Islamic Finance Under UAE Law: Sukuk, Murabaha, and Ijarah Explained

Islamic finance in the UAE is governed by codified statute, not Sharia directly

Companies raising capital, structuring financing, or entering lending relationships with Islamic financial institutions in the UAE operate within a statutory framework that was substantially rewritten between 2022 and 2025. UAE courts do not apply Sharia principles as freestanding law in commercial disputes. They apply codified UAE legislation first, and only where that legislation is silent do they turn to Sharia as a supplementary source under Article 1 of the Civil Code (Federal Law No. 5 of 1985).

• The Commercial Transactions Law (Federal Decree-Law No. 50 of 2022) codifies Islamic finance contracts for the first time. Articles 468 to 497 define Murabaha, Ijarah, Musharaka, Mudaraba, Istisna'a, and Salam with binding statutory precision.
• Federal Decree-Law No. 6 of 2025, effective 16 September 2025, is now the primary law governing the CBUAE, all licensed financial institutions, and insurance. It consolidates and replaces both the 2018 Central Bank Law and the 2023 Insurance Activities Law.
• The Higher Sharia Authority (HSA), established at the CBUAE, issues rulings that are legally binding on all Islamic financial institutions and their internal Sharia committees. It has issued 985 rulings and 17 standards to date.
• The Dubai Court of Cassation ruled in July 2025 (Commercial Appeals Nos. 595/2025 and 608/2025) that all forms of interest or financial benefit tied to delayed repayment of Islamic financing obligations are absolutely prohibited, even when characterised as compensation.

Who this applies to

This article targets UAE companies seeking Sharia-compliant financing (whether for working capital, real estate, equipment, or project finance), issuers and investors considering Sukuk as a capital markets instrument, conventional businesses that deal with Islamic banks or Islamic windows at conventional banks, and foreign companies entering the UAE that need to understand how Islamic finance obligations are enforced.

The UAE has seven fully licensed Islamic banks (Dubai Islamic Bank, Abu Dhabi Islamic Bank, Sharjah Islamic Bank, Emirates Islamic, Ajman Bank, Al Hilal Bank, and Ruya), two foreign Islamic banks, and approximately 15 Islamic windows at conventional banks. For legal support from financial services lawyers in the UAE, including Islamic finance structuring, regulatory compliance, and dispute resolution, our team advises banks, funds, corporate borrowers, and issuers across the DIFC, ADGM, and UAE mainland.

Islamic finance products now represent 24% of total UAE banking assets. Even companies that do not seek Islamic financing may encounter these structures through counterparties, joint venture partners, or acquisition targets that hold Sharia-compliant facilities.

The legal framework at a glance

Four layers of regulation apply to Islamic finance transactions in the UAE, depending on where the institution is licensed and where the transaction is booked.

For companies establishing a presence in the DIFC specifically, our article on DIFC business setup covers the licensing process and regulatory requirements. The broader regulatory framework for banks and fintechs operating in the UAE is addressed in our article on banking and financial services law in the UAE.

What the Higher Sharia Authority does and why it matters commercially

The HSA is not an advisory body. Under Article 24 of the 2025 CBUAE Law, its rulings on Sharia-compliant activities and business are binding on every Islamic financial institution licensed in the UAE mainland, including the internal Sharia supervisory committees (ISSCs) that sit within each bank. The HSA comprises five to seven members with expertise in Islamic financial jurisprudence, appointed by the CBUAE Governor.

At the institutional level, every Islamic bank must maintain an ISSC of at least five members (the CBUAE may grant exemptions down to three). The CBUAE's Sharia Governance Standard implements a three-lines-of-defence model: the business line as the first line, the Internal Sharia Control Division and Sharia Compliance Function as the second, and Internal Sharia Audit as the third.

The practical consequence for borrowers and issuers is that a product approved by one bank's ISSC may not be approved by another's. There is no guarantee of uniformity below the HSA level. If your company is negotiating a Murabaha facility with two banks simultaneously, the documentation terms may differ not only commercially but on points of Sharia structure. This creates transactional friction and due diligence requirements that conventional financing does not involve.

When a transaction is challenged on Sharia compliance grounds, the CBUAE consults the HSA, informs the institution, and requires rectification within 30 days. Failure to rectify can result in sanctions ranging from fines to licence revocation.

Sukuk: how Islamic bonds are structured in the UAE

A Sukuk issuance in the UAE typically involves an orphan special purpose vehicle (SPV), commonly incorporated in the Cayman Islands, DIFC, or ADGM, that issues trust certificates to investors. The SPV uses the proceeds to enter a Sharia-compliant funding arrangement with the originator (the company raising capital). Investors receive periodic distributions derived from the underlying assets or business activity, not interest payments.

The three structures most commonly used in the UAE market are Sukuk al-Ijara (the originator sells assets to the SPV and leases them back, with rental payments flowing to investors), Sukuk al-Wakala (the SPV appoints the originator as agent to invest the proceeds in a Sharia-compliant portfolio, increasingly popular for its structural flexibility), and Sukuk al-Mudaraba (a profit-sharing arrangement where the originator manages the investment and shares profits with investors according to a pre-agreed ratio).

The critical distinction is between asset-based and asset-backed Sukuk. The vast majority of UAE Sukuk are asset-based: the originator transfers only beneficial ownership to the SPV, and investors have recourse primarily to the originator's creditworthiness rather than the underlying assets. True asset-backed Sukuk, involving genuine sale and bankruptcy remoteness, remain rare. This is partly because UAE onshore law does not recognise trust and beneficial ownership concepts in the common law sense, which creates enforcement uncertainty that has been flagged by multiple practitioners as a structural gap.

The SCA's Board of Directors' Decision No. 16 of 2014 governs mainland Sukuk issuance and sets a minimum nominal value of AED 10 million per issuance. On Nasdaq Dubai, which has become a leading global Sukuk listing venue with over USD 102 billion in outstanding instruments as of late 2025, the listing process involves DFSA Official List admission followed by admission to trading. Recent UAE issuances include Dubai Islamic Bank's USD 1 billion sustainability-linked Sukuk (November 2025), Sharjah Islamic Bank's USD 500 million AT1 Sukuk, Binghatti's USD 300 million debut, and Arada's USD 450 million issuance. The UAE federal T-Sukuk programme issued AED 6.6 billion in the first half of 2025 alone, with auctions oversubscribed more than six times.

For companies considering SPV-based capital raising, our article on tokenising economic rights via an SPV in the UAE addresses the regulatory perimeter for structuring investment vehicles, which overlaps significantly with Sukuk issuance mechanics.

The Dana Gas precedent remains the defining Sharia compliance risk. In 2017, Dana Gas PJSC declared its USD 700 million Mudaraba Sukuk "no longer Sharia compliant" and refused payments, triggering parallel litigation in Sharjah and London. The English High Court upheld the purchase undertaking under English law regardless of the Sharia arguments. Since Dana Gas, most Sukuk documentation now includes explicit waiver clauses preventing the obligor from challenging Sharia compliance after issuance. The emerging risk is AAOIFI Standard 62, which would require actual legal transfer of asset ownership to Sukuk holders and could make existing asset-based structures more expensive or structurally untenable.

Murabaha: a sale contract, not a loan

Murabaha is the most widely used Islamic finance structure in the UAE. It is a sale: the bank purchases an identified asset from a third-party supplier, takes actual or constructive possession, discloses the original cost and an agreed profit margin to the customer, and resells at the marked-up price on deferred payment terms. Article 481 of the Commercial Transactions Law defines Murabaha as a sale at cost plus a fixed profit that cannot be increased after execution. The price is locked at inception.

In practice, the profit rate is benchmarked to EIBOR or SOFR/Term SOFR. Leading Sharia scholars have approved the use of conventional interest rates as a pricing benchmark provided the underlying transaction structure remains a genuine sale rather than a disguised loan. Documentation typically includes a Master Murabaha Agreement, a Purchase Order (the customer's promise to buy), an Agency Agreement (where the customer procures goods on the bank's behalf), Offer and Acceptance Notices, and security documents including mortgage pledges and post-dated cheques.

Commodity Murabaha (Tawarruq) is the dominant working capital structure, accounting for the overwhelming majority of Islamic financing in the UAE. The mechanics involve four parties: the bank purchases a commodity (typically LME-traded base metals) from one broker at spot price, sells it to the customer at a marked-up deferred price, and the customer immediately sells to a different broker at spot for cash. The CBUAE itself uses Commodity Murabaha for monetary policy operations. However, regulatory scrutiny is increasing. AAOIFI standards require that commodities physically exist and that ownership genuinely transfers at each stage. The OIC International Islamic Fiqh Academy ruled in 2009 that pre-arranged Tawarruq is impermissible, though AAOIFI has opted to regulate rather than prohibit the instrument.

The 2025 Court of Cassation rulings on interest

The Dubai Court of Cassation's July 2025 rulings (Commercial Appeals Nos. 595/2025 and 608/2025) are the most consequential recent development for Murabaha practice. The General Assembly established an absolute prohibition on any form of interest or financial benefit tied to delayed repayment of Islamic financing obligations, including amounts characterised as "compensation" for late payment. The Court declared Sharia principles as public order, overriding procedural norms, and the ruling binds all Dubai courts.

A separate Judgment No. 9/2025 specifically invalidated interest clauses in Murabaha contracts even where both parties had agreed to them, citing Articles 468, 473, and 481 of the Commercial Transactions Law. Article 473 prohibits borrowing or lending with interest in any form for Islamic financial institutions.

For borrowers, this means that late payment on a Murabaha facility cannot attract interest or interest-equivalent charges. For Islamic banks, it means the only remedy for delayed payment is the contractual profit margin already agreed at inception, plus any actual damages that can be proven without reference to interest calculations. Late payment penalties, if collected, must be donated to charity under Sharia governance rules and cannot be retained as income.

For early settlement, HSA Resolution No. 76/3/2019 requires that Islamic banks not impose early settlement fees beyond actual costs incurred and must provide an Ibra (rebate of unearned profit). This effectively makes mandatory what was previously a discretionary concession.

AAOIFI Standard 59 on the Sale of Debt has also disrupted practice: a Murabaha facility cannot be directly refinanced by another Murabaha (no rollover). The market workaround of entering a new Murabaha one business day before expiry remains a compliance grey area with potential for disputes.

Ijarah: Islamic leasing and the ownership obligation

Ijarah is a lease: the lessor retains ownership of the asset and grants the lessee the right to use it for a specified period in exchange for rental payments. Article 491 of the Commercial Transactions Law provides the commercial definition. The commercially dominant form is Ijarah Muntahia Bittamlik (IMB), a lease combined with a separate promise to transfer ownership at the end of the term through a gift, a sale at nominal price, a gradual transfer, or a sale at a pre-agreed price.

The requirement for a separate transfer contract, distinct from the lease itself, is what distinguishes IMB from conventional hire-purchase. The transfer cannot happen automatically with the final rental payment; it requires an independent act. This is now codified in the Commercial Transactions Law.

The lessor must bear genuine ownership risk throughout the lease term. The lessor must own the asset before leasing it, rent commences only after delivery, and the asset must be identified and non-consumable. Article 495(3) of the Commercial Transactions Law mandates that basic maintenance and insurance costs are the lessor's obligation and cannot be charged to the lessee. This provision directly disrupted the prior common market practice of recharging these costs to the lessee through agency constructs.

Ijarah is the primary structure for Islamic home finance in the UAE. The property is registered in the bank's name at the Dubai Land Department (or equivalent) during the lease term, with transfer to the customer upon completion. Dubai's 2010 exemption from double registration fees for Ijarah transactions was a significant facilitation measure, addressing the cost burden of two title transfers (originator to bank, then bank to customer at term end). For companies involved in Dubai real estate transactions, our article on Dubai property law for investors and developers covers the registration and transfer framework.

Ijarah is also the standard technique for Islamic aircraft financing. Emirates' first ECA-backed Sukuk (USD 913 million for four A380s) and the 2025 Turkish Airlines deal (a 12-year Swiss franc-denominated Ijarah for an A350, structured by Dubai Islamic Bank) demonstrate the structure's capacity for complex cross-border transactions.

The re-characterisation risk

The most significant legal risk in Ijarah is re-characterisation. Dubai courts have taken the position that an Ijarah transaction viewed in its entirety may constitute a sale on deferred terms rather than a lease. Article 477 of the Commercial Transactions Law explicitly empowers this substance-over-form analysis: if the real substance of the arrangement involves transferring the burdens and consequences of ownership upon delivery, the transaction will be treated as a sale "even if the sale is called a lease by the parties."

This means that if the Ijarah documentation effectively transfers all risks of ownership to the lessee from day one (through maintenance obligations, insurance recharges, and automatic title transfer mechanisms), a court may re-characterise the arrangement as a sale. The consequences for the lessor include loss of the ownership-based security position and potential treatment of the profit element as disguised interest.

How UAE courts handle Islamic finance disputes

The UAE has no specialised Sharia courts for commercial Islamic finance matters. All disputes proceed through the ordinary civil and commercial courts, with the DIFC Courts and ADGM Courts available for transactions within those jurisdictions.

The courts apply codified UAE law as the primary source. If a contract purports to be governed by "Sharia law" without specifying a jurisdiction's legislation, courts will likely disregard that choice and apply applicable UAE statutes. Only where the contract terms are unclear and legislation and custom are both silent will courts turn to Sharia as a supplementary source, following the hierarchy in Article 1 of the Civil Code and applying the Maliki and Hanbali schools.

The Dubai Court of Cassation's ruling in Cassation Appeals Nos. 898-927/2019 established a substance-over-form test for Islamic finance contracts. The court held that labelling a contract "Murabaha" is insufficient; there must be objective evidence that the bank genuinely purchased and owned the goods before reselling them. Where the bank merely financed without genuine purchase, the contract constituted prohibited riba. This precedent means Islamic financial institutions can no longer rely on contractual labels to withstand judicial scrutiny.

For disputes involving international elements, the DIFC Courts offer an alternative forum through opt-in jurisdiction under Dubai Law No. 16 of 2011, allowing parties to submit any local or international case by consent. DIFC Courts apply DIFC laws (modelled on common law principles) and can receive expert evidence on Sharia compliance matters. The International Islamic Centre for Reconciliation and Arbitration (IICRA), headquartered in Dubai, resolves disputes under Sharia-compliant procedural rules. For companies considering arbitration, our article on choosing the right UAE arbitration clause in 2026 covers the institutional options.

A critical enforcement point: the UAE is a New York Convention signatory, but recognition of foreign arbitral awards may be refused if the award contravenes Sharia principles, which courts treat as part of UAE public policy. This makes the choice of seat, governing law, and institutional rules a material risk allocation decision in any Islamic finance dispute.

What companies should do next

For companies raising capital or entering financing arrangements with Islamic institutions in the UAE, the three areas that require immediate attention are documentation discipline, the July 2025 interest prohibition rulings, and Sharia governance due diligence.

On documentation: all Sharia compliance elements must be embedded in the contract itself. A governing law clause that references "Sharia" without specifying UAE legislation is unlikely to be enforced as the parties intended. The contract must specify which UAE law applies, how the Sharia compliance of the structure was verified (by which ISSC or under which HSA ruling), and what happens if a Sharia compliance challenge arises after execution.

On the interest prohibition: companies with existing Murabaha or Ijarah facilities should review all late-payment, penalty, and compensation clauses against the July 2025 Court of Cassation rulings. Any clause that imposes a financial charge linked to delay, regardless of how it is labelled, is now void as a matter of public order in Dubai. This applies to both the bank's ability to charge and the borrower's ability to rely on previously agreed penalty structures in settlement negotiations.

On Sharia governance: before entering any Islamic financing, companies should confirm that the product has been approved by the relevant bank's ISSC, that the ISSC's approval is consistent with applicable HSA rulings, and that the documentation accurately reflects the approved structure. A Murabaha that is documented as a sale but executed as a loan will not survive judicial scrutiny.

Legal advice may be required to assess how these obligations apply to your existing facilities, proposed capital raises, or cross-border transactions involving UAE-licensed Islamic financial institutions.

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