Accommodating Islamic Finance within Albania’s Legal and Financial Framework: A Comparative Study of European Practices

Purpose — This paper explores the specific legal, fiscal, and regulatory adaptations necessary to create a viable and competitive framework for Islamic finance within Albania’s secular, European Union (EU)-aligned financial system. It moves beyond identifying the potential of Islamic finance to diagnosing current barriers that constrain the market, examining how Albania can implement a level playing field to promote financial inclusion. Design/Methodology/Approach — The study adopts a qualitative, two-stage research design. It first conducts a diagnostic analysis of Albania’s legal and fiscal framework to identify foundational impediments. It then employs a targeted comparative analysis of European jurisdictions, prioritising relevant civil law models (Germany, France, Bosnia and Herzegovina) and drawing specific tax solutions from the United Kingdom (UK), to extract practical, actionable insights for the Albanian context. Findings — The research identifies two primary impediments: (1) foundational conflicts in core banking law, chiefly an interest-based definition of ‘credit’ that legally excludes Sharīʿah-compliant contracts, and (2) a prohibitive tax regime that creates double taxation (e.g., VAT on murābaḥah and property transfer tax on diminishing mushārakah), rendering Islamic products commercially unviable. The findings from the comparative analysis show that successful European jurisdictions overcame these exact barriers not through systemic overhauls, but through targeted, pragmatic reforms—such as flexible regulatory interpretation (the German model), administrative tax circulars (the French model), and hybrid developmental market-entry strategies (the Bosnian model)—which provide a clear roadmap for Albania. Originality/Value — This paper contributes to the limited literature by moving beyond a general discussion of the ‘potential’ of Islamic finance to providing a detailed diagnosis of specific legal and fiscal barriers in Albania. It is the first to map these specific problems to proven, practical solutions from relevant European civil law jurisdictions, offering a context-sensitive, actionable roadmap for policymakers and financial sector stakeholders. Research Limitations/Implications — The research is based primarily on secondary data and regulatory comparison. Future studies could extend the analysis by incorporating empirical data from Albanian consumers and regulators to assess practical readiness and demand for Islamic financial services. Practical Implications — The findings offer a roadmap for Albanian authorities to implement a more inclusive financial environment and attract ethical capital by enabling Sharīʿah-compliant banking within existing structures. Social Implications — Facilitating access to Islamic finance may enhance financial participation among underserved populations, contributing to broader economic inclusion and social cohesion in Albania.