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Islamic Finance Law

Islamic finance law has developed around Islamic finance, a faith-based system of ethical finance that shares its roots with the Abrahamic faiths of Judaism and Christianity (acknowledged in the Qur’an as the earlier God-sent scriptures). At its core, Islamic finance is premised on the prohibition of investment in interest-based ventures, and in businesses that provide goods or services contrary to Islamic principles, such as alcohol and gambling. Specifically, Islamic finance instruments must avoid the (i) payment or receipt of interest (“riba”),(ii) unconditional reward (some risk must be assumed), (ii) excessively tenuous/uncertain transactions (“gharar”) (e.g., sale of an unborn calf), (iii) speculative transactions (“maisir”) (e.g., enrichment without labor (gambling)), and (iv) transactions involving forbidden (haram) goods or activities.

Islamic finance is growing and it is estimated that there are assets under management of well over several trillion dollars. Islamic finance, as it posits, equity or quasi-equity investing serves as a natural and stabilizing counter-part to the existing financial system. Much interest in Islamic finance stems from developing structures that entice funds from the Gulf region for inward investment; increasingly, investors are searching for ethically-based structures and to the extent countries have such conduits they stand in a preferred status to attract such in-bound investment. In fact, some European financial capitals have gone to some lengths to attract such investment by creating a favorable regulatory climate for such investment.

Some prevalent Islamic finance products on the market include (i) musharaka, a partnership whereby each partner contributes assets to a venture and agree on a profit share, (ii) ijara, involving selling the right to use an asset for an agreed lease period, during which the lessor retains ownership of the underlying asset (commonly used for project/property financing transactions), and (iii) sukuk, which are derivative ownership certificates issued for an underlying asset, the revenues from which are distributed to the certificate holders.