• This Practice Notes presents a high-level analysis of the Sharia Compliance in Murabaha Transactions.

• IFI : Islamic financial institution.

Some commentators have noted that the interplay of form and substance for European tax purposes parallels the relationship of form and substance for Sharia purposes. From a Sharia perspective, substance can also take precedence. However, given the novelty of the modern Islamic finance industry, the uncertainty regarding permissible transactions and the importance placed on Sharia compliance, industry participants have nonetheless tended to emphasise the form of a transaction.

Adherence to approved forms provides some assurance that the transactions represented by those forms comply with Sharia. From this perspective, the use of old transaction structures such as the murabaha appears conservative. However, many critics of the Islamic finance industry target adherence to these structures as one of the chief problems with the industry. These critics argue the structures have been used in the UK, for instance, by equity investors and financial institutions to mimic conventional interest-bearing transactions such as loans, and to circumvent the substance of the transactions that the structures should memorialise.