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By: Sarah Snebold, Volume 105 Staff Member

Within a globalized economy, it would be foolish to turn a blind eye to Islamic finance and its respective market. Islamic finance presents the ability to tap into emerging markets within the Middle East, Africa and Asia.[1] Citigroup Inc. and Morgan Stanley profited by entering these markets, evidenced by to the rise of mergers and acquisitions in the Middle East and Africa.[2] Furthermore, Islamic finance bonds (the sukuk) emphasizes the expansion of Islamic finance beyond the Muslim world, with the sukuk increasingly covering assets based in the U.K., continental Europe, Asia, and the United States.[3] But even without the sukuk growing outside the Muslim world, Citigroup Inc. and Morgan Stanley point to the expanding market of Islamic finance, especially within the energy sector.

Yet, the United States fails to recognize the potential for the green sukuk to serve as the ideal vehicle for financing infrastructure and energy projects in the Middle East and North Africa.[4] There is no law within the United States addressing Islamic finance on the federal level. Consequently, businesses lack direction to define transactions for tax purposes creating the potential for a significant tax liability. In addition, this significantly increases the opportunity cost for U.S. businesses to compete in the sukuk market. Specifically, the void of resources and legal direction regarding Islamic finance prevents U.S. businesses—who are smaller than Morgan Stanley—from participating in a potentially lucrative market.

This Post will explain the unique features of Islamic Finance. First, it focuses on the principles and underlying ethics of Islamic finance, including: the prohibition of interest, the role of banks, and sustainability focused bonds. Next, it examines the world’s largest Islamic finance transaction: a USD 44.78 billion perpetual subordinated instrument between the Ministry of Finance of The Kingdom of Saudi Arabia and the Saudi Electricity Company. The transaction exhibits how the principles of Islamic Finance and underlying ethics shape the structure of transactions in a manner that is starkly different from conventional banking. Seeing the lucrative potential of Islamic finance and its’ fundamental differences from conventional banking exposes the need for the U.S. to supply resources and laws to diminish the high costs for U.S. business to enter the market.


Islamic finance as an industry began in 1970 with global assets today over USD 2.5 trillion.[5] The core of Islamic finance, how businesses and individuals raise capital per Sharia law, is as old as Islam.[6] Islam is more than a religion; it encompasses a way of life, including commercial and financial aspects.[7] Thus, states under Sharia law base their criminal and civil legal systems out of the Qur’an.[8] Essentially, Sharia law eliminates the difference between church and state and operates in a fundamentally different way than Western capitalism.[9] There are eight distinctive features of Islamic finance: (1) religious basis; (2) prohibition of interest; (3) linking to real assets; (4) banks act as a partner; (5) presence of profit and loss sharing; (6) more prudent selection for resource allocation; (7) more prudent selection for productive investment; and (8) prohibition of unnecessary and excessive risk.[10] In an attempt to reconcile conventional banking with the unique traits of Islamic finance, transactions can delineate its’ assets and cash flows, thus employing both shariah-compliant and conventional financing.[11]

A. An Unthinkable Concept in Conventional Banking: Riba

An area within Islamic finance that raises extensive issues is the prohibition of Riba. Riba is a concept in Islam referring to growth, translating to the pursuit of illegal, exploitative gains made in business or trade under Islamic law.[12] Islam forbids interest credited from loans or deposits, seeing this as usurious and exploitative.[13] Riba counters the foundation of conventional banking—interest-based—creating additional hurdles for businesses to conduct transactions in an expanding market. To clarify how Riba raises complications for Western companies, imagine a hypothetical where an energy company in Texas wants to complete a transaction with a company in Saudi Arabia. The Texan company cannot rely on the traditional transactions steeped in interest-based banking. Instead, the Texan company must figure out how to structure a transaction to be Sharia-compliant and enforceable in both countries.

Riba illuminates the stark contrast between conventional banking and Islamic finance. Islamic jurists and Islamic economists’ critique conventional banking as an inefficient allocation of resources in an interest-based system because it links the creditworthiness of the borrower and their collateral to provide to their worthiness for the resource.[14] Conversely, Islamic banking links the allocation of resources to the productivity of the borrower’s economic activity and skills.[15] When the two systems interact, the parties must reconcile fundamentally opposing banking systems, changing the form of the transaction.

B. Changing the Role of Banks: A Partner to Both Parties

The bank plays a contrasting role in Islamic finance versus its role in conventional banking. Islamic finance replaces interest-based banking with sharing profit and loss by both the fund’s provider and the fund’s user.[16] In conventional banking, the bank borrows funds from depositors and lends the funds to borrowers or entrepreneurs.[17] As the fund’s provider, the bank earns interest on their loan irrespective of the outcome.[18] However, Islamic banks act as a partner to both the depositor and the borrower.[19] The fund’s provider (bank) shares in the profit at a pre-agreed ratio.[20] Consequently, the basis for a bank’s decision to fund a transaction is significantly different in Islamic banking versus conventional banking. In conventional banking, the bank focuses on the borrower’s creditworthiness, ensuring the borrower’s ability to pay the interest and the principle.[21] In Islamic banking, the bank focuses on the proposed project and the entrepreneur’s ability for success because the project’s success and profits create profits for the bank.[22]

C. Sukuk: Shifting Focus to the Value of the Transaction to Society

The Sukuk is the Islamic alternative to a conventional bond,[23] reflecting a pass-through certificate in practice.[24] The Accounting and Auditing Organization for Islamic Financial Institutions (AAOFI) “defines sukuk as certificates of equal value representing an ownership interest in defined assets, usufruct, or services, as well as equity in a project or investment activity.”[25] The sukuk presents an opportunity utilize socially responsible investing[26] with access to tangible assets and steady revenue streams, typically with sovereign-backed financing.[27]

Shariah law is deeply entrenched with an ethical framework[28] depicted through the legal maxim: “There shall be no harm, nor the reciprocation of harm.”[29] Islam’s ethical values parallel the growing interest in socially responsible investing (“SRI”). Globally, investors and financial institutions are recognizing the likelihood of an environmental catastrophe and the seriousness of the environmental crisis.[30] Accordingly, investors and financial institutions started establishing normative criteria to screen out behavior and products viewed as irresponsible and unethical.[31]

In line with the growth of SRI, the green sukuk has progressed considerably over the past 3 years, arguably making adoption of the green sukuk a key capital market instrument for funding environmentally friendly projects.[32] A green sukuk is financially a conventional “sukuk” but mandates usage of the sukuk proceeds only to fund environmentally friendly projects.[33] Consequently, green sukuk is a noteworthy vehicle for supporting environmentally conscious efforts, such as “green” or carbon-conscious-projects, through Islamic real estate and private equity investors.[34]


The world’s largest Islamic finance transaction delineates the bank’s “partner” role and how the principles of Riba and Sukuk shape transactions and underlying ethics.[35] Saudi Electricity Company (SEC) generates and distributes electricity throughout Saudi Arabia.[36] The Ministry of Finance of The Kingdom of Saudi Arabia signed an agreement with SEC regarding a USD 44.78 billion perpetual subordinated instrument under Abdulaziz Alajlan & Partners’ legal counsel in association with Baker & McKenzie Limited.[37]

The SEC transaction is a great demonstration of the Islamic finance concepts described above that directly influence the structuring of the respective transaction. The transaction used trust financing—the Mudaraba—an Islamic finance technique,[38] where a lender and a borrower establish a profit-sharing partnership undertaking a business or investment activity.[39] The investor provides the financing, and the borrower provides the professional, managerial, and technical know-how for carrying out the business. Instead of interest, the borrower earns a “fee” deducted from profits, with the parties sharing said profits according to their pre-agreed ratio.[40] This reflects the Riba, discussed above, with the bank entering as an additional partner within the transaction. The SEC transaction reflects how Islamic financing techniques—such as the Mudaraba—can also be considered a partnership contract. With one partner—Rab al Maal—acting passively and providing capital[41] and the other partner—Murarib—providing labor and knowledge,[42] and parties sharing the profit, per the previously agreed upon ratio.[43] However, only the partner providing the capital bears losses, with their liability limited to the funds already invested.[44] The Mudaraba can be terminated by either party unilaterally with a reasonable period of notice or mutually terminated at any time.[45]


The SEC transaction represents how the AAOIFI and market participants responded to the downturn through strengthening green sukuk and integrating green standards into its norms.[46] It represents the prominence of sovereign or government-related entities to issue the sukuk in the GCC.[47] And points to how the energy sector, particularly power, oil, and gas, is dominating the sukuk issuance market.[48] The SEC transaction and the rise of green sukuk signals the fact that Islamic finance is not disappearing.

Furthermore, the market for green investments—investment activities focusing on companies and projects committed to environmentally conscious business practices[49]— continues to grow and is projected to grow exponentially.[50] Simultaneously, the need for infrastructure, energy, and financing liquidity within the Middle East and North Africa (MENA), creates a strong incentive to utilize the green sukuk.[51] Despite this, the U.S. plays an inactive role financing projects in the MENA region in comparison to China, whose activities are of particular interest to U.S. foreign policy.[52] Nor are there any U.S. laws specifically addressing Islamic finance.[53] The unique characteristics of Islamic finance combined with the lack of U.S. laws and resources makes it more difficult for U.S. businesses to fully take advantage of the market. Thus, the U.S. legislature needs to respond by addressing Islamic finance and allow U.S. businesses to profit from the market during its’ projected exponential growth.


[1] Umar F. Moghul & Samir H. K. Safar-Aly, Green Sukuk: The Introduction of Islam’s Environmental Ethics to Contemporary Islamic Finance, 27 Geo. Int’l Envtl. L. Rev. 1, 39 (2014).

[2] Matthew Martin, JPMorgan Ousted as Mideast-Africa’s Top Dealmaker by U.S. Rivals, Bloomberg News (Dec. 21, 2020, 5:43 AM),after%20a%2013%2Dyear%20absence [].

[3] Moghul & Safar-Aly, supra note 1.

[4] Id. at 40.

[5] ICD Refinitiv Finance Development Indicator (IFDI), Islamic Finance Development Report 2019: Shifting Dynamics 4 (2019).

[6] See Syeda Fahmida Habib, Fundamentals of Islamic Finance and Banking, WILEY 1 (2018).

[7] Id.

[8] Id. at 28 (“The first and primary source of Shariah law is the Quran.”).

[9] See id. at 1 (“The Islamic law called Shariah law dictates specific dos and dont’s related to all aspects of a Muslim’s life, including commercial and financial transactions.”).

[10] See id. at 3–4.

[11] John H. Vogel, Islamic Finance and Markets: Getting the Deal Through, Crowell & Moring (2020).

[12] See Habib, supra note 6, at 31 (“[Riba] means the increase, addition, expansion or growth in the money that is owed. Hence Riba or interest means earning money from money. . . . Islam considers Riba to be unearned and undeserved income and prohibits all forms of it.”).

[13] See id. at xii.

[14] Id.

[15] Id.

[16] Id.

[17] Id. at 3.

[18] Id. at 31.

[19] Id. at 3.

[20] Id. at 31.

[21] Id.

[22] Id..

[23] Id. at 218; see also S&P Global, Islamic Finance Outlook: 2020 Edition 10 (2020).

[24] Moghul & Safar-Aly, supra note 1, at 35.

[25] Id. at 34 (citing Accounting & Auditing Org. for Islamic Fin. Inst., Standards for Islamic Financial Institution 307 (2007) (standard 17 § 2)).

[26] Id. at 25.

[27] Id. at 34–35.

[28] Id. at 4.

[29] Id. at 24.

[30] Id. at 2.

[31] Id.

[32] Pioneering the Green Sukuk: Three Years On, The World Bank (Oct. 6, 2020), [].

[33] Id.

[34] Id.

[35] Legal Advisors Abdulaziz Alajlan & Partners in Association with Baker & McKenzie Limited Advises the Ministry of Finance of The Kingdom of Saudi Arabia in Relation to a SAR 167.92 Billion Shariah Compliant Financing to Saudi Electricity Company, Baker McKenzie (Nov. 17, 2020), [].

[36] Saudi Electricity Co, Bloomberg, [].

[37] Baker McKenzie, supra note 35.

[38] Habib, supra note 6, at 95.

[39] Mudaraba, Practical Law: Glossary, 6963?transitionType=Default&contextData=(sc.Default)&firstPage=true [].

[40] Id.

[41] See Habib, supra note 6, at 95.

[42] Mudaraba, Islami Bank Bangladesh Limited, [].

[43] Id.

[44] See Habib, supra note 6, at 97.

[45] Id. at 96.

[46] Id. at 37.

[47] Id. at 39.

[48] Id. at 37.

[49] James Chen, Green Investing, Investopedia (Sept. 29, 2019) [].

[50] See Elliot Smith, The Numbers Suggest the Green Investing ‘Mega Trend’ is Here to Stay, CNBC (Feb. 14, 2020 at 3:00 AM), [] (“We believe . . . green stocks could, over time, become some of the world’s most valuable companies – even eclipsing the current technology monopolies as regulation accelerates during the coming decade.”).

[51] See Habib, supra note 6, at 40.

[52] See Jordi Quero, China’s Impact on the Middle East and North Africa’s Regional Order: Unfolding Regional Effects of Challenging the Global Order, 13 Contemp. Arab Affs. 86 (2020) (discussing how China may prove successful in creating alternative norms and institutions in comparison to those which currently define the global liberal order, and so could trigger shifts in the MENA normative environment).

[53] John H. Vogel, Islamic Finance & Markets in the USA, Lexology (Mar. 13, 2019), [] (“There are no US laws specifically addressing Islamic finance in the United States . . . .”).