ISLAMIC FINANCE AND THE SHADOW ECONOMY: A POTENTIAL SOLUTION?
Keywords:
Islamic Finance, Shadow Economy, Sharia Principles, Financial Inclusion, Economic Development, Regulatory Challenges, Sustainable Investment, Informal Economy, Ethical Banking, Muslim-majority Countries.Abstract
This article explores the potential of Islamic finance as a tool to mitigate the effects of the shadow economy. Islamic finance, grounded in Sharia principles, offers an ethical alternative to conventional financial systems by prohibiting interest and promoting risk-sharing and asset-backed financing. The shadow economy, characterized by unregulated economic activities, poses significant challenges to economic stability and governance. By providing access to formal financial services, Islamic finance could reduce the prevalence of informal economic activities, especially in Muslim-majority countries where such systems are underdeveloped. This article discusses the challenges and opportunities of Islamic finance, its regulatory landscape, and its potential to enhance economic turnover by mobilizing idle funds into productive investments. It argues that while Islamic finance alone cannot address all the complexities of the shadow economy, it can play a crucial role within a broader strategy aimed at legal reform, financial education, and stakeholder collaboration.
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