Institutional Capacity and the Contemporary Paradox of Islamic Finance

This paper argues that the contemporary paradox of Islamic finance is not primarily a doctrinal failure, nor the result of insufficient demand, but rather the consequence of uneven institutional capacity across jurisdictions. Despite strong normative appeal, sustained sectoral growth, and the expansion of Islamic finance across more than 140 countries, the industry remains unevenly institutionalized, geographically concentrated, and operationally fragmented. To explain this gap, the paper develops an institutional capacity framework structured around three dimensions: normative coherence, institutional credibility, and operational capacity. It shows that Islamic finance requires not only Shariah-compliant products, but also harmonized and intelligible standards, credible governance mechanisms, transparent Shariah supervision, effective audit structures, professional expertise, market infrastructure, and deep ecosystems. By applying this framework to current debates on standardization, Shariah governance, perceived authenticity, market depth, and ecosystem development, the paper suggests that the future of Islamic finance depends on its ability to transform Shariah principles into coherent standards, credible institutions, and operationally robust markets.