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Islamic Project Financing

27 July 2022

When it comes to international law, one of the most important considerations is compliance with multiple systems. Here, Burlingtons’ Lydia Mills shares details about working with UK and Islamic Law

Islamic finance, in its broadest sense, is financing activity which adheres to Sharia principles derived from the religious precepts of Islam. In practise, this involves using innovative or alternate investment structures which are both Sharia compliant and deliver financial returns akin to non-Sharia transactions.

How is Islamic finance different to conventional finance?

One of the key elements of Islamic finance is that returns must be generated from commercial risk-taking and trade. Money is not seen to have intrinsic value in and of itself and cannot be used to generate money. It follows that, unlike conventional finance, there is an absence of interest (riba). Instead, a mark-up or profit share is realised through entering into sale and purchase agreements, leasing arrangements or equity investments. With a tangible underlying asset capable of generating income, real estate finance is a well-established area of Islamic finance, with prime residential or trophy commercial assets being a primary focus.


Interpretation of Sharia principles varies, particularly across international borders. To ensure that projects and their underlying agreements are Sharia compliant, financing bodies will typically require a supervisory board or committee of Sharia scholars to issue a religious opinion (fatwa) on a proposed transaction. This pronouncement will usually be a condition precedent to a transaction proceeding. While there is a limited number of qualified Sharia scholars, in practise scholars will often sit on multiple boards or committees, contributing to a more uniform interpretation on Sharia.


Islamic finance structures differ but can be broadly categorised as either asset-based or risk-sharing. For example, one of the most widely accepted structures used for trade finance is “murabaha”. In a murabaha transaction, the financing party rather than the borrowing party buys an asset from the seller and onward sells the asset to the borrower for the original purchase price plus a mark-up agreed at the outset. This mark up or premium is usually calculated in reference to a benchmark figure such as Libor, plus a margin.


Istisna’a is a method of Islamic finance usually used for construction projects. Unlike the murabaha structure, the lender does not acquire a finished product or asset but funds its construction or development to an agreed specification, at which point it acquires the product or asset and sells it back to the developer. Again, the lender’s return is usually tied to a benchmark figure plus a margin.


Akin to a conventional joint venture, a musharaka is usually seen in long term investment projects whereby the financing party contributes capital and the party seeking finance contributes either assets or its professional services. The musharaka partners will share the profits at an agreed ratio, however losses are shared on the basis of capital input. This model may be varied so that the financing party’s participation diminishes over time as the other party buys its interest.

Combining conventional and Islamic finance

Where projects include elements of both conventional and Sharia compliant funding, careful structuring is required to keep these separate. By way of example, businesses or assets which are the subject of financing arrangements must be permissible (halal) and a retail park may include a restaurant which sells alcoholic products, which is prohibited.

In this instance, some Sharia advisors will permit investment on the basis that the restaurant occupies only a small percentage of the site as a whole. Alternatively, the retail park could be divided into a portfolio of units acceptable to Sharia investors.

Where more structural separation is required, Sharia funding could occur at top-co level, which by equity investment or shareholder loan provides funds to a subsidiary acquiring the retail park (reverse murabaha). Ultimately, there is no “one size fits all” approach and each structure and project would need to be assessed and guided by the Sharia advisors on a case-by-case basis.

Islamic finance and the UK

Historically the additional complexity, time and associated cost involved in incorporating Islamic finance into projects deterred potential borrowers. However, with innovative structuring these difficulties are surmountable. Indeed, Islamic finance is growing rapidly in the UK which last year saw the issuance of its second sovereign Islamic bond (sukuk) of £500 million, more than double the size of its first issuance in 2014.

This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Lydia Mills or write to us using the contact form below.

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