The Real Economy Principle in Islamic Finance: Reconnecting Finance with the Real Economy through Production, Trade, and Investment

Abstract

The increasing separation between financial markets and the real economy has intensified concerns over financialization, excessive leverage, and the growing dominance of financial transactions over productive economic activity. Although Islamic finance is widely recognized for its prohibition of riba , asset-backed financing, trade-based transactions, and risk-sharing principles, these features are generally examined as separate contractual or legal characteristics rather than as components of a coherent economic philosophy. This paper argues that the defining characteristic of Islamic finance is its commitment to maintaining a continuous relationship between financial intermediation and the real economy. Building on this perspective, the study proposes the Real Economy Principle as an integrated conceptual framework that explains the economic orientation of Islamic finance through four interrelated pillars: asset linkage, trade orientation, productive investment, and economic value creation. Together, these pillars illustrate how Islamic finance seeks to align financial intermediation with production, trade, entrepreneurship, and sustainable economic development. The paper further examines the implications of the proposed framework for Islamic financial institutions, central banking, and financial stability. By integrating concepts that are typically examined independently in the existing literature, the Real Economy Principle provides a unified perspective on the underlying economic philosophy of Islamic finance and offers a conceptual foundation for future theoretical and empirical research on the relationship between finance and the real economy.