Islamic Finance

An alternative to conventional banking and finance

Islamic or Shari’ah-compliant finance is based on the principles of Islamic law (Shari’ah), as set out in the Qu’ran and derived from the Sunnah (the practices of the Prophet Muhammad). Islamic finance is often considered an alternative to conventional banking and finance.

Basic Shari’ah principles include:

  • Sharing risks. One of the pillars of Islamic finance is that profit is not guaranteed - a lender must share the risks of a transaction with the borrower.
  • No unfair gain. The charging of interest (Riba) is strictly prohibited, including the idea of unfair gain and exploitation by one party to a transaction. This means there must be a balance between income gained and risks taken.
  • No speculation. Transactions that are purely based on speculation and chance, rather than on the efforts of the parties involved, and in which the risk exists of total loss for one party, are considered void. In terms of Islamic finance transactions, this includes investment in products that have the characteristics of a gamble.
  • No uncertainty. Any agreement considered to contain a significant element of uncertainty (Gharar) may be considered void. The key elements of a contract, such as the subject matter and the price, must be predetermined.
  • Protection of the public interest. Any investment in a product or activity considered unethical or against the public interest is prohibited. This includes investment in gambling, alcohol and pork products.

Various international bodies have been created in recent years with a view to establishing standardised Shari’ah governance principles. Based in Bahrain, the Accounting and Auditing Organization for Islamic Financial Institutions is an autonomous not-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shari’ah standards for Islamic financial institutions and the industry at large.

Islamic corporate governance is also defined by the Islamic Financial Services Board, a Kuala Lumpur-based international body, which sets global prudential standards and guiding principles for the financial industry in compliance with Shari’ah.

Role of the Shari’ah board

Most Islamic financial institutions have their own Shari’ah board or committee consisting of one or more Shari’ah scholars or advisors who are expert in Islamic commercial jurisprudence and finance. The Shari’ah board examines the structure and documentation of a product or a transaction to determine whether it is in compliance with, and permissible, under Islamic law.

Why is Luxembourg a domicile of choice for Islamic finance?

The Luxembourg legal and regulatory framework is well adapted to Islamic financial instruments and transactions, as well as being one of Europe's main financial centres.

The principal Islamic contracts, such as Murabaha, Ijara, Istisna’a and Musharaka, are commonly used under Luxembourg law and have been the subject of clarification by the country's tax authorities, to ensure they offer the same advantages as conventional financial instruments. In addition, Luxembourg benefits from a well-developed network of double-taxation-avoidance treaties, numerous bilateral investment protection treaties, as well as offering a large selection of vehicles and structuring options.

What opportunities does Luxembourg offer ?

The Luxembourg legal framework offers various opportunities for the implementation of financial transactions and structures in a Shari’ah-compliant way:

  • An Islamic financial institution may enter into a contractual relationship with its counterparty, for example in the form of a Murabaha, Musharaka, Mudaraba or Ijara, in which its prospective income is tied to the underlying transaction and takes the form of a share of profit rather than a spread.
  • A wide range of regulated and unregulated vehicles may be used to structure Shari’ah-compliant investments in private equity or real estate, or to organise family estates.
  • To obtain access to medium- to long-term capital debt, a company or government may consider the issuance and/or its listing of Sukuk in Luxembourg.
  • Funds may be set up in a Shari’ah-compliant manner and invest in instruments that earn profit in ways that are deemed Halal, including investment in equities, Sukuk, commodities and real estate.

How can we be of assistance?

Arendt has established a team focusing on Islamic finance in Luxembourg and Dubai, developing efficient solutions for clients’ needs. Our team represents both Islamic and non-Islamic banks, as well as financial institutions and asset managers throughout the entire value chain of commercial Islamic finance products.

Our lawyers are active within committees and working groups set up by the Luxembourg authorities, as well as business associations dedicated to Islamic finance. We are also a founder member of Isfin, a global network of independent law firms specialising in Islamic finance.

Our strategic presence in Dubai enables us to cover all key jurisdictions and markets in the Middle East, North Africa and India.

Please click here to download our Islamic Finance brochure.

Please click here to learn more about our Team in Dubai.

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