Islamic Finance in a Conventional Framework: Evaluating Its Impact on the UK Capital Market

Abstract

Islamic banking has become an increasingly prominent force within global financial systems yet its integration into Western capital markets mainly in UK, remains limited by regulatory or structural misalignments. This paper evaluates the intersection of Islamic finance principles, rooted in Shariah prohibitions on riba i.e., interest and gharar i.e., excessive uncertainty, with UK’s conventional regulatory framework by focusing on implications for capital adequacy, deposit protection, market diversification and including consumer trust. The research identifies systemic incompatibilities between profit and loss sharing models and Basel III capital adequacy ratios through an interdisciplinary literature review and regulatory analysis, as well as the doctrinal tensions between UK deposit guarantees and Islamic risk sharing norms. Empirical evidence drawn from global and UK centric studies demonstrates that Islamic financial instruments, particularly sukuk and Shariah compliant equities offer strong crisis flexibility and ethical investment appeal, yet suffer from limited scalability under current UK oversight structures. Major gaps include absence of personalized models, insufficient Shariah governance integration and a lack of localized behavioral insights on Muslim and non-Muslim investors. We propose an actionable policy recommendation plan i.e. adoption of AAOIFI standards, pilot programs for takaful based deposit insurance and enhanced transparency requirements. With an aim to foster an inclusive and Shariah yielding market our findings contribute to a rising way forward for financial pluralism and call for reconfiguring UK financial paradigms with a future focus on prioritizing proportional analyses with progressive Islamic finance jurisdictions such as Malaysia to prepare evidence-based reform pathways.