For decades, Islamic finance and mainstream capital markets have run on parallel tracks. They share the same cities, sometimes the same banks, yet they often use different products, different rules and different investor networks.
That gap may be starting to narrow. As banks and governments experiment with putting financial assets on digital ledgers, the same technology is being used to build Shariah-compliant products. The result is an unexpected meeting point between two worlds that have long operated side by side.
A large market that is easy to overlook
Islamic finance is no longer a niche. According to the Islamic Finance Development Indicator report from LSEG and the Islamic Corporation for the Development of the Private Sector (ICD), global Islamic finance assets are projected to reach US$9.7 trillion by 2029. The global sukuk market passed US$1 trillion in outstanding value in 2024.
The UK has played a bigger role than many people realise. London has long been one of the main Western centres for Islamic finance. The government issued its first sovereign sukuk in 2014, raising £200 million, and followed it with a £500 million issue in 2021. At the time, the Treasury described the move as cementing the UK’s position as a leading hub for Islamic finance outside the Islamic world.
The principles behind Shariah-compliant finance
To see why tokenization fits, it helps to understand what makes a product Shariah-compliant.
No interest. Islamic law prohibits riba, or interest. Returns have to come from trade, leasing, partnership or ownership rather than from lending money at a fixed rate.
Real assets. Investments are expected to be linked to tangible economic activity, not pure speculation.
Shared risk. Profit and loss are generally shared between the parties rather than pushed entirely onto one side.
Permitted activities. Businesses involved in areas such as alcohol, gambling or conventional banking are excluded.
A sukuk reflects these principles. Instead of lending money, holders own a share of an underlying asset, or the income it generates.
Where tokenization comes in
Tokenization means recording ownership of an asset as a digital token on a blockchain or similar shared ledger. The asset stays the same. What changes is how ownership is issued, recorded and transferred.
Mainstream finance is moving in this direction. In the UK, the Bank of England and the Financial Conduct Authority run a Digital Securities Sandbox that lets firms test digital market infrastructure under supervision. In July 2026, HSBC became the first sandbox participant approved to provide live digital securities depository services. The government has said the first issue of its pilot digital gilt, known as DIGIT, will take place on HSBC’s platform by the first quarter of 2027.
These developments are about conventional government debt. But the underlying idea, a clear digital link between an investor and a specific asset, lines up closely with the logic of Islamic finance.
Why the two fit together
Several features of tokenization map naturally onto Shariah principles.
Asset traceability. A token can be tied to a specific asset, with a record of who owns what. That supports the requirement for real, identifiable assets.
Built-in rules. Smart contracts can encode conditions, such as how rental income is distributed, which can help make compliance more consistent.
Clearer audit trails. A shared ledger can make it easier for Shariah boards and auditors to review how funds and assets have moved.
Smaller units. Assets can be divided into small portions, which could open products such as sukuk to a wider range of participants over time.
In the Gulf, this is already being tested. Regulators in the UAE and Bahrain have created supervised environments for digital sukuk and tokenized real assets. Abu Dhabi Islamic Bank has launched a digital sukuk offering through its banking app.
Specialist firms are also emerging to handle the process. Tokenizing an asset usually involves coordinating lawyers, Shariah scholars, custodians and technology providers. Dubai-based Zamanat is one example of a firm that acts as a single accountable partner across that process, from structuring and Shariah compliance to digital issuance.
The challenges that remain
The meeting point between these worlds is promising, but it is far from settled.
Scholarly consensus. Shariah scholars and standard-setters are still discussing how existing rules apply to digital formats, and views can differ between jurisdictions.
Regulatory differences. A product regulated in Dubai is not automatically permitted in London, and cross-border offerings face several sets of rules.
Liquidity. A digital token can be transferable around the clock, but that does not guarantee an active secondary market.
Technology risk. Smart contract errors, cyberattacks and custody arrangements remain concerns across the digital asset sector.
Legal certainty. Courts and regulators are still working through exactly what rights a token represents and how they are enforced.
What it could mean for the UK
The UK brings together several ingredients that matter here: a long record in Islamic finance, a regulatory sandbox for digital securities, and a government actively testing tokenized gilts.
Whether that leads to tokenized sukuk or other Shariah-compliant digital products in London remains an open question. It will depend on regulatory choices, industry demand and progress in the Gulf, where much of the early work is taking place.
What is clear is that the lines between conventional finance, digital infrastructure and Islamic finance are becoming less rigid. For a financial centre that has long positioned itself as a bridge between markets, that is a trend worth following.
This article is for general information only and does not constitute financial, investment or religious advice.
