Global capital markets have undergone profound change over the past decade, witnessing a significant yet silent funnelling of investment funds towards a distinct risk-reward profile.

A relatively new class of financier with little or no brick-and-mortar presence has entered the fray and reshaped how funds flow through the economy. It is private credit.

But what is it? At its core, private credit is simply lending that happens outside traditional banks and public bond markets.

Instead of a mid-sized company going to a traditional high-street bank for financing or issuing bonds, it borrows directly from an investment fund or a specialised lending institution. It is a straightforward, privately negotiated deal between a borrower and a lender that bypasses public markets and traditional banking regulations.

A trillion-dollar shift

A decade ago, private credit was a niche corner of the financial world. Today, it is colossal and perhaps the fastest-growing space of global finance, hosting $3.5 trillion in assets under management, according to research from the Alternative Credit Council.

The future is optimistic, too, with industry forecasts suggesting the sector to reach $4 trillion by the end of 2029.

Following the 2008 financial crisis, regulators tightened rules around traditional lending, forcing banks to hold more capital and take fewer risks, restricting outflows to small and medium-sized enterprises. Private credit funds stepped in to fill the void and have aggressively expanded their market share ever since.

Why Islamic investors want in?

From GCC sovereign wealth funds to family offices and ultra-high-net-worth individuals, the appeal of private credit to Islamic investors is obvious.

Historically, Islamic fixed-income portfolios have been heavily reliant on the Sukuk market. And while Sukuk has won well-deserved plaudits, Islamic capital markets remain highly concentrated and dominated by sovereign issuers, financial institutions and blue-chip corporations.

Moreso, Islamic investors targeting higher yields – typically found in the middle market – or greater portfolio diversification face slim pickings.

Private credit offers exactly what these investors require. It provides access to a highly diversified pool of borrowers, regular cash flows, and, most importantly, attractive yields. Furthermore, private credit loans often use floating profit rates, which reset periodically in line with prevailing market rates, meaning investors aren’t locked into a fixed return that inflation can quietly erode over time.

This built-in feature has made the asset class especially attractive in recent years.

Structuring roadblocks

However, getting Islamic capital into global private credit has its own challenges, primarily because of how the asset class has been developed.

The vast majority of global private credit has originated conventionally, built entirely on interest-bearing loans. This is a complication the Islamic finance industry has spent years trying to unravel through structures such as the ‘Double SPV Murabaha’.

In simple terms, the ‘Double SPV Murabaha’ essentially acts as a ‘wrapper’ utilizing a pair of special purpose vehicles and trading of commodities, allowing investments into and cash flows from conventional investments to pass on to Islamic investors in a technically compliant format.

This remained a reliable workaround for years. But with evolving consumer consciousness and a broadening Islamic finance space, Shari’a scholars and standard-setting bodies have tightened screening of camouflaged offerings. They argue, and rightly so, that simply repackaging a conventional interest-bearing loan does not convert it into an ethical, risk-sharing Islamic asset.

The pushback is no longer theoretical. The Higher Shari’a Authority in the UAE, one of the most influential regulatory bodies in Islamic finance, has explicitly banned the use of the Double SPV Murabaha structure.

The authority has drawn a hard line: mimicking conventional debt without genuine Shari’a-compliant origination or real economic trade is unacceptable. For asset managers trying to deploy Islamic capital into Western private credit funds, this ruling has created a massive roadblock.

Shift to authentic origination and smart structuring

So, where does the market go from here? The answer lies in authentic origination and robust structural innovation.

Rather than waiting for a conventional loan to be written and then trying to wrap it with a Shari’a-compliant cover, forward-thinking players are now moving to the very front of the line.

One highly effective avenue worth mentioning is the Alternative Investment Benchmark (AIB). On the surface, utilising an AIB solution provides a clean, compliant pricing and referencing framework that allows Islamic capital to flow into private credit through genuinely asset-backed channels, entirely avoiding the red flags of synthetic wrappers.

Beyond frameworks like the AIB, specialized originators are also looking at structuring private credit deals directly with corporate borrowers using Islamic contracts from the onset. Whether it is purchasing and leasing back the company’s equipment (Ijara) or entering into a cost-plus financing arrangement (Murabaha), the goal is to originate authentic Islamic assets at the source.

While this requires heavier lifting and deeper education for conventional borrowers, it completely eliminates Shari’a compliance risks. It provides investors with the yield they want, backed by a structure that Shari’a scholars support.

What’s next?

Demand for Shari’a-compliant alternative assets is vastly outpacing supply. As wealth continues to accumulate across the GCC and Southeast Asia, Islamic investors are no longer willing to sit on the sidelines while the rest of the financial world capitalises on the private credit boom.

The era of banking on ‘form over substance’ structures to access conventional markets is coming to an end.

The future of Islamic private credit will belong to institutions willing to roll up their sleeves, implement frameworks like the AIB, and originate authentic, asset-backed transactions.

Building the necessary infrastructure and educating the broader market will take time, but those who get it right will not only unlock one of the most lucrative and untapped segments of Islamic capital markets but also set a template that everyone else will eventually have to follow.

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