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| Illustration by Ai |
Islamic banking could strengthen its original profit-sharing model by integrating financial technology such as blockchain, smart contracts, and artificial intelligence, according to a 2026 study by Agus Supriatna, Euis Amalia, and Desmadi Saharuddin of Universitas Pamulang, Indonesia. Published in the Jurnal Multidisiplin Madani (MUDIMA), the research concludes that digital innovation can reduce long-standing operational barriers that have limited the use of Mudharabah and Musyarakah, two core Islamic financing contracts based on risk sharing rather than debt. The findings are significant because they offer practical strategies for improving transparency, expanding financing for small businesses, and reinforcing the ethical foundations of Islamic finance.
Islamic Finance Faces a Persistent Profit-Sharing Challenge
Islamic banking was established to promote fairness by encouraging financial institutions and entrepreneurs to share both profits and business risks. Unlike conventional lending, which relies on interest payments, Islamic finance emphasizes partnerships in which returns depend on actual business performance.
In practice, however, Islamic banks around the world continue to rely heavily on debt-like financing products such as Murabahah, while genuine profit-and-loss sharing contracts represent only a small portion of their portfolios. This gap between Islamic financial principles and everyday banking practices has become widely known as the "Profit-and-Loss Sharing (PLS) Paradox."
The researchers explain that this paradox has become increasingly important as governments, regulators, and financial institutions seek ethical and sustainable financial systems that support financial inclusion, economic resilience, and the United Nations Sustainable Development Goals (SDGs).
Mapping a Decade of Global Islamic Finance Research
Rather than conducting field experiments, the research systematically reviewed the global academic literature on profit-and-loss sharing in Islamic banking.
The researchers examined peer-reviewed studies published between 2016 and 2026 using a Systematic Mapping Study (SMS) approach. Articles were collected primarily from the Scopus database and verified using the Watase Uake system to reduce the inclusion of low-quality or predatory journals.
From an initial pool of 300 scientific articles, a rigorous screening process identified 57 high-quality international studies for detailed analysis.
The research combined:
- Qualitative thematic analysis
- Bibliometric mapping using VOSviewer
- Publication trend analysis
- Cross-country comparisons of Islamic banking research
This approach allowed the researchers to identify recurring challenges, emerging technologies, and future research directions across the global Islamic finance landscape.
Why Islamic Banks Prefer Debt-Based Financing
The study found that Islamic banks generally avoid profit-sharing contracts because they involve significantly higher operational risks.
One of the biggest challenges is information asymmetry. Banks often struggle to verify the true financial performance of businesses receiving Mudharabah or Musyarakah financing. Entrepreneurs may unintentionally or deliberately underreport profits, making it difficult for banks to calculate fair profit sharing.
As a result, banks must invest heavily in monitoring, auditing, and verification processes, substantially increasing transaction costs.
The researchers also identified international banking regulations as another major obstacle.
Current Basel III capital regulations classify profit-sharing investments as relatively high-risk assets. Consequently, Islamic banks must hold substantially larger capital reserves for Mudharabah and Musyarakah financing than for many debt-based financing products.
According to the study, this regulatory framework unintentionally encourages banks to choose financing instruments that resemble conventional lending, even though they provide less genuine risk sharing.
Digital Technology May Solve Long-Standing Problems
One of the study's most important findings is the growing role of financial technology in addressing the structural weaknesses of profit-sharing finance.
The researchers found that several emerging technologies have the potential to transform Islamic banking.
These include:
- Blockchain, which can provide secure and tamper-resistant financial records.
- Smart contracts, which automatically distribute profits according to agreed contractual terms.
- Artificial intelligence (AI), which can improve credit assessment for entrepreneurs.
- Big data analytics, which enables banks to evaluate business performance more efficiently.
Together, these technologies can provide near real-time transparency of business cash flows, significantly reducing opportunities for fraud or profit underreporting.
The study suggests that digital monitoring can dramatically lower operational costs while improving trust between financial institutions and entrepreneurs.
Research Reveals Shifting Global Priorities
The review also shows how Islamic finance research has evolved during the past decade.
Earlier studies mainly focused on legal compliance and comparisons between Islamic and conventional banking systems.
More recent research increasingly explores:
- Digital transformation
- Risk management
- Artificial intelligence
- Sharia governance
- Financial sustainability
- Financial inclusion for small and medium-sized enterprises (SMEs)
Indonesia and Malaysia remain among the world's leading contributors to Islamic banking research, although significant growth is also occurring in Saudi Arabia, the United Arab Emirates, Qatar, Pakistan, Bangladesh, and the United Kingdom.
The researchers note that modern Islamic finance is increasingly viewed not only as a religious financial system but also as a model for ethical, socially responsible, and sustainable economic development.
Implications for Policymakers and the Banking Industry
The findings have important implications for regulators, financial institutions, fintech companies, and policymakers.
For regulators, the study recommends reconsidering capital requirements for digitally supported profit-sharing financing. Lower regulatory burdens could encourage Islamic banks to expand Mudharabah and Musyarakah financing without compromising financial stability.
For Islamic banks, adopting blockchain-based monitoring systems and AI-powered credit evaluation could reduce agency costs while improving transparency and operational efficiency.
For entrepreneurs and SMEs, wider access to genuine profit-sharing financing could increase business opportunities while reducing dependence on conventional debt financing.
The study also argues that Islamic finance should move beyond evaluating Sharia compliance solely through legal contracts. Instead, financial products should also be assessed based on whether they genuinely promote equitable risk sharing and broader socio-economic justice.
Researchers Call for a New Direction in Islamic Banking
According to Agus Supriatna, Euis Amalia, and Desmadi Saharuddin of Universitas Pamulang, the future of Islamic banking depends on shifting the focus from formal contractual compliance toward the actual economic substance of risk sharing.
The researchers conclude that integrating blockchain, smart contracts, and artificial intelligence can substantially reduce information asymmetry, lower monitoring costs, and strengthen the practical implementation of Mudharabah and Musyarakah financing. They also emphasize that regulators should redesign macroprudential policies to better support digitally enabled profit-sharing instruments rather than treating them as excessively risky assets.
Looking Ahead
As digital finance continues to evolve, Islamic banking faces an opportunity to reconnect with its original principles while embracing technological innovation.
The study suggests that financial technology can help overcome barriers that have persisted for decades, making ethical profit-sharing finance more practical, transparent, and competitive. If regulators, financial institutions, and technology providers work together, Islamic banking could move closer to delivering the equitable and sustainable financial system envisioned by its founding principles.
Author Profile
Agus Supriatna is a researcher at Universitas Pamulang, Indonesia, specializing in Islamic economics, Islamic banking, financial governance, and Sharia financial systems. This study was conducted together with Prof. Euis Amalia and Prof. Desmadi Saharuddin, both academics with expertise in Islamic economics, Sharia finance, public policy, and Islamic financial governance.
Source
Article Title: The Profit-and-Loss Sharing Principle in Islamic Economics: Concepts, Implementation, and Challenges in Mudharabah and Musyarakah Contracts
Journal: Jurnal Multidisiplin Madani (MUDIMA)
Publication Year: 2026
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