Debt Without Usury: How Islamic Finance Can Reshape Sovereign Borrowing in Developing Nations

Abstract

This chapter explores Islamic finance as a sustainable alternative to conventional sovereign borrowing, emphasizing risk-sharing and asset-backed models over usury (riba). With developing nations facing severe debt crises, Islamic finance offers solutions through instruments like sukuk (Islamic bonds) and profit-loss-sharing (PLS) arrangements, enhancing fiscal resilience and aligning with Sustainable Development Goals (SDGs). Case studies from Malaysia, Indonesia, Nigeria, and non-Muslim-majority countries demonstrate sukuk's success in infrastructure financing, lower defaults, and green investments. However, regulatory gaps, market limitations, and expertise shortages hinder adoption. The study concludes that Islamic finance can transform sovereign debt by promoting ethical, stable, and inclusive economic growth.