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United Kingdom | Publication | 七月 2023
This article was first published in Estates Gazette on 13 June 2023
Many high-profile real estate transactions in the UK involve inward investment, and so it should be no surprise that Islamic finance has been successfully used to finance real estate assets in the UK for decades.
Despite this, Islamic finance is still considered a niche area by real estate professionals.
Yet, as Islamic investors continue to focus on the UK market, it is set to become more prevalent.
It is worth noting that Islamic finance may also appeal to those who do not subscribe to the Islamic faith, especially if the financial products are priced competitively, as some of the principles which are explored further below are also found in other faiths and cultures.
This is the first in a series of articles which aim to provide an overview of some key concepts and terminology to help demystify this area of financing for commercial real estate professionals.
Islamic finance is a form of financing based on the principles of Islamic law. It differs from conventional finance in multiple ways (it is not just a prohibition on the receipt and payment of interest, although this is probably its most commonly known feature) but the ultimate purpose is usually the same – to provide a customer with funds that can be used to further its legitimate commercial activities.
Shari’ah (which literally means “the way”) is the body of Islamic law which sets out rules, principles and standards which govern every aspect of a Muslim’s life, including economic and commercial activity. There are two primary sources:
Practising Muslims will refer to these sources to ensure that their activities are halal (permissible).
However, as with many theological and legal principles, there may not always be a consistent interpretation. There are some parts of Shari’ah that are quite specific, but others are of wider application and so may require further interpretation.
English qualified lawyers do not opine on Shari’ah compliance.
The transaction will instead need to be blessed by a Shari’ah scholar. As a result, financial institutions involved in Islamic finance may appoint scholars to form a supervisory board tasked to consider and advise on the acceptability of transactions from a Shari’ah compliance perspective.
Such an advisory board is often expected to advise on compliance at the outset of a transaction as well as ongoing, holistic compliance for that institution.
A Shari’ah scholar will either use:
If the scholar is satisfied that the structure of a transaction and the documentation proposed are acceptable, a fatwa may be issued (being a pronouncement by a Shari’ah scholar).
This has greater weight if there is a consensus (ijma’a) among several scholars, which is why a supervisory board is typically formed.
The following principles are particularly relevant in determining whether the proposed transaction will be acceptable:
There are many different contractual structures that may be used, and acceptable commercial contracts and legal relationships have developed over time.
The most common are briefly introduced below.
The commodity murabaha is a widely used version of the murabaha structure which allows the financier to provide longer-term financing without acquiring the asset which is the subject of the financing.
It is usual for the documents to be governed by English law (and if there are overseas elements in respect of companies involved, there may also be documents governed by such local law, as is the case for conventional financing).
It is also typical for the finance documents to contain a confirmatory statement or warranty that both parties have reviewed and assessed that the transaction is in accordance with Shari’ah principles and that neither party will raise an objection as to a matter of Shari’ah compliance.
Following Beximco Pharmaceuticals Ltd and others v Shamil Bank of Bahrain [2004] EWCA Civ 19, if a Shari’ah supervisory board has approved the documents, the English courts will simply look to the agreed contractual provisions and enforce these in accordance with English law.
Therefore, a fatwa from a board of Shari’ah scholars is helpful to protect against suggestions that a transaction or financial product is not Shari’ah-compliant.
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