on profit-sharing agreements. This means that businesses and investors mutually share the risks and rewards associated with a particular venture or transaction.

• Asset-backed lending: Asset-backed financing is a technique that involves getting financing that's backed by a tangible asset. This method also corresponds with Islamic finance, as "financing must be linked to real assets," according to the World Bank .

Electronic Commerce And Digital Banking

Islamic banks and financial technology companies offer a variety of online services that address the financial requirements of individuals as well as companies, and I see opportunities for further innovation:

• Digital wallets: Digital wallets are becoming increasingly popular , and, from my perspective, Islamic digital wallets could be developed to offer consumers the convenience of online payments while ensuring Shariah-compliant deals. These wallets would need to stick to strict security norms, making them a secure result for those seeking to align their financial exertion with Islamic beliefs.

• Mobile apps: Mobile apps are the "preferred channel" for Middle Eastern consumers to access digital services, according to research by McKinsey . To meet the requirements of Islamic finance, I've seen some apps incorporate special features such as Zakat calculators and charitable payment options to help users fulfill their religious obligations. For example, in 2021, Smart Dubai and the UAE Zakat Fund launched a Zakat payment service on DubaiNow, a government app, according to Gulf News .

E-commerce Platforms And Shariah Compliance

Middle Eastern e-commerce platforms and brands can incorporate features and take precautionary actions to adhere to Islamic finance principles.

• Product lists: Sellers can mark their goods that are Shariah-compliant on e-commerce sites. This allows customers to quickly identify and select goods that align with their religious beliefs.

• Item descriptions: Islamic banking puts a strong emphasis on accountability. E-commerce brands can offer in-depth details about goods, their costs and the available maintenance options. This can help customers make well-informed judgments that correspond with their beliefs.

• Payment gateways: E-commerce platforms such as PayHalal provide payment services that follow Islamic financial laws. These specific portals can give customers peace of mind in their financial relations by ensuring that all payments correspond to Shariah rules.

While the perpetration of Islamic banking principles into e-commerce gives tremendous possibilities for Middle Eastern enterprises and customers, it also creates challenges. A refined approach is required to achieve the right balance between invention and heritage. Sustaining Shariah-biddable e-commerce platforms, financing choices and digital services demands perpetual attention and resilience.

In the Middle East, e-commerce and Islamic finance aren't contrary forces; rather, they're correlative principles that constitute a dynamic terrain. The region's acceptance of technological invention has resulted in a distinct and flexible ecosystem that is favorable to both businesses and consumers. As the globe observes this cohesive cooperation, I believe the Middle East offers an illustration of how tradition and technology can live together while serving the different conditions of a culturally rich and digitally advanced society.

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Fintech in islamic finance literature: A review ☆

Muneer m. alshater.

a Faculty of Business, Philadelphia University, Amman, Jordan

b Institute of Business Administration, Karachi, Pakistan

Indri Supriani

c Department of Economics, Faculty of Economics and Business, Universitas Brawijaya, Indonesia

Mustafa Raza Rabbani

d Department of Economic and Finance, College of Business Administration, University of Bahrain, Zallaq, Bahrain

Associated Data

Data included in article/supp. material/referenced in article.

This study reviews Islamic FinTech research development from 2017 to 2022. The study adopts a hybrid approach combining bibliometric and content analysis to reveal the current research trend of Islamic FinTech research. Using the Scopus database, we retrieve 85 documents and analyze them using RStudio and VOSviewer. The content analysis categorizes the research output in Islamic FinTech into four distinct streams. The study finds potential for cointegrating FinTech into Islamic finance to benefit the unbanked and small-medium-size businesses, the adoption of FinTech in Islamic finance will also help the government improve financial inclusion, conquer financial crises, such as COVID-19, and achieve SDGs for a sustainable nation. However, the lack of legal regulation and the lower financial literacy becomes the primary obstacle to the development of FinTech in Islamic finance.

Islamic FinTech; Crowdfunding; Payments; Blockchain; Cryptocurrency; P2P lending.

1. Introduction

FinTech ( Financial Technology ) is an emerging field within finance. It refers to the use of technology to enable incremental or drastic improvements in financial services ( Alshater and Othman, 2020 ; Thakor, 2020 ). The Financial Stability Board (2019) defines FinTech as “Technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services”. Islamic FinTech is no different else than being compliant with shariah and a special focus on Islamic compliant institutions or Islamic countries ( Alshater and Othman, 2020 ). The term “Islamic” stands to differentiate between conventional and shariah-compliant FinTech operators. This differentiation is rational due to the many differences in FinTech business models between the two systems. For example, profit interest-based P2P lending, one of the most thriving business models in FinTech, is fundamentally rejected in the Islamic finance system due to ( riba ) being a primary prohibition in the system.

As Islamic Finance is now a $3 trillion industry with growing demand, this puts a context of what Islamic FinTech might witness soon, given the industry is already on the rise ( Islamic Finance Development Report, 2019 ). Thus, studying the emerging industry dynamics becomes more critical as FinTech aims are in line with the primary shariah objectives for financial transactions. According to Thakor (2020) , FinTech aims to unveil cheaper ways to overcome financial contracting frictions and lower the cost of financial services to improve consumer welfare; in a similar vein, D. K. C. Lee and Teo (2015) defined FinTech's five principles: low-profit margin, light asset, expandability, innovation, and easy compliance, which all are in line with shariah principles.

Fintech history starts as early as 1866, Consumer International (2017) divided the FinTech developmental period into three phases. The first phase between 1866 to 1967 was marked by trans-Atlantic cable and telegraph as a means of financial communications. Between 1967 and 2008, the second phase saw the emergence of online banking and ATMs where financial institutions started incorporating information technology into financial products and services. The third phase, from 2008 onwards, is marked by the use of high-tech by newer entrants with different characteristics, creating a new competitive landscape for financial institutions. Palmié et al. (2020) state that the emergence represented an industry-wide system-level change that led to the inception of new actors and the convergence of competencies. This intensive rise of FinTech at the industry level, especially in major economies such as the US, UK, China, and Germany, motivated researchers to investigate FinTech related topics from different dimensions. From the conventional perspective, the literature is growing at a fast pace, so do various types of reviews ( Al-Sartawi et al., 2022 ; Li and Xu, 2021 ; Sangwan et al., 2020 ; Suryono et al., 2020 ; Utami et al., 2021 ), in contrast from Islamic perspective the pace is much slower, which motivated us to conduct this study, as few reviews tried to catch up the progress including non-directly related topics e.g ( Rabbani et al., 2020 ). Our study is more comprehensive in nature and scope as it focuses on reviewing all relevant and published articles tackling compliant innovative technological applications concentrating on Islamic financial institutions.

This study makes several contributions to the existing literature. (1) It is the first study to illustrate the basic characteristics of publications in the Islamic FinTech domain, including the annual progress, the most influential articles, and keywords co-occurrence, beside the development of the research streams over the years. (2) Further, the study does a comprehensive overview of the research publications in Islamic FinTech and each category under it. (3) The study adopts a hybrid method combining bibliometric methods and content analysis to review 85 studies from 2017–2022 (4) Finally, it provides an overview of the current special environment of Islamic FinTech and the challenges faced by besides providing suggested future research directions.

The remainder of this paper is organized as follows. Section 2 introduces the data collection and research methodology. Section 3 presents the bibliometric results. Section 4 presents the content analysis. We conclude the paper in section 5 .

2. Review methodology

2.1. methodology and study framework.

The study uses various methods such as bibliometric analysis, content analysis and SLR to provide a Quanti-qualitative perspective of Islamic FinTech research development. Bibliometric is a quantitative analysis that enables the researchers to discover the emerging trend of collaboration networks and identify the intellectual structure of a certain field of study ( Liu et al., 2020 ; Donthu et al., 2021 ). This method is useful for mapping the Islamic FinTech research based on statistical analysis. Moreover, this study uses content analysis and SLR as it allows the researcher to categorize the literature, analyze the gaps in existing studies, and offer recommendations for the research topic ( Paul and Criado, 2020 ). The SLR used is based explicitly on the Preferred Reporting Items for Systematic reviews and Meta-Analyses (PRISMA), a well-suited method to synthesize the research finding from the most impactful selected studies in this research field. We follow the PRISMA guideline proposed by Moher et al. (2009) who divided PRISMA into four main steps: identification, screening, eligibility assessment, and identification of the findings. This method assure transparency on how the data is collected and the final number of papers included for review. We employ RStudio software to achieve the following research objectives (RO1.1 and RO1.2), whereas (RO1.3 and RO2) are addressed using VOSviewer software. Following are the outlined objectives:

To evaluate the current publication trend of Islamic FinTech.

as answers to RO1 are rather quantitative in nature, hence, further sub objectives are categorized as follow:

• RO1.1. To present the performance of publication and citation annually.
• RO1.2. To identify the most influential studies based on the number of citations.
• RO1.3. To investigate the collaboration network globally.

To identify the main research themes from existing studies on Islamic FinTech.

To analyze the primary result and limitations of the selected studies.

To detect research gaps and provide recommendations for future research.

2.2. Data source and collection

This study curated the data from the Scopus database, a well-known and comprehensive database covering various social disciplines including business and finance fields ( Guckenbiehl et al., 2021 ). Alshater et al. (2020) state that the Scopus database contains a greater number of Islamic finance research than other databases such as Web of Science, while it also indexes more well-validated studies than those solely appearing on Google Scholar, EBSCO, or ProQuest. Moreover, several previous review studies on Islamic economics, banking, and finance, primarily relied on Scopus e. g Paltrinieri et al. (2020) , M. K. Hassan, Aliyu, et al. (2020) , and Foglie and Panetta (2020) . Figure 1 shows data collection steps for bibliometrics and SLR with PRISMA. The bibliometrics analysis is used in this study to answer the RO1 and RO2 , whereas SLR-PRISMA is adopted to address the RO3 and RO4 .

Prisma flow diagram showing article selection process.

The first step of collecting the data is the identification of keywords for the data curation process. The vast development of Islamic FinTech literature which spans through multiple disciplines, including technology and religion, resulted in challenges in identifying the right keywords. As Lee and Shin (2018) described, there are six business models of FinTech, including lending, capital market, insurance services, wealth management, payment, and crowdfunding. In detail, Laidroo et al. (2021) identified seven activities of FinTech, including, (1) Payment activity refers to the online and mobile payment model; (2) Deposit and lending activity which covers the crowdfunding model, peer-to-peer lending, microlending, and consumer financing model; (3) Investment management activity which covers Robo-advice, social trading, and automated advice model; (4) Distributed ledger technology activity which covers digital currency and blockchain model; (5) Banking infrastructure activity covering user interface and open banking model; (6) Analytics activity; and (7) Insurance.

Given the consideration of previous explanation, the selected keywords in this study were identified by conducting a pre-simulation to assure that the keywords cover most of the existing studies related to Islamic FinTech. Moreover, the selection of keywords also referred to previous scientometric research by various researchers who tried to cluster the knowledge in this area, for example, Liu et al. (2020) , suggested including the words P2P, crowdfunding, blockchain, cryptocurrency, robo-advisors, and mobile payment, as they are related to FinTech business model.

Guided by the previous literature, therefore, the study applied several important search keywords including, “Fintech” OR “Financial Technologies” OR “Financial Technology” “finance technology” OR “Islamic Fintech” OR “Blockchain” OR “Digital Finance” OR “P2P” OR “P2P Lending’ OR “Credit Scoring” OR “Robo Advisor” OR “Insurenctech” OR “Smart Contract∗” OR “Bitcoin” OR “Crowdfunding” OR “Crypto∗ OR “Financial Inclusion” in the Article Title, Abstract, Keyword. These keywords were further combined with another set of keywords, namely. “Islam∗” OR “ Shariah ” OR “Shari'ah” to represent Islamic FinTech. In result, at the first stage of data curation, we obtain 265 documents. Moreover, as this study strive to investigate the existing studies on FinTech within the Islamic view, we conducted another data search using “Financial Inclusion” in the Article Title, Abstract, Keyword, followed by two search field by using “Islam∗” OR “ Shariah ” OR “Shari'ah”, AND followed by “ fintech” OR “ finance technology ” OR “ financial technologies ” OR “ digital finance ” in the Article Title, Abstract, Keyword, to collect related articles. Thus, at the second stage of data curation, we obtained 11 documents. The data of this study retrieved the data from the Scopus database in February 2022 and resulted in 276 documents.

The second step is data screening. The selected articles from the previous step are filtered based on specific criteria described in Figure 1 . Hence, 159 out of 276 documents were excluded as it does not satisfy our screening criteria; this step leaves 117 potentially relevant studies. Previous SLR studies on Islamic banking and finance, such as Narayan and Phan (2019) , Khan et al. (2020) , and Foglie and Panetta (2020) suggested only including the articles published by highly ranked peer-reviewed journals, measured by an A and A∗ rank indexed by ABDC journal list or two star and above on the ABS list however, due to the limited number of articles in Islamic FinTech published in these outlets, this study relied only on the Scopus database for selecting documents.

The third step is reviewing the articles to satisfy the eligibility of inclusion in the review, by reviewing the full text of the paper. The criterion in this step refers to the article's content where we followed Lundberg et al. (2006) in hiding the article's identity suggestion, including journals and authors' names, to avoid subjectivity in manual refinement, also using the following inclusion criterion: (1) Studies related to Islamic FinTech; (2) Studies discussing the role and impact of Islamic FinTech in business, Islamic economics, philanthropy, banking, stock market, and halal industry; and (3) Studies investigate one of the business models of Islamic FinTech. While the exclusion criterion is: (1) Studies discuss other topics as the study's objectives, while Islamic FinTech has a small part of the study; and (2) Studies that did not offer substantial insights into Islamic FinTech. The full-text analysis has excluded 32 articles from 117, leaving 85 articles for the final evaluation.

The final step is categorizing and summarizing literature findings. In this step, we extracted the substantial findings of previous studies and presented them in tables and discuss them. Moreover, we analyze the research gaps, limitations, and identify the direction for future research, for early career researches in fintech and Islamic fintech.

The Statistical analysis of Islamic FinTech publications is measured using bibliometrics analysis to answer RO1 and RO2. Publication trend is frequently used to present the current development of a discipline and scientific output ( Liu et al., 2020 ). The general performance analysis is presented to address RO1, whereas RO2 is answered by utilizing co-occurrence author keyword and co-word analysis on the article's title and abstract.

3.1. General performance

3.1.1. analysis of the overall growth trend.

This section explains the data utilized in this study. According to our dataset, the first publication related to Islamic FinTech was in 2017. Since then, 85 articles have been published by 52 journals. Moreover, 205 authors have worked on FinTech related articles, out of whom 10 have worked independently, while the rest have collaborated in conducting the research. The collaboration index is relatively high at 2.83 points. Hence, the high percentage of multi-authored documents and collaboration index is associated with the interdisciplinary nature of Islamic FinTech with other disciplines such as business and economics, finance, law, shariah , and information technology.

Figure 2 reflects the yearly trend of Islamic FinTech publications and citations between 2017 to 2022. In terms of citation performance, the trend remained stagnant during 2017–2019, the 85 articles on Islamic FinTech have been cited 332 times. In sum, this study expects that the total publication and citation of Islamic FinTech would significantly increase in the next five years given the increasingly moving average trend and the massive escalation of Islamic FinTech in terms of asset and performance.

The number of growth and trend of published articles and citation 2017–2022.

3.1.2. Analysis of the influential articles

Table 1 present the most cited articles based on the criteria of a minimum of ten citations from the Scopus database. This current study measured the impact of the articles based on global citation. Global citations assess the performance of an article based on the total citations from a variety of disciplines and articles ( Agbo et al., 2021 ). According to Table 1 , the article authored by Mensi et al. (2020) has the highest citations among the articles published by Scopus indexed journals. This study examines the relationship between bitcoin, the Islamic stock market, and Sukuk .

Table 1

Top influential articles on islamic FinTech

Note: GC = Global citation.

3.1.3. Analysis of the collaboration network

Paltrinieri et al. (2020) stated that identifying the co-authorship analysis will help researchers build their research collaboration and result in higher quality papers. It offers a broad and cross-countries perspective. The distance between nodes represents the linkage between the countries, and the smaller distance indicates the higher linkage and the strong relationship between them ( Van Eck and Waltman, 2014 ). Figure 3 describes the research collaboration amongst countries on Islamic FinTech with a minimum of one publication. It also illustrates that the country's collaboration network was divided into five clusters. Malaysia was cited as the centre of collaboration with the United States, Indonesia, Bangladesh, Japan, and Finland's research partnership in the green cluster. This result implies that these countries have published a similar topic of discussion on Islamic FinTech. Furthermore, the short distance nodes between Malaysia United Arab Emirates (UAE) (in the cluster red) indicated that these countries tend to conduct joint research partnerships. Malaysia and the United Kingdom are also present the closer nodes. Thus, the collaboration network between these two countries is of relative strength.

Collaboration network map of countries.

Moreover, the red cluster consists of eight countries with similar topic interests, namely, France, India, Oman, Palestine, Luxemburg, Russian Federation, and UAE. Furthermore, Australia, China, Pakistan, South Korea, the United Kingdom, and Vietnam were found in cluster blue. These countries have a strong connection with Malaysia, Saudi Arabia, and Italy as their research partners. Besides, in the yellow cluster, Canada, Greece, Italy, Malta, and Morocco tend to have a common research topic. Finally, Saudi Arabia, Kuwait, Tunisia, and Bahrain were found in the purple cluster. In conclusion, research related to FinTech and the Islamic finance industry has spread globally and attracted researchers from various countries, including non-Muslim majority countries.

3.2. Research main theme

The most discussed topics in Islamic FinTech research are presented using keyword co-occurrence analysis. The mapping analysis visualises the most common topic based on the co-occurrences of keywords ( Baker et al., 2020 ). Figure 4 . describes the keyword occurrence: author keywords by setting the minimum occurrence of word is two times. Based on the figure, this study confirms that there are four clusters. The most frequently used keywords in the red cluster are FinTech, Islamic finance, Islamic bank, financial inclusion, riba , and customer retention. At the same time, the most widely used keywords are bitcoin, cryptocurrencies, blockchain , gold, Malaysia, smart contract, and COVID-19 in the yellow cluster. In the blue cluster: cryptocurrency, shariah compliance, trust, precious metal, security, system and technology, and SEM become the highly used keywords. Lastly, in the green cluster: Crowdfunding, Islamic crowdfunding, Indonesia, TAM, and SME are the most appear keywords.

Keyword analysis.

Based on the keyword's occurrence, the red cluster is related to the adoption of FinTech in Islamic financial institutions while the yellow cluster mainly examines the correlation between FinTech's products and the Islamic stock market. The studies on the blue cluster cover the studies related to the shariah compliance and customer's trust in FinTech. Lastly, the green cluster analysis of the technology acceptance of FinTech in SMEs.

This study also offers analysis of the trending topics over the years. Van Eck and Waltman (2014) underlined that co-word analysis on the article's title and abstract could be constructed and visualized to reveal the research main theme clusters based on research topic similarities. The darker nodes and links designate the past topics. By analysing the keywords, as shown in Figure 5 studies related to the concept of financing and payment in the Islamic FinTech platform are the oldest topics. While the most recent topics on Islamic FinTech covers studies related to financial inclusion, social implication, role, intention, benefit, and COVID-19. Moreover, intention, ease, sample, factor, and determinant also dominated the latest topic. Hence, it can be concluded that research exploring the contribution of FinTech and the intention to adopt FinTech in the Islamic finance industry has become a recently discussed topic.

Topics concern over the past years.

4. Content analysis of Islamic FinTech publications

This section is divided into two sections. The first section addresses the RO3 which categorize the literature into four distinct streams namely: (1) Financial technology (consists of two sub-streams: Customer perception on Islamic FinTech and Islamic FinTech's current development and its impact on Islamic finance institutions); (2) Islamic FinTech and distributed ledger technology (consist of two sub-streams: Cryptocurrency and Blockchain), (3) Financial inclusion; and (4) Islamic FinTech and deposit-lending (consist of two sub-streams: P2P Lending and Crowdfunding). The second section explains the research gap and future research recommendations to answer the RO4.

4.1. Content analysis

4.1.1. stream 1: financial technology.

This stream consists of 20 articles that can be divided into two sub-streams: Customer perception on Islamic FinTech, its current development, and its impact on Islamic finance institutions.

The first sub-stream is related to customer perception. Most of the studies measure customer perception of Islamic FinTech through customer intention on using Islamic FinTech ( Darmansyah et al., 2020 ; Oladapo et al., 2021 ); customer's acceptance (I. M. Shaikh et al., 2020 ); customer's satisfaction ( Baber, 2019 ); customer's retention ( Baber, 2020b , 2020c ); and customer's trust (M. Ali et al., 2021a , Ali et al., 2021b ). FinTech in Islamic finance institutions provides four types of services: payments, crowdfunding, advisory, financing, and compliance ( Baber, 2020b ). Several key factors are affecting customers' intention to use Islamic FinTech based on previous studies:

First, shariah compliance. There is still debate amongst the scholars and practitioners about whether religiosity drives the customers to use Islamic banking, a study by Baber (2020b) and Marzuki and Nurdin (2020) proved that Islamic banking customers have a strong concern toward shariah -compliance of FinTech products. Moreover, Baber (2019) correctly argues that shariah -compliance of FinTech services becomes a crucial factor in customer satisfaction. Thus, to maintain the customer's loyalty and satisfaction, the quality and performance of Islamic banking, specifically mobile banking, should improve immensely. Hence, the results of these studies call attention to enhancing the roles of the shariah supervisory board in ensuring the services meet Islamic principles.

Second, is the ease of use. An interesting study by Darmansyah et al. (2020) concludes that the technology acceptance model becomes the most significant factor influencing customers’ intention in using FinTech, particularly in P2P services. In detail, I. M. Shaikh et al. (2020) ascertained that perceived ease of use and usefulness play an important role in shaping customer intention. In the same vein, Baber (2019) also argued that apps design has massively increased customer satisfaction in using Islamic FinTech. Besides, M. Ali et al. (2021) pointed out that the secure Islamic FinTech apps and operations increase customer trust in accessing Islamic FinTech. Hence, the key implication drawn from these studies is the importance of user experience in using Islamic FinTech. Thus, FinTech providers should pay more attention to improving FinTech apps and websites quality by considering the customer needs and prevailing innovations.

Third, is customer knowledge. Oladapo et al. (2021) put forth that customers' knowledge of Islamic FinTech is significantly related to the increasing customer's intention to utilise FinTech. Moreover, the result is also supported by Baber (2020c) , who assured that providing adequate information regarding Islamic principles will enhance the customer's satisfaction. These studies clarify that banking practitioners and operators should regularly attend training, seminars, and conferences to update their capacity to offer customers comprehensive knowledge related to FinTech.

The second sub-stream addressed Islamic FinTech development and its impact on Islamic finance institutions. Rabbani et al. (2020) conducted a systematic literature review to synthesize Islamic fintech; they found that three dominant topics have been widely discussed: Islamic FinTech opportunity and challenges, cryptocurrency/blockchain shariah compliance, and the law/regulation aspect of fintech innovations. this study underlined that FinTech offers more cost-effective financial services than traditional finance and banking. Based on a country level Muryanto et al. (2021) stated that Indonesia, as the largest Muslim population country, has massive potential to elevate the economic growth by utilizing Islamic FinTech. Moreover, this study also describes several challenges in Islamic FinTech's development, including weak regulation, inefficient permit procedures, and a higher rate of illegal FinTech practices. Another study Almulla and Aljughaiman (2021) documented that the massive growth of FinTech firms negatively affects conventional and Islamic banks' performance, measured by the declining ROA and ROE rates. These studies' findings illustrate the possibility of financial institutions shifting from banking to FinTech firms, highlighting disruptive technology's negative impact on traditional financial institutions.

On the other hand, numerous studies have investigated FinTech practices adoption's impact on Islamic finance institutions' performance, specifically Islamic banks and microfinance institutions. Mustafa Raza Rabbani and Khan (2020) underlined that FinTech could significantly decrease the operational cost of Islamic banking, which will allow it to offer more competitive products. Moreover, Selim (2020) ascertained that implementing FinTech in foreign currency transactions by Islamic banks would increase their market share. In return, Islamic banking can provide non-interest rate transactions in real-time and without riba . Moreover, Altwijry et al. (2021) conducted an interesting discussion regarding the shariah-based FinTech money creation. This study emphasized the validity and credibility of Islamic banking to adopt FinTech in their services, answering a debate about whether Islamic banking is necessarily creating money to support their business. This study underlines that Islamic bank should fully enhance their ability to adapt Sharīah-compliant FinTech.

Moreover, in the case of Islamic microfinance, S. A. Shaikh (2021) explained that FinTech would enable Islamic microfinance to obtain a broader range of fund providers, increase transparency, decline the transaction cost, support the customer's monitoring process, and increase the accuracy in screening criteria. However, research by X. Wang et al. (2021) reported that the Islamic bank's investment in FinTech has not yet been effective; this indicates that there are still areas that require improvement. The result of this study is also supported by Nastiti and Kasri (2019) , who declared that the policy-maker should make a strenuous effort to establish a supportive investment environment for an Islamic bank to adopt FinTech. In short, the adoption of FinTech will elevate the development and efficiency of Islamic financial institutions, which will lead to the improvement of Islamic finance institutions' role in economic growth. Hence, a solid collaboration amongst the stakeholder is crucial.

Despite the massive growth of Islamic FinTech, one of the biggest obstacles in its way is the lack of specific legal law from policymakers. Nurhasanah and Rahmatullah (2020) from Indonesia revealed that the Islamic FinTech providers are still behind in terms of regulation, law, and operational rules compared with their conventional counterparts. The uncertainty of the legal law of Islamic FinTech has also resulted in the weak security of customers' data and the increasing number of illegal FinTech. Moreover, the ineffective role of shariah supervisors as regulating authorities has also become the primary reason that hinders the growth of FinTech's start-up (Ilyas et al., 2020; Tajudin et al., 2020 ). In the Malaysian case, the government has set a specific target to digitalize the financial industry, which breaks down to the liberation of specific areas, including insurance, trading assistance, Robo-advisory, and P2P lending. By analyzing the development of FinTech start-ups in Malaysia and Finland, this study tells us that special committees and legal laws are required to drive Islamic FinTech development. Table 2 further summarizes the prior literature in this stream.

Table 2

Financial technology.

4.1.2. Stream 2: Islamic FinTech and distributed ledger technology

This stream consists of 33 studies and is divided into two sub-streams: Cryptocurrency (25 articles) and Blockchain (8 articles). The list of articles in this stream is presented in Table 3 .

Table 3

Islamic FinTech and distributed ledger technology.

The first sub-stream is about the cryptocurrency literature ; it mainly discusses the role of cryptocurrency from a shariah centric perspective and the risk-return tradeoff of cryptocurrencies ( Ajouz et al., 2020a , Ajouz et al., 2020b ; Hammad, 2018 ; Lietaer, 2017 ; Oziev and Yandie, 2018 ; Saleh et al., 2020 ; Siswantoro et al., 2020 ; Virgana et al., 2019 ; M. Abubakar et al., 2019 ; N. Khan et al., 2020 ; Lahmiri and Bekiros, 2019 ; Lahmiri et al., 2020 ; Mensi et al., 2020 ; Rehman et al., 2020 ). Islamic finance does not consider money as a subject matter of trade but as a medium of exchange. However, the introduction of digital currencies has renewed the debate on the status of money and its dynamics, especially within the context of digital currency, i.e., cryptocurrency. In this regard, Oziev and Yandie (2018) critically analyzed bitcoin's nature and features and identified no contradiction of bitcoin with Islamic laws. Much has been written about the status of money and its role in the overall economy after the seminal work of Nakamoto in 2008 ( Figuera and Tortorella Esposito, 2019 ; Mohamad and Sifat, 2017 ; Oberauer, 2018 ).

Nevertheless, cryptocurrencies are heavily criticized for their functional point of view for the following main reasons ( Abozaid, 2020 ; Y. S. Abubakar et al., 2018 ). First, all the products within the nomenclature of cryptocurrency are derived from financial engineering without being backed by real economic assets; thus, it does not fit within Islamic finance. Islamic finance proposes financial intermediation based on real tangible assets, which naturally strengthen the economy and make it more resilient during economic turmoil. Secondly, Islamic finance does not allow transactions based on interest and speculation (M. K. Hassan et al., 2019 ). Also, recent studies show that cryptocurrencies are inefficient ( Bariviera, 2017 ; Nadarajah and Chu, 2017 ; Tiwari et al., 2018 ), highly volatile and speculative ( Cheah and Fry, 2015 ; Elsayed et al., 2020 ; Katsiampa, 2017 ), very sensitive to macroeconomic factors ( Demir et al., 2018 ; P. Wang et al., 2020 ), and lacks flexibility and acceptability ( Hanif, 2020 ), it cannot be used as a medium of exchange on the ground because of its speculative nature ( Baur et al., 2018 ). Thirdly, cryptocurrencies are also used in illegal activities such as money laundering and purchasing drugs and weapons ( Hammad, 2018 ). Cryptocurrencies are type of digital currencies that are generally not asset-backed or issued by any central bank, so it doesn't have the same features of fiat money. Lastly and very importantly, due to the aforementioned factors, cryptocurrencies are not directly backed by any country or regulatory body, unlike fiat money which has implications for monetary policy. If central bank money no longer defines the unit of account for most economic activities and if crypto assets instead provide those units of account, the central bank's monetary policy becomes irrelevant. Moreover, most developing countries are heavily dependent on foreign currency reserves to meet their fiscal deficit and debt obligation. This provides an analogy to cryptocurrency and may disconnect the monetary policy in local currency from the local economy. This dilemma will remain in developing countries if a global digital currency is not introduced.

Siswantoro et al. (2020) investigated a class of 23 different cryptocurrencies and asserted that cryptocurrencies are highly volatile and cannot become alternative fiat money in Muslim countries. Specifically, Kirchner (2021) ascertained that the shariah compliances of cryptocurrency still become a debate amongst the shariah scholars. From an Islamic law perspective, the classification of cryptocurrency still needs further analysis. Hammad (2018) reported similar findings. However, if the cryptocurrency is backed by any precious metal such as gold, it will increase its acceptance rate and adaptability in Muslim populated countries. Ajouz et al. (2020a) analyzed the recently emerged Precious Metal Backed Cryptocurrency (PMBC) and found that more than 63.55% of respondents will accept PMBC as a mode of transaction for their future payments. In other studies, Ajouz et al. (2020b) proposed a model for implementing the PMBC mechanism, and Ajouz et al. (2020c) assessed the shariah compliances of PBMC. These studies highlighted that PMBC provided shariah compliances standards to perform the function of money while operating as a peer-to-peer payment system.

In a similar vein, Saleh et al. (2020) and Virgana et al. (2019) maintained the view that payment methods based on cryptocurrencies are legitimate, as they reduce the transactions cost and are backed by shariah as fiat money. Similar to the analogy of cryptocurrency, Lietaer (2017) proposed a model of global digital currency i.e., ‘Trade Reference Currency’, and will be backed by tangible assets such as gold, silver, oil, etc., and the bearer will bear storage cost. Over the last decade, the family of cryptocurrencies has witnessed tremendous growth, with more than USD 2 trillion in total market value.

With the advent of cryptocurrency and developments around blockchain, technology experts, industry professionals along shariah scholars have been working to introduce FinTech in shariah - compliant financing products and services. In this regard, M. Abubakar et al. (2019) argued that cryptocurrencies have three competitive advantages over other forms of money, namely, (1) It is based on a unique decentralized financial system; (2) It's controlled issuance; (3) to surmount inflation. Consequently, X8 AG 1 and OneGram 2 launched the shariah - compliant cryptocurrencies backed by gold and stable fiat currencies such as USD, euro, etc.

Several studies have assessed the empirical nature of cryptocurrencies along with Islamic equity and capital markets to understand the risk-return tradeoff and whether they provide diversification and hedging opportunities. For example, Uddin et al. (2020) consider the role of bitcoins as hedging instruments in portfolio management. Using a comprehensive daily dataset of Islamic, convention, and sustainable assets, they reported that bitcoin values are mean-reverting in the long run, however, bitcoin provides portfolio diversification benefits to all equity markets both in the short and long run. Lahmiri et al. (2020) also observe the long-term persistence in the fluctuation of bitcoin prices along with European and Islamic markets. Another research by W. M. A. Ahmed (2021) analysis the sensitivity of the Islamic stock market towards the dynamic volatility of bitcoin in developed and emerging markets and found a similar behavior of Islamic stock in two types of markets during normal, bear, and bull markets states. Similarly, Rehman et al. (2020) studies the risk dependence structure of bitcoin along with the Islamic equity market for the period of 2010–2018 and found that the value at risk of bitcoin is higher than those of Islamic equity markets, which naturally implies that investors from cryptocurrency market should add Islamic equity funds to reduce the overall risk of their portfolio. Besides, Mensi et al. (2020) analyzed bitcoins' co-movement and risk structure with the Islamic equity and bond market and provided mixed results. They find strong co-movement of bitcoin in the same direction at a lower frequency with Islamic equity and bond, suggesting lower (higher) diversification benefits for the long run (short-run) investors. Lastly, empirical evidence during the policy uncertainty period, Hasan et al. (2021) portrayed the positive and significant relationship between cryptocurrency policy uncertainty towards gold, Sukuk , and the DJ Islamic index return, which indicates the existence of diversification benefit between those assets during bearish, normal, and bullish market period. Besides, this study also mentioned that the existence of shariah screening criteria on Sukuk and the DJ Islamic index improves the resistance of Islamic investment instruments towards uncertainty and the economic meltdown period.

Few studies have also assessed the differences between Islamic and conventional cryptocurrencies. The shariah compliance of bitcoin and cryptocurrency still has become a debate amongst Islamic scholars and stakeholders (M. K. Hassan, Karim, et al., 2020 ). Aloui et al. (2021) found that Islamic cryptocurrencies positively correlate with yellow metal. However, this relationship is negative and weak for conventional cryptocurrencies. Likewise, Lahmiri & Bekiros (2019) reported that green and Islamic cryptocurrencies showed anti-persistence in their returns while the volume, prices, and volatility exhibit a higher pertinence dynamic than its counterpart. During economic meltdown due to COVID-19 ( Nugroho, 2021 ), Islamic gold-backed cryptocurrency (GC-gold) has shown better performance than conventional GC-gold, which is indicated by the resistance of Islamic GC-gold to COVID-19's impact. Moreover, Chkili et al. (2021) found that bitcoin provides a safer asset for investors during economic downturns than Islamic stock. Thus, it is suggested that investors add bitcoin to their investment portfolio to reduce the risk. These findings imply significant differences between Islamic and conventional ones; the logical reason is the existence of screening criteria standards in Islamic cryptocurrencies. Furthermore, the behavior of Islamic and conventional cryptocurrencies was also influenced by investor sentiment, where the investor in an Islamic portfolio should follow specific rules based on shariah compliance, including the prohibition of any speculation activities.

In contrast with the previous studies, a research by Bahloul et al. (2021) ascertained that during the COVID-19 crisis period, bitcoin and Islamic stock indexes had a similar volatility pattern, and the two types of investment instruments did not offer safe-haven investment. Hence, it can be concluded that bitcoin has a similar characteristic with other investment instruments, and the massive amount of information related to bitcoin will gradually decrease the Muslim perspective regarding the uncertainty ( gharar ) of bitcoin. Moreover, However, the legal regulation related to shariah compliances of bitcoin should be designed to evaluate and improve its legality from an Islamic perspective. Another interesting study conducted by Echchabi et al. (2021) examined the predicting factors that affect Muslims in Oman to invest in Bitcoin and found that perceived ease of use, compatibility, awareness, and facilitating conditions plays a vital role in shaping the investor's intention. Importantly, this study underlines that the respondents believe they have a sufficient understanding and awareness of the Bitcoin concept, its benefits, and the strategies utilized to administer a Bitcoin account. Research that empirically assesses the investor behavior using a quasi-qualitative approach is still scarce; this topic becomes significant to investigate to obtain comprehensive knowledge regarding Muslim intention to adopt bitcoin.

The second sub-stream is blockchain . Blockchain has become one of the most popular technologies behind cryptocurrencies. This stream discuss the implementation of blockchain technology on various Islamic financial services, including the Sukuk industry, musharakah scheme, takaful, and zakat ( Delle Foglie et al., 2021 ; Al-Sakran and Al-Shamaileh, 2021 ; Abdeen et al., 2019 ; Mohd Nor et al., 2021 ). Blockchain classifies and records the transaction, which is connected to every party. Thus, the adoption of blockchain in finance will enhance the transparency and traceability of every single financial transaction. Hence, it increases the accountability in financial services, which in turn, promotes trust between the parties ( Chong, 2021 ). Furthermore, Delle Foglie et al. (2021) and Busari and Aminu (2021) demonstrated that the adoption of smart contract and tokenization on Sukuk would support the development of Sukuk by reducing operational cost, assuring shariah compliance, strengthening standardization, removing the ambiguities from shariah interpretations, and speed-up the transaction process (N. Khan et al., 2022 ). Despite the numerous advantages of implementing blockchain technology in Islamic financial services, the lack of legal regulation related to blockchain, the absence of shariah standard of Islamic FinTech, and the complexity of Islamic finance principles become the primary factors that prevent the escalation of blockchain integration in Islamic financial institutions ( Alaeddin et al., 2021 ).

M. H. Ali et al. (2021) explained that blockchain has huge potential in elevating the Supply Chain (SC) benefits for the halal food industry by increasing SC transparency, food quality, traceability, and avoiding food fraud. In the same vein, Al-Sakran and Al-Shamaileh (2021) underlined that integrating blockchain into the musharakah financial scheme will automatically enable the parties to conduct e-negotiation. This study illustrated the e-negotiation model by allowing the entrepreneur and investors to come to an agreement. The entrepreneurs should input their information, including the purpose of investment, professional background, and previous business projects. Thus, the blockchain will automatically ensure the shariah compliance of business activities, assess business risk, and provide relevant information for the investor to decide their participation in the business.

In addition, Mohd Nor et al. (2021) stated that the usage of blockchain technology could be improved by socializing and educating the community regarding the significant advantages and convenience of utilizing blockchain on Islamic social finance such as zakat . This effort is predicted to lead to a massive improvement in zakat collection and distribution for society. Moreover, Abdeen et al. (2019) emphasized that a certificate from a legal authority that describes the specific roles of investors, entrepreneurs, and operators is urgently essential to manage and control the safety and shariah -compliance of transactions in the Blockchain expected to intensify the participation in Islamic finance. Based on the findings of these studies, it can be ascertained that blockchain technology will increase customer engagement in Islamic finance ( Abdeen et al., 2019 ). In consequence, it promotes the contribution of the Islamic finance instrument itself to economic growth. Studies also examined the correlation between blockchain and the capital market. Table 3 further summarizes the prior literature in this stream.

4.1.3. Stream 3: financial inclusion

This stream consists of 13 studies as described in Table 4 , it is about the role of Islamic FinTech in financial inclusion. A discussion on some of the most important papers are presented as follows:

Table 4

Financial inclusion.

Islamic social finance tools such as zakat, sadaqah, waqf , Islamic microfinance, and micro takaful models lead to financial inclusion ( Macchiavello, 2017 ; Zauro et al., 2020 ). Islamic social finance tools have a positive impact on financial inclusion. The extensive use of Islamic social finance tools lead to less inequality of income in Muslim countries ( Zulkhibri, 2016 ). The use of financial technology has increased the reach of Islamic financial institutions to the last man standing in the queue with social finance such as zakat, waqf, and Islamic microfinance (H. Ahmed and Salleh, 2016 ). This statement also supported by Aziz et al. (2021) who investigated the correlation between digital banking and financial inclusion and found that digital banking has a positive correlation to financial inclusion. Moreover, Ezzahid & Elouaourti (2021) explained that digital banking plays a prominent role in reducing the number of unbanked by providing financial access in a convenient way and competitive price.

Other studies further investigate the role of FinTech in enhancing the contribution of the Islamic social economy and financial institutions during COVID-19. Mustafa Raza Rabbani et al., 2021a , Rabbani et al., 2021b proposed a model of utilizing Islamic finance as an instrument in combating the COVID-19's impact and revealed that Islamic FinTech will accelerate the collection and distribution of funding for the community in the short, medium, and long term. The role of Islamic FinTech and its adoption by the Islamic financial institutions will offer remarkable solution for economic activities due to COVID-19. Rabbani, Ali, et al. (2021) divided the four-stage economic model in combating COVID-19, namely, business and economic damage, financial contagion, bottom formation, and post COVID-19 effects. In addition, for each stage of the epidemic, this study also recommends ten unique Islamic financial services. In detail, M. K. Hassan, Rabbani, et al. (2020) offers four potential Islamic finance instruments merged with FinTech in combating the economic downturn due to COVID-19, namely, Islamic cryptocurrency, a blockchain-based system for zakat and qardh-al-hasan , smart contracts, and smart Islamic banking. In a broader context, Hudaefi (2020) argued that implementing FinTech services in Islamic financial institutions has huge potential in elevating the social and economic welfare of the unbanked population by distributing funding for their small and underdeveloped business sectors; which will support the government in achieving the Sustainable Development Goals (SDGs), particularly SDG 1 no poverty, SDG 2 zero hunger, and SDG 10 reduce inequality. Interestingly, Baber (2020a) pointed to other advantages of having FinTech in Islamic finance, as the improvement of women's quality of life as it is focused on empowering women both financially and socially.

Previous studies highlighted the importance of implementing FinTech in Islamic financial institutions for financial inclusion. Interestingly, Aminah et al. (2020) stressed that despite the crucial impact and massive potential in escalating the contribution of Islamic finance towards financial inclusion, the adoption of FinTech itself had been significantly proven in leading the Islamic banking market share to the upward trend. Furthermore, Banna et al. (2021) and Syed et al. (2020) also revealed that the adoption of FinTech in Islamic banking has a crucial role in promoting banking stability, specifically during the economic downturn caused by COVID-19, specifically by minimizing the cost of services, maximizing profit, and promoting the efficiency of banks. Hassan (2015) suggests the possibility of including poor Muslims in mainstream financial services through innovative approaches. Islamic microfinance can be viable if it is delivered with FinTech, as it can lead to financial inclusion and is based on the principle of Islamic solidarity. He argues that FinTech-based microfinance can generate enormous employment and economic prosperity for the poor. Correspondingly, Hidayat (2019) also concludes that financial inclusion is an excellent idea for the poor and marginalized. However, it can only be achieved through the help of Islamic banks and non-banking financial corporations (NBFCs). Islamic banks need to collaborate with Islamic microfinance institutions to achieve financial inclusion. Shinkafi et al. (2020) and Zulkhibri (2016) report similar findings, arguing that Islamic banks and financial institutions have an essential role in the financial inclusion of the poor and marginalized. As Islamic banking is based on the principle of compassion, solidarity, and economic justice, it can help achieve financial inclusion by bringing more innovative financial services through FinTech ( Rabbani and Khan, 2020 ).

Islamic financial institutions have an essential role to play in the country's financial inclusion. The findings of the study conducted by Banna et al. (2020) suggest that barring a few countries in the Middle East and MENA region, most of the selected countries have some inconsistent trends in the Islamic banking sector. It further concludes that financial inclusion is linked with the efficiency of Islamic banks. The study is a post-crisis analysis. It concluded that Islamic banks are still bearing the consequences of the financial crisis; therefore, Islamic banks should focus more on financial inclusion, and banks with a sound and high level of the inclusive financial environment should have high efficiency. Moreover, Tajudin et al. (2020) also emphasized that adopting FinTech improves the performance of Islamic financial institutions in two ways. First, it escalates the living standard of the underserved community. Second, it becomes an effective way to strengthen the intimacy between the customer and service provider through broader customer knowledge regarding social finance. In addition, S. A. Shaikh (2021) , Aydin and Iqbal (2017) and Macchiavello (2017) also underlined that Islamic financial institutions such as Islamic microfinance, banks, and credit unions have an essential role to play in achieving financial inclusion through the use of technology.

Financial inclusion and the role of Islamic finance must be viewed differently in Muslim and non-Muslim countries ( Sain et al., 2018 ). The study is conducted in Australia, and it concludes that FinTech has nothing to do with financial inclusion and in Australia alone, despite the widespread use of financial technology, there are 3.1 million of the adult population who are financially excluded. They further draw a conclusion that the Muslim population is finically excluded due to their religious beliefs because Islam prohibits riba and Australia is not governed by the Islamic financial system. Baber (2020a) , Kannaiah et al. (2017) , and Abubecker et al. (2019) support these findings, one being that the Muslims in Non-Muslim countries are financially excluded and are not able to get valuable financial services due to their religious beliefs. Adewale and Haron (2017) support the argument that religion being an impediment to financial inclusion.

From another perspective, Kannaiah et al. (2017) and Kim et al. (2018) discuss the relationship between financial inclusion and the economic growth of a country. They gather panel data from 55 OIC countries and conclude by applying panel VAR, IRF's and granger causality tests. Pg Md Salleh (2015) , Brekke (2018) , and Zauro et al. (2016) analyzed financial inclusion and individual characteristics with regard to the specific countries. Jan et al. (2018) , Aydin and Iqbal (2017) , and A. E. E. S. Ali (2017) say that financial inclusion is bout justice in Islamic finance. It is the right of every individual to have access to valuable financial services. Banna et al. (2020) , and Arsyianti and Kassim (2018) analyze the role of Islamic banking in financial inclusion and how Islamic banking can be used as a tool for financial inclusion. Having access to the key financial services is the major indicator of the economic well-being, quality of life, and standard of living of the population all across the globe ( Banna et al., 2020 ; Sain et al., 2018 ). Not only that having access to these valuable financial services helps a person to make an online payment, access to credit and offers, investments, and getting banking and other financial services ( Aldoseri and Worthington, 2017 ). According to the Global Findex databases 2017, the situation in Organization of Islamic Cooperation (OIC) countries remains worse as adults participating in the financial system or having no access to the financial services remains low as compared to the high-income countries. Despite the huge penetration of Islamic banks and financial services in these countries, the level of financial inclusion remains significantly low ( Baber, 2020a ). There are 41% adults with the contribution in the financial system in OIC countries as compared to the 92% in the high-income countries. The report further stresses that around 75% of the world's unbanked population lives in developing countries. The unbanked population of the world is dominated by the Muslim countries with countries like Pakistan and Bangladesh with 5.2% and 3.7% of the worlds unbanked population respectively.

There is a strong opportunity for Islamic FinTech to fill this gap by providing access to financial services to this segment of people and bringing confidence in the financial system through technology. Financial inclusion can be achieved by combining technology with Islamic finance and Islamic FinTech is the way to go forward ( Kim et al., 2018 ). There are also studies on the role of Islamic versus conventional finance in financial inclusion ( Nawaz, 2017 ). Albaity et al. (2019) concluded that Islamic FinTech is based on the principles of ethics and morality and this characteristic makes it more fit for financial inclusion. S. Khan et al. (2019) stressed that Islamic finance has some financial services like zakat which automatically leads to financial inclusion. This view is also confirmed from the findings of Sain et al. (2018) , which concludes that Islamic financial services combined with technology can lead to financial inclusion. On the other hand, there are credible studies like Baber (2020a) which concluded that there is no inter-relationship between FinTech adoption and financial inclusion. Voluminous studies have been proved that the integration of FinTech will uplift the number of banked population and boost the Islamic finance performance. Notwithstanding, the low quality of education, particularly for women and elder people in utilizing FinTech; the presence of risks such as network disruption and account securities, and the lower number of smartphone users; and lack of firm regulation related to FinTech become the prominent factors in preventing the massive adoption of FinTech in Islamic economics, finance, and banking. Therefore, the findings of existing studies suggest the need for the stakeholder to establish an impactful effort in creating a conducive environment for integrating FinTech in Islamic social-economy and financial institutions. Organizing regular seminars, campaigns, workshops, and training sessions in increasing digital financial literacy, which in turn, prompt the effectiveness of mobile banking usage specifically for the unbanked community, small business owners, undereducated people, women, and elder people ( Banna et al., 2021 ; Ezzahid and Elouaourti, 2021 ). More importantly, a national and international standard for Islamic FinTech regulation is urgently needed to improve the integration of FinTech and Islamic financial institutions, as well as the qualification of shariah board members, particularly in technological aspects, to ensure that FinTech in the Islamic finance industry is regulated in accordance with shariah principles ( Razak et al., 2020 ).

4.1.4. Stream 4: Islamic FinTech and deposit-lending

There are 19 previous studies on this stream, which can be divided into two sub-streams, namely, peer-to-peer (P2P) lending (4 articles) and crowdfunding (15 articles). Prior studies on P2P lending stress the challenge and potential development of Islamic P2P lending. To a large extent, this sub-stream discusses the current Islamic P2P platform development situation.

The first sub-theme is p2p lending. P2P lending is a platform that enables borrowers to acquire a source of funds from the lender through the internet ( Rosavina et al., 2019 ). The conventional concept of p2p differs from the Islamic concept, as lending can not be interest based, thus it is a sort of peer to peer financing which took the name of lending while it is indeed a shariah complaint financing in concept. P2P lending is one of the financial services provided by FinTech, it is predicted to become the most convenient financial platform for the unbanked community. Specifically, Rosavina et al. (2019) investigate several influencing factors in using the Islamic P2P platform. This study ascertained that the rejection from banking institutions leads the customer to find other financing alternatives, such as P2P lending that offers a more extended payment period, shariah-based loans, and profit loss sharing schemes.

In general, the P2P lending platform is predicted to become a “new banking service” with several additional advantages presented by the speed, efficiency, and channels better than the traditional bank ( Sa'ad et al., 2019 ). This phenomenon leads to an unwanted situation, the weakness of the banking system's contribution to economic development. However, rather than viewing the P2P lending platform as a competitor, the integration and collaboration between Islamic P2P lending and Islamic banks would promote the positive development trend of the business cycle, especially for the small business sector. Several studies investigate the possibility of optimizing the P2P platform. Sa'ad et al. (2019) proposed a model and argued that the MSC model is innovative and provides equal benefits for the parties: business owners, investors, and P2P companies. This model relied on the musharakah contract, where the business owners and investors agree to run the business and share the profit and loss-sharing equally based on the capital contributed. At the same time, the P2P company gains a fixed fee as the agent that connects the two parties.

Related to the previous discussion regarding the musharakah contract, Aprita and Adhitya (2020) emphasized that the profit and loss sharing scheme is effective in specific business models, and the scheme's implementation should be done by ensuring transparency between the parties. This study underlines that the P2P platform should create an upstream-downstream ecosystem that provides financial services and solutions for non-payment financing cases. Moreover, this study also suggested that P2P lending platforms collaborate with notaries or legal parties to promote safety and speed up transactions. From another perspective, Muhammad et al. (2021) demonstrated several significant factors that affect the failure of the P2P lending platform. This study pointed out that the higher level of debt and financing ratio and the weak support from the government will lead to the failure of the P2P platform. Most importantly, this study showed that the stricter Islamic principles applied by the P2P platform would reduce the probability of failure faced by the P2P platform. Therefore, this study calls on P2P players to improve the quality borrower selection criteria and lending prudence and run the platform under shariah compliance.

Another interesting study by W. Ali et al. (2018) proposes a conceptual framework that predicts the intention to adopt FinTech in SMEs' Peer-to-Business (P2B) financing platform. This study highlights two prominent factors that arguably influence the adoption of the P2B platform. First, an internal factor is derived from cost, brand, security, perceived ease of use, and usefulness; second, external factors cover social influence and facilitating conditions. In addition, this study also highlights that the study on the intention to adopt P2P and P2B platforms by SMEs from an Islamic perspective is still underexamined. Therefore, this study suggests that extensive research is urgently needed to explain the predicting factors of SMEs adopting FinTech platforms.

The second sub-theme in this stream is crowdfunding. Crowdfunding is the broader concept derived from crowdsourcing, which aims to collect financing from many individuals for social, profitable, or cultural projects ( Mollick, 2014 ). The literature has defined crowdfunding as an open call, essentially through the Internet, for the provision of financial resources either in the form of donations or in exchange for some form of reward and voting rights to support projects based on social, profitable, or cultural motives ( Mollick, 2014 ; Schwienbacher and Larralde, 2010 ). Historically, the first crowdfunding-based projects were initiated in 1800 to fund the Statue of Liberty's pedestal. In 2000, a website named AristShare was designed to provide a platform for artists to raise funds. The World Bank (2013) categorized crowdfunding based on four main types. First, donation-based crowdfunding is purely based on donation and philanthropy; thus, there is no compensation for the party who provides the funds. Second, debt-based crowdfunding is based on debt-based contracts. The crowd lender provides the financing to small businesses or startups and receives a fixed interest and principal payment at a stipulated time. Third, reward-based crowdfunding is when the provider of funds receives an appreciation or reward in the form of a gift or acknowledgment for supporting the project. Lastly, equity-based crowdfunding is purely based on the profit and loss sharing mode of financing and is more aligned with venture capital.

Previous literature on crowdfunding within the context of Islamic finance has mainly proposed crowding as a solution to the halal industry, the book publishing industry, startup companies, agricultural activities, and reviving waqf ( Abdullah and Oseni, 2017 ; Ishak et al., 2021 ; Hendratmi et al., 2020 ; Saiti, Musito, et al., 2018 ; Zain et al., 2019 ). A few studies also focused on the development of crowdfunding and its awareness ( Saiti, Musito, et al., 2018 ; Shofiyyah et al., 2019 ).

To begin with, Abdullah and Oseni (2017) argue that equity crowdfunding inherently follows Islamic laws amid its structure of profit and loss sharing. However, scrutiny of its governance structure, business model, and products offered under the umbrella of equity crowdfunding is required. In detail, Ishak et al. (2021) assess the possibility of implementing mudharabah -based crowdfunding for the book publishing industry, specifically self-publishers and small publishers. This study proposes a framework of mudharabah crowdfunding consisting of three parties: First, the publishers, as the mudharib (who have the professional capability of producing and publishing books), should offer detailed and transparent information regarding the business plan and profit estimation. Second, the platform is the agent who bridges the publisher and funders; the platform's responsibilities include marketing the books and promoting the publisher to obtain more funding sources. Third, the funders, such as the rab al-Mal , should have a clear and comprehensive understanding of the loss and return from the contracts and business activities.

Equity crowdfunding can be a good source of external financing, especially for halal SMEs, which struggle to get financing from financial institutions. Likewise, Hendratmi et al. (2020) proposed an innovative crowdfunding model by developing a website that will not only provide a good source of generating funds but also help connect geographically diversified investors. In a similar vein, Saiti, Afghan, et al. (2018) suggested Salam-based crowdfunding for the agriculture industry to have access to funds. Moreover, a few studies also recommended crowdfunding based on the waqf model, especially in non-Muslim countries ( Zain et al., 2019 ). Furthermore, by conducting semi-structured interviews with the experts, Hapsari et al. (2022) also found that crowdfunding offers a sustainable fund source to develop waqf lands. In another case, Afroz et al. (2019) declare that implementing crowdfunding for financing solar energy in Malaysian households is possible. This study underlines that the most profound factors affecting the model's acceptance are income, household size, and knowledge about climate change. In a nutshell, the findings of these studies agree that Islamic crowdfunding contributes substantially to escalating business performance in various fields of business. Especially for small-medium-sized enterprises, the owners can obtain additional fund resources based on shariah contracts, such as mudarabah, musyarakah , and salam . Hence, it is suggested that the government take significant action to optimize crowdfunding platforms as a source of funds.

The development of the crowdfunding market depends on the market structure and economic development, advancement in the regulatory framework, and IT infrastructure. Moreover, Kazaure et al. (2021) described that social media and crowdfunding information also significantly shape SME owners' intention to obtain additional funding support from online crowdfunding, which boosts the massive growth of crowdfunding platforms among business people. Similarly, Salim et al. (2021) assess the determining factors of young entrepreneurs' intention to obtain business funds from the crowdfunding system in Malaysia. This study highlights that perceived ease of use and usefulness play a vital role in influencing young entrepreneurs' intention to accept crowdfunding. Hence, crowdfunding is expected to increase SMEs' performance and promote economic growth. Another research by Baber (2020b) found that integrating FinTech, particularly crowdfunding, into the Islamic banking system will escalate the business cycle of social entrepreneurship and micro-finance and build a firm platform for the global Islamic philanthropy system. Global crowdfunding is growing at 44%, with total assets of USD 290 billion to USD 418 billion from 2016 to 2017, respectively ( Ziegler et al., 2020 ).

Despite this unprecedented growth, the crowdfunding market is also subject to some limitations especially within the framework of Islamic jurisprudence. Foremost and the important one is the regulatory impediments that further restrict its growth. For example, a crowdfunding model is required for credit insurance to eliminate the credit risk. Since Islamic equity crowdfunding is based on the mudharabah model, it is a matter of concern whether the profit distribution mechanism follows the law of the country. Islamic crowdfunding is strictly allowed for businesses that are deemed permissible in Islam and not allowed to have a conventional lending approach i.e., involvement of interest ( Saiti, Musito, et al., 2018 ). Lastly, frauds and scams are the major threats in establishing a stable crowdfunding market regardless of its structure and model ( Ishak and Rahman, 2021 ). Besides, from the business owner's perspective, by involving in an online crowdfunding platform, the possibility of their business ideas will be copied higher. Thus, they are reluctant to share their detailed information online. Hence, they tend to become more hesitant to obtain funding from online crowdfunding ( Rahman et al., 2020 ). Consequently, there is a dire need for awareness among all the stakeholders and institutionalize it at the macro-level, including establishing shariah regulation for crowdfunding platforms ( Shofiyyah et al., 2019 ; Baber, 2021 ). Table 5 further summarizes the prior literature in this stream.

Islamic FinTech and deposit-lending.

4.2. Future research direction

This section discusses the general features of the literature based on bibliometrics and content analysis; to draw the research gap from the previous studies.

First, the total of number of papers reviewed using content analysis is 85 documents, divided into five streams. In detail, Islamic FinTech and deposit-lending consisting of cryptocurrency and blockchain sub-streams became the most discussed topics with 39% (33 out of 85 papers). The general analysis of the FinTech topic and the financial inclusion topic has attracted around 23%, followed by Islamic FinTech related to deposit and lending, consisting of two sub-streams, namely P2P lending and crowdfunding sub-streams (22%). Moreover, financial inclusion has become the least popular topic studied by researchers, as only 13 papers (15%) have been found in the Scopus database. Specifically, in terms of sub-theme topics, P2P lending has become the most underexamined topic, with only four publications in this field.

In the disruptive era, industry 4.0, automation, and artificial intelligence, including Robo advisors in finance, have shown unprecedented growth with the possibility of replacing human resources (X. Wang et al., 2021 ). However, Islamic investment has specific criteria that should follow shariah compliance, thus, calling attention to this topic. Second, the current development of Islamic FinTech studies was heavily conducted in Asian countries with Muslim majorities, including Malaysia, Indonesia, Pakistan, and Nigeria. Therefore, it is suggested that studies on these topics could be extended to other Muslim countries in the MENA beside some other non-Muslim majority countries.

Lastly, the research method. Previous studies on crowdfunding, P2P lending, blockchain, and financial inclusion were mainly qualitative. These investment instruments are at the initial stage of integrating with Islamic finance. Thus, it required more quantitative and conceptual analysis regarding the models and shariah compliance. On the other hand, the existing studies on the FinTech stream mainly discussed quantitative methods based on secondary or primary data. Moreover, in recent years, the prior studies on this stream have investigated the determinant factors of intention in using FinTech, as visualized in Figures  4 and ​ and5 5 .

Table 6 provides a list of future research directions.

Table 6

Future research direction.

5. Conclusion

This study portrayed a comprehensive literature development on Islamic FinTech sourced from the Scopus databases, covering a period from 2017 to 2022. The study identified four streams that dominated the discussion of Islamic FinTech literature based on content analysis using the SLR-PRISMA approach. In detail, financial technology (customer perception towards Islamic FinTech, 8 articles, and Islamic FinTech development and its impact on Islamic Finance Institutions, 12 articles); Islamic FinTech and distributed ledger technology (Cryptocurrency 25 articles, and Blockchain, 8 articles), financial inclusion (13 articles); Islamic FinTech and deposit-lending (P2P Lending, 4 articles, and Crowdfunding, 15 articles).

By conducting a content analysis on each stream, we reveal that the cointegration of FinTech in Islamic finance has enormous potential in elevating socio-economic development, particularly for the underdeveloped community, unbanked people, and small-medium-sized businesses. In addition, the adoption of FinTech in Islamic finance will support the government in improving financial inclusion, conquering financial crises, such as COVID-19's crisis, and achieving SDGs for a sustainable nation. However, the lack of laws, legal regulations and the lower financial literacy become the primary obstacles preventing the development of FinTech in Islamic finance. Additionally, based on the previous research's results, this study underlined that the shariah compliance of cryptocurrency and blockchain is still inconclusive with tendency toward rejection of cryptocurrency as a meduim of exchange.

Aside from its theoretical and practical implications, this study has a limitation as it only utilized papers indexed by Scopus.

Declarations

Author contribution statement.

Muneer M. Alshater Conceived and designed the experiments; Analyzed and interpreted the data; Contributed reagents, materials, analysis tools or data; wrote the paper.

Indri Supriani: Conceived and designed the experiments; Analyzed and interpreted the data; Contributed reagents, materials, analysis tools or data; wrote the paper.

Irum Saba & Mustafa Raza Rabbani: Analyzed and interpreted the data; wrote the paper.

Funding statement

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

Data availability statement

Declaration of interests statement.

The authors declare no conflict of interest.

Additional information

No additional information is available for this paper.

Acknowledgements

We thank Heliyon for waiving the article publication fee for manuscripts published in this special issue entitled: “Islamic finance in the post-COVID world: Opportunities and challenges”. We also extend our thanks to the Guest editor and the kind reviewers for their constructive feedback which helped in significantly improving the quality of this review.

☆ This article is a part of the "Islamic finance in a post-COVID world" Special issue.

1 https://www.x8currency.com/x8x/ .

2 https://onegram.org/ .

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