This chapter investigates the intersection between Islamic banking principles and circular economy (CE) models, with particular attention to their potential to support sustainable financing pathways for small and medium-sized enterprises (SMEs). It argues that Shariah-compliant finance, through the prohibition of interest (riba), excessive contractual ambiguity (gharar), and speculative behavior (maysir), together with requirements for asset-backing and ethical investment, aligns with the CE’s emphasis on regenerative use of resources and long-term value retention. The discussion considers the ethical and operational foundations of Islamic banking, its compatibility with circular business models, and the relevance of financial instruments such as mudarabah, Musharakah, ijarah, Murabahah, and sukuk. Case studies are used to illustrate current applications and their limitations. The chapter also evaluates regulatory, institutional, and market-level barriers that restrict wider adoption. The analysis concludes with recommendations for regulatory alignment, capacity development, and demand stimulation, positioning Islamic finance as a credible vehicle for sustainable SME development.