A joint publication launched by the Islamic Development Bank Institute (IsDBI) and London Stock Exchange Group (LSEG) warns that many emerging and developing economies are caught in persistent structural “development traps” that inhibit long-term growth and transformation.
The report – titled “Development Traps and the Role of Islamic Finance: An Introduction to Development Challenges Facing IsDB Member Countries” – sets out a data-driven framework for identifying five key obstacles, and explores how Islamic finance can play a meaningful role in addressing them.
The report was launched during the 20th AAOIFI-IsDB Annual Islamic Banking and Finance Conference held on 2 November 2025 in Manama, Bahrain.
The conference brought together policymakers, economists, and industry leaders to discuss how Islamic finance can help member countries overcome persistent structural barriers to growth.
The report comes amid mounting recognition of the potential of Islamic finance to support sustainable, inclusive development, but also underlines the formidable barriers that many countries continue to face in converting financial innovation into structural progress.
Five key growth barriers identified
According to the report, the five “development traps” are:
The Middle-Income Trap – where economies struggle to escape a mid-income plateau because productivity, diversification and innovation stagnate.
The Natural Resources Trap – over-reliance on resource rents which inhibit diversification and generate volatility.
The SMEs & MSMEs Trap – where small and medium enterprises fail to scale, limiting job creation, innovation and broad-based growth.
The Debt Trap – mounting public or private indebtedness that constrains productive investment and squeezes fiscal space.
The Technology Trap – insufficient adoption of digital tools, innovation and knowledge capital that hinder leap-frogging and upgrading.
The report says these traps can interact and reinforce one another, deepening stagnation instead of promoting acceleration. It argues that identifying early warning indicators through extensive global data sets is vital to designing policy responses.
The co-authors say that while the traps are formidable, deploying Islamic finance instruments may provide distinctive avenues to help emerging economies overcome them.
The publication highlights Shariʿah-compliant tools such as sukūk (Islamic bonds), waqf (endowments), muḍārabah (profit-sharing), and zakāt (alms or mandatory charity) as potential enablers for inclusive, risk-sharing, and sustainable growth.
Dr Sami Al-Suwailem, Acting Director General of IsDBI, described the-launching of the report as “an important milestone in our efforts to provide actionable intelligence for policymakers. It offers early-warning signals to help our member countries avoid structural traps and leverage the full potential of Islamic finance for sustainable, inclusive growth.”
Mustafa Adil, Head of Islamic Finance at LSEG, said: “Our partnership with IsDBI demonstrates how financial innovation and reliable data can be mobilised to address the most pressing development challenges. Islamic finance is not only ethical — it is strategically positioned to deliver impact in emerging economies.”
The report suggests that linkage-mechanisms between capital markets and Islamic finance frameworks can help score-up new forms of inclusive growth financing; for example, via sukūk financing of SMEs, technology-oriented projects, or waqf-backed innovation hubs.
For many countries within the IsDB member-group, achieving structural transformation remains elusive despite decades of growth. The emergence of the five “development traps” offers a taxonomy through which policymakers, investors and practitioners can calibrate risks and opportunities more precisely.
Moreover, the emphasis on Islamic finance adds a fresh dimension: rather than simply viewing capital-markets development as a conventional task, the report reframes the challenge in terms of ethics, participation, risk-sharing and inclusion; values that are increasingly central to sustainable development thinking.
The data-driven approach (drawing on over 20 global institutions, including the World Bank, International Monetary Fund (IMF), United Nations Development Programme (UNDP), World Intellectual Property Organization (WIPO), Organisation of the Petroleum Exporting Countries (OPEC) and the International Labour Organization (ILO)) underscores a deeper shift toward data-intensive policy-making in the Islamic finance development space.
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