It is not just about the prohibition of interest
The prohibition on the charging of interest (or riba) is probably the most well-known aspect of conducting business in accordance with Shariah principles. The Islamic finance industry has grown exponentially in recent decades to cater to the increasing demand for Shariah-compliant finance.
However, Shariah can have a much wider effect on commercial transactions. For example, investments that involve chance or speculation (known in Arabic as maisir) or prohibited products (such as pork products, alcohol and conventional finance) are unacceptable or haram.
This can obviously take some real estate developments (such as casinos) out of the scope of Shariah-compliant investment and cause issues for other asset classes, particularly in the hospitality, retail and banking sectors.
Of particular relevance to the property industry is the fact that conventional insurance products are haram and, as a result, developers who are operating strictly in accordance with Islamic principles can be required to purchase Shariah-compliant insurance products, or takaful.
Relevance extends globally
Many of the Shariah-compliant structures used in business have been developed in the predominantly Muslim countries of the Middle East and south-east Asia. However, in recent years, Islamic finance has become much more of a global phenomenon as investors from Islamic countries have looked to put their money overseas and governments and corporates from countries outside the Muslim world have issued Shariah-compliant bonds (or sukuk) to tap into alternative sources of funding.
The UK is a prime example of this and a number of real estate investments in London (for example, Chelsea Barracks and the Shard) have relied on Shariah-compliant investment. Several non-Islamic countries have issued sovereign sukuk, including Singapore, the UK and Hong Kong, and this trend is set to continue as other parts of the world, such as Africa, follow suit.
There is no standard for Shariah compliance
Shariah (literally meaning “the way” in Arabic) is a set of rules, principles and parameters derived from the primary sources of the Koran and the practice of the Prophet Muhammad. Certain elements of Shariah are fairly specific (such as the prohibition on interest) but others are more akin to principles or guidelines, which are open to further interpretation.
As a consequence, there are no codified rules governing Shariah-compliance and the structures and their implementation in practice vary depending on the jurisdiction of parties and the approach of their Shariah supervisory boards.
The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) publishes agreed standards for use in the context of Islamic finance and these are increasingly used by banks and financial institutions but Shariah-compliant products continue to evolve and adapt as the industry grows.
There are challenges integrating with local laws and customs
In most countries, including some in the Muslim world, the legislative and regulatory frameworks do not expressly cater for Shariah-compliant products. In particular, the fact that many Islamic finance structures rely on the sale and leaseback of real property, practitioners need to be careful to avoid additional stamp duty or other taxes that would not arise in conventional finance.
A number of countries, such as the UK, France, Malaysia and Singapore, have introduced legislation to deal with these issues, and this has helped the development of Islamic finance in those jurisdictions, as discussed above.
Real estate is a natural fit for Shariah-compliant investment
Shariah encourages investment in assets that are for the benefit of society as whole. The combination of this core principle and the fact that many Islamic finance structures need to be asset-based or asset-backed means that the real estate sector is ideally placed for Shariah-compliant investment and that growth in this area is set to continue.
Anthony Pallet is a partner at Hogan Lovells Dubai