Islamic finance and banking services represent a unique system based on Sharia principles, excluding riba (usury), which forms a distinct approach to financial operations and investments. The formation and development of Islamic finance have been formed over centuries, closely related to the history of Muslim societies and modern economic realities.
History of Islamic Finance
Decisions on the permissibility of financial products are made based on ijma (consensus of scholars) and fatwas (religious rulings), supervised by Islamic financial regulators and Sharia councils.
Islamic Finance: Development and Scale
The COREDO team has implemented projects for launching Islamic investment funds in the EU and supporting sukuk (Islamic bonds) transactions for corporate clients from the Czech Republic and the UK.
Islamic Finance for Business: Why Necessary?
Islamic finance is not only a religious feature but also a tool for enhancing social and ethical sustainability, integrating ESG principles, and accessing fast-growing markets in the Middle East and Southeast Asia. Halal investments enable companies to raise capital from new categories of investors, minimize reputational risks, and meet responsible business standards. COREDO’s experience shows that competent integration of Islamic financial instruments into a business model increases partner trust and opens access to new financing sources.
Principles of Islamic Finance
The principles of Islamic finance reflect Sharia requirements for fairness, transparency, and ethics in economic relations. These rules form a unique system where permissible and prohibited financial practices, such as riba and participation in risks, are strictly regulated.
Prohibition of Riba: Influence on Finance
Riba is a fundamental prohibition in Islamic finance. It is not only the refusal to charge and pay interest but also a fundamental change in the logic of financial relationships: income can only be earned through participation in real business, rather than passive capital provision. All Islamic financial instruments, from mudaraba (equity financing) to sukuk, are structured to eliminate riba and ensure a fair distribution of profits and losses.
Solutions developed at COREDO for European companies provide for a legal review of contracts and the structuring of Sharia-compliant transactions, allowing clients not only to meet Islamic law requirements but also to minimize tax and compliance risks.
Gharar and Maysir in Islamic Finance
For business, this means that derivatives, options, futures, and any deals with inherently uncertain outcomes are prohibited. In practice, COREDO has carried out a Sharia compliance audit for an investment fund in Estonia, with particular attention paid to eliminating gharar in documentation and excluding maysir from the investment policy.
Social Responsibility and Partnership
Fairness and partnership are integral elements of Islamic finance. Companies are obliged to uphold social responsibility, maintain transparency, and avoid investments in prohibited sectors (alcohol, gambling, weapons). Islamic corporate governance and ESG integration are becoming standards for international companies working with Islamic banks and funds. COREDO’s practice confirms that the implementation of Islamic corporate governance principles contributes to long-term sustainability and reduces regulatory risks.
Islamic Financial Products for Business
| Instrument | Description | Business Applicability | Key Risks/Limitations |
|---|---|---|---|
| Mudaraba | Equity financing based on partnership | Funding startups, investment projects | Requires transparency, joint management |
| Musharaka | Joint investment, partnership | Development of new lines, M&A | Need for clear role distribution |
| Ijarah | Leasing, asset rental | Purchasing equipment, real estate | Need to assess fair value |
| Murabaha | Trade financing with deferred payment | Procuring raw materials, goods | Risk of non-compliance with Sharia if improperly structured |
| Sukuk | Islamic bonds | Raising capital, investments | Strict Sharia compliance audit |
| Takaful | Islamic insurance | Asset protection, risk mitigation | Limitations on insurable risks |
Mudaraba and Musharaka: Differences and Essence
Mudaraba is equity financing where one party provides capital, and the other manages the project, with profits shared in a pre-agreed proportion. Musharaka is a partnership where all participants contribute and jointly manage the business. These instruments are particularly sought after for financing startups and investment projects in the EU and Asia. COREDO has demonstrated that mudaraba minimizes risks for the investor, while musharaka provides flexibility in business scaling.
Leasing or Trade Financing: Ijarah, Murabaha
Both instruments are actively used for financing equipment, real estate, and working capital. COREDO’s solutions for clients in Singapore and Dubai include comprehensive legal expertise and transaction support for ijarah and murabaha, allowing our clients to effectively manage assets and liquidity.
Sukuk and Islamic Investment Funds
Sukuk are Islamic bonds backed by real assets, where income is earned not from interest but from a share in the profit from using the asset. Islamic investment funds offer Sharia-compliant collective investment tools. The COREDO team has supported the issuance of sukuk for a technology company in the UK, ensuring not only compliance with AAOIFI standards but also transparency for investors.
Thus, Islamic financial instruments encompass not only investments but also Sharia-compliant insurance.
What is Sharia Insurance?
For international companies, takaful becomes an effective tool for asset protection and risk management. COREDO’s practice includes Sharia compliance audits of insurance products and the implementation of takaful for corporate clients in the EU and Asia.
Sharia Compliance in Islamic Finance
Sharia compliance in Islamic finance is a control and assessment system ensuring that all financial products and operations comply with Islamic law requirements. This approach requires not only understanding the peculiarities of the Islamic economy but also detailed structuring of each transaction following Sharia principles, highlighting the significance of the following aspects of the process.
Sharia Structuring of Deals
Structuring deals according to Sharia requires comprehensive auditing, Islamic Due Diligence, and obtaining a fatwa from an accredited Sharia council. For this, COREDO develops individual verification algorithms, including analysis of funding sources, legal review of contracts, and interaction with Islamic financial regulators.
Islamic Compliance and Auditing for Business
Compliance in Islamic finance is not only about meeting formal requirements but also about constant Sharia compliance auditing, appointing an Islamic compliance officer, and integrating AAOIFI standards into corporate governance. COREDO’s solutions allow companies to build transparent processes, reduce regulatory risks, and ensure partner and investor trust.
AAOIFI and IFSB Standards in Islamic Finance
Adherence to these standards is a mandatory condition for entering international markets and attracting investments. COREDO’s experience shows that integrating AAOIFI standards into a company’s corporate policy accelerates deal approval and enhances transparency.
Islamic Finance: Opportunities and Risks for Business
Islamic finance opens new opportunities for business, offering instruments based on principles of fairness and financial sustainability, while also posing specific risk management requirements. For companies considering Islamic banking, it is important to understand not only growth potential but also the specifics of risks arising from unique religious and legal constraints.
Islamic Banking for Business in the EU and Asia
Islamic banking for corporate clients in the EU and Asia combines traditional banking services with Sharia requirements: current accounts, financing, investment products, and asset management. The implementation of Islamic financial technologies (fintech) allows for compliance automation, accelerated Sharia compliance auditing, and operational transparency. In practice, COREDO has implemented projects integrating Islamic financial products for companies in the Czech Republic and Singapore, enabling clients to enter new markets and attract halal investments.
Successful Cases of Islamic Finance Worldwide
In Africa, COREDO’s practice involved structuring mudaraba transactions for agribusiness startups, ensuring sustainable development and business social responsibility.
Nevertheless, even with the successful implementation of Sharia standards and socially responsible strategies, companies face a number of unique challenges and risks, which will be discussed further.
Challenges and Risks for Companies
The implementation of Islamic finance comes with a range of challenges: compliance complexity, the need for constant auditing, a limited choice of Islamic banks in certain jurisdictions, as well as transparency and reporting requirements. Risk management in Islamic finance requires not only legal expertise but also a deep understanding of Sharia specifics. COREDO’s solutions include developing individual risk management strategies, tax planning, and supporting transactions at all stages.
Integration of Islamic Finance into Business
The integration of Islamic finance into business opens new opportunities for companies seeking honest and transparent financing based on principles of partnership and ethics. To effectively utilize these tools, it is important to understand how to choose an Islamic bank and suitable financial products.
How to Choose an Islamic Bank and Products
- Define strategic goals: market expansion, attracting halal investments, ESG transformation.
- Conduct Islamic due diligence of selected banks and financial products.
- Request a fatwa and Sharia compliance audit from accredited councils.
- Appoint an Islamic compliance officer and implement regular audit procedures.
- Integrate Islamic financial products (sukuk, mudaraba, ijarah) into the corporate structure.
How to Ensure Sharia Compliance?
- Develop internal compliance policies in Islamic finance.
- Implement regular Sharia compliance audits and AAOIFI-standard reporting.
- Ensure transaction transparency and exclude prohibited elements (riba, gharar, maysir).
- Leverage COREDO’s experience for deal structuring and regulator interaction.
ESG and Islamic Finance: Integration
- Include ESG criteria in investment policy and corporate governance.
- Develop a system for assessing the social and ethical sustainability of projects.
- Integrate Islamic ethics into investment decisions and asset management.
- Adopt COREDO’s best practices for integrating ESG principles into Islamic financial strategies.
Conclusions and Business Advice
Islamic finance is not only an alternative to traditional banking but also a strategic tool for international business. The principles of Islamic finance ensure transparency, fairness, and sustainability, while Islamic banks and financial products offer new opportunities for investment attraction and risk management. Practical steps, developed based on COREDO’s experience, enable companies to minimize legal and compliance risks, integrate ESG, and enter new markets. For successful transformation, it is crucial to ensure constant Sharia compliance audits, use international standards, and engage professional consultants.
Questions About Islamic Finance For Business
You need to conduct a Sharia compliance audit, obtain a fatwa, and integrate AAOIFI standards into corporate procedures.
Key risks include compliance complexity, a limited choice of banks, the need for constant auditing and transparency.
ROI is calculated based on the share of profit earned through partnership or investments, considering the absence of interest and prohibited income.
The integration of fairness, transparency, social responsibility, and regular Sharia compliance audits is required.
Use tools such as mudaraba, musharaka, sukuk, and integrate Islamic banking into the corporate structure, considering local and international standards.
The key standards are AAOIFI, IFSB. Regulators include central banks of Islamic countries, Sharia councils, and international organizations.
Include ESG criteria in investment decisions, corporate governance, and reporting, leveraging Islamic ethics and AAOIFI standards.
If you plan to implement Islamic finance into your business model or enter new markets, the COREDO team is ready to offer comprehensive support – from strategic planning to transaction facilitation and Sharia compliance auditing.