The Evolution of Islamic Finance: Contractual Continuity, Institutional Transformation, and the Search for Sharia Substance

Islamic finance has expanded from classical trade-based mechanisms into a global financial architecture with total assets exceeding US$3 trillion. While existing literature extensively documents its chronological progression, critical analysis regarding whether modern financial engineering preserves the economic substance of classical risk-sharing remains fragmented. This study adopts a qualitative historical-documentary and comparative thematic approach to evaluate the transformation of Islamic finance from its normative foundations to contemporary fintech innovations. We introduce a five-dimensional analytical framework, comparing Classical Foundations, Modern Forms, Continuity Mechanisms, Transformation Dynamics, and Sharia/Ethical Implications, to examine how classical contracts (Mudarabah, Musharakah, Bay’ al-Salam) have evolved into modern capital market instruments (Sukuk, Takaful, trade finance). Our findings indicate that while contractual continuity remains robust at the formal compliance level, institutional transformation has led to a significant reliance on debt-like replication (Tawarruq) and benchmark pricing linked to conventional interest rates. Consequently, modern innovations often prioritize legal form over economic substance (Maqasid al-Shariah).