TRW & Co · Banking, Finance & Capital Markets
Islamic Finance in the UAE
Islamic finance in the UAE covers Sharia-compliant banking, financing, sukuk, funds and takaful, regulated by the Central Bank onshore and by separate authorities in the DIFC and ADGM. With a new Central Bank law in force since September 2025, structures, documents and governance need checking against both Sharia approvals and the updated rules.
Key pointIn Islamic finance the structure itself does the legal work: if the financier does not own the asset before selling or leasing it, or the steps are not evidenced, both Sharia approval and enforceability can be put in doubt.
At a glance
New Central Bank law
Federal Decree-Law No. 6 of 2025 came into force on 16 September 2025, consolidating banking, insurance and payments regulation, including Islamic institutions and takaful operators.
Binding Sharia rulings
The Higher Sharia Authority within the Central Bank issues resolutions that bind the internal Sharia supervision committees of UAE Islamic financial institutions.
Separate centre rules
The DFSA in the DIFC and the FSRA in the ADGM apply their own Islamic finance rules, including Sharia supervisory board and Islamic window requirements.
Structure carries risk
Murabaha, ijara, musharaka, istisna and wakala allocate ownership and loss differently, which affects pricing, insurance, tax treatment and enforcement on default.
Governing law matters
English courts have held that referring to Sharia principles does not displace English governing law, so compliance must be built into the structure.
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What Islamic finance in the UAE covers
Islamic finance in the UAE is the provision of banking, financing, investment and insurance on terms that comply with Sharia principles: no interest (riba), no excessive uncertainty (gharar), no financing of prohibited activities, and returns linked to real assets, trade or shared risk. It spans retail home finance, corporate and project facilities, sukuk issues, Islamic funds and takaful.
The UAE is one of the world's largest Islamic banking markets, and Dubai Islamic Bank, founded in 1975, is widely regarded as the first modern Islamic commercial bank. Today Islamic banks, Islamic windows of conventional banks, takaful operators, sukuk issuers and fund managers operate onshore and in the DIFC and ADGM.
For a borrower, an investor or a bank, Sharia compliance is a legal question as well as a religious one. The structure determines who owns the asset, who bears risk, what the documents must say, how tax applies and what happens when things go wrong. A structure that works commercially can fail if the sequence of ownership and sale is wrong.
The legal and regulatory framework for Islamic finance in the UAE
The Central Bank and the 2025 law
Onshore Islamic banks, finance companies and takaful operators are licensed and supervised by the Central Bank of the UAE. Federal Decree-Law No. 6 of 2025 regarding the Central Bank, Regulation of Financial Institutions and Activities, and Insurance Business came into force on 16 September 2025. It replaced the 2018 Central Bank law and the 2023 insurance decree-law, bringing banking, insurance and payments under one statute. The UAE Legislation portal announcement summarises its scope.
The 2025 law gave existing institutions a one-year period to bring their positions into line, which ran to mid-September 2026, with power for the Central Bank's Board to extend it. Implementing regulations issued during 2026 cover operational resilience, remuneration, telemarketing and insurance licensing, and the CBUAE Rulebook is the place to check current standards.
Sharia governance
The 2018 Central Bank law repealed the 1985 federal law on Islamic banks and placed the Higher Sharia Authority within the Central Bank on a statutory footing. Its resolutions and fatwas bind the internal Sharia supervision committees of Islamic financial institutions, which must review products, documents and operations. Institutions should check how the 2025 law and the Central Bank's Sharia governance standards restate these duties for their business.
In practice, an Islamic bank's internal Sharia committee approves each product and template, an internal Sharia audit tests implementation, and deviations can lead to income being purified, usually by donation to charity, rather than recognised as profit.
Capital markets, the DIFC and the ADGM
Public offers and listings of sukuk on the Abu Dhabi Securities Exchange and Dubai Financial Market fall under the Capital Market Authority, which replaced the Securities and Commodities Authority from 1 January 2026. In the DIFC, the Dubai Financial Services Authority applies its Islamic Finance Rules, including requirements for Sharia supervisory boards and Islamic windows, and Nasdaq Dubai is a major sukuk listing venue. The ADGM's Financial Services Regulatory Authority applies its own Islamic finance rules, available through the ADGM rules and regulations page.
Civil and commercial law
Islamic finance contracts operate within UAE civil and commercial law. The Civil Code restricts interest in civil loans, while commercial legislation permits interest between merchants, which is why conventional and Islamic products sit side by side. Islamic documents rely on sale, lease, agency and partnership rules, so the drafting must work under the general law as well as satisfy the Sharia committee.
Choosing a structure: the main contracts compared
Islamic finance in the UAE has no single “Islamic loan”. Each structure allocates ownership and risk differently, and the right choice depends on the asset, the purpose and the tax and registration consequences.
| Structure | How it works | Typical use | Point to watch |
|---|---|---|---|
| Murabaha (including commodity murabaha) | Financier buys an asset and sells it to the customer at cost plus an agreed profit, payable in instalments | Working capital, trade and corporate facilities | The financier must own the asset before selling it; sequencing must be evidenced |
| Ijara | Financier owns the asset and leases it to the customer, often with a promise to transfer ownership at the end | Home finance, real estate, aircraft and equipment | Ownership risks such as total loss stay with the lessor unless passed back through service agency |
| Diminishing musharaka | Financier and customer co-own the asset; the customer buys out the financier's share over time and pays rent on it | Home and real estate finance | Title, registration and co-ownership rights need careful drafting |
| Istisna | Contract to manufacture or build an asset for delivery later, often paired with a forward ijara | Construction and project finance | Completion risk and the link to the construction contract |
| Wakala | Agent invests funds on the principal's behalf for an expected profit | Deposits, treasury and sukuk | Agent's duties and treatment of losses |
| Sukuk | Certificates representing undivided interests in underlying assets or ventures | Sovereign, bank and corporate capital raising | Asset-based versus asset-backed recourse, and listing rules |
The standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) are the common reference point for structures and documentation, and they recognise many types of sukuk. Sharia committees may still take different views on specific features, so obtain approval early.
In Islamic finance the structure is the security: if ownership and sale do not happen in the right order, the documents may not deliver what the term sheet promised.
How an Islamic finance transaction runs, step by step
- Define the commercial need. Identify the asset, the purpose, the tenor and the pricing basis, and whether the deal is bilateral, syndicated, listed or a refinancing of conventional debt.
- Select the structure and the Sharia reviewer. Agree which contracts fit the asset and confirm whose Sharia committee will approve the transaction, including in a syndicate where several banks have their own boards.
- Agree the term sheet. Set out profit rate, payment dates, late payment arrangements, security, events of default and early settlement terms in a way the Sharia committee can accept.
- Diligence the assets. Check title, encumbrances, registrations, insurance and any consents needed to transfer or lease the asset, particularly for land in Dubai and Abu Dhabi.
- Draft and approve the documents. Prepare the master agreement, purchase and sale undertakings, lease or murabaha contracts, agency and security documents, then obtain the formal Sharia pronouncement.
- Execute in the right order. Complete purchases, offers and acceptances in the sequence the structure requires, with records showing each step, especially for commodity murabaha trades.
- Register and perfect security. Register mortgages, pledges and assignments with the relevant land, movables or free zone registries and insure assets, using takaful where available.
- Manage the life of the deal. Monitor payments, service agency duties, covenants and Sharia audit findings, and plan early settlement and refinancing within the structure.
Documents and evidence to assemble
A strong file protects both financier and customer if the transaction is later challenged in court or by a Sharia audit:
- The Sharia pronouncement or fatwa approving the structure and documents.
- Master financing agreement, with schedules for each drawdown or purchase.
- Purchase orders, offers, acceptances and commodity trade confirmations, time-stamped to show ownership before resale.
- Lease, service agency and purchase or sale undertakings for ijara and musharaka structures.
- Title documents, valuation reports and insurance or takaful policies for the underlying assets.
- Security documents and registration certificates for mortgages, pledges and assignments.
- Board approvals, constitutional documents and, for sukuk, offering documents and regulatory approvals.
Keep the evidence of each sale or lease step. In a dispute, the court will look at what actually happened, not just the master agreement.
Risks and common mistakes in Islamic finance in the UAE
Getting the murabaha sequence wrong
A murabaha depends on the financier owning the asset or commodity before selling it to the customer. Where trades are back-dated, run through a broker without proper confirmations, or the customer acts as agent and sells to itself without documentation, the Sharia committee may treat the profit as non-compliant and require purification. It also creates arguments in court about whether a valid sale took place. Use clear agency appointments, time-stamped confirmations and an operations checklist that the Sharia audit can test.
Treating late payment charges as interest
Islamic documents cannot charge interest on overdue amounts. The usual solution is an undertaking by the customer to pay a late payment amount that the financier donates to charity, sometimes with a separate claim for actual loss. Drafting that looks like default interest, or a financier that keeps the charity amount, risks Sharia non-compliance and challenges to enforceability. Courts will also scrutinise compensation claims against the actual damage proven. Agree the mechanism with the Sharia committee and apply it consistently in collections.
Overlooking ownership risk in ijara
In an ijara, the financier owns the asset, so major maintenance, structural insurance and total loss risk sit with it as owner. These are normally passed back to the customer through a service agency agreement, with costs reflected in rent. If the agency is poorly drafted, or insurance proceeds do not cover the outstanding amount after a total loss, the financier may be left short. Align the lease, the service agency, the takaful cover and the purchase undertaking so the economics hold in every scenario.
Assuming sukuk holders own the assets outright
Many sukuk are asset-based rather than asset-backed. Investors have a beneficial interest and a purchase undertaking from the obligor, but limited direct recourse to the assets. In a default, recovery depends on enforcing the undertaking and the governing law. Some market disputes have also raised arguments that structures were no longer Sharia-compliant. Investors should read the transaction documents, legal opinions and risk factors closely, and issuers should make sure the Sharia pronouncement and disclosures match the structure.
Ignoring the 2025 Central Bank law transition
The 2025 Central Bank law widened the licensing perimeter, consolidated insurance and banking rules and raised penalties. Islamic banks, finance companies, takaful operators and fintechs offering Sharia-compliant products should have completed a gap analysis by the end of the reconciliation period. The law also states that new regulations do not, of themselves, upset agreements already made with customers. Check whether product terms, marketing, outsourcing and governance meet the new standards, and keep evidence of the review.
Cross-border Islamic finance: Bangladesh, the UK, Saudi Arabia and beyond
UAE Islamic finance is international. Facilities are syndicated across GCC banks, sukuk are sold to investors in Asia and Europe, and documents are often governed by English law with disputes in London, the DIFC Courts or arbitration.
Governing law matters. In Shamil Bank of Bahrain v Beximco Pharmaceuticals (2004), involving a Bangladeshi borrower, the English Court of Appeal held that a clause making the agreement "subject to the principles of the Glorious Sharia" did not displace English law as the governing law. The practical lesson is that Sharia compliance is managed through structure and Sharia approval, not through the governing law clause.
Bangladesh has its own Islamic banking sector and central bank guidelines, and Saudi Arabia, Malaysia and the UK each treat Islamic products differently for regulatory and tax purposes. The UK's tax rules for alternative finance arrangements aim for tax neutrality with conventional finance, and Singapore has taken a similar approach. When a UAE structure touches those markets, local regulatory, tax and enforcement advice should be built in early, and enforcement of foreign judgments or arbitral awards in the UAE should be planned from the outset.
In a syndicated or club deal, agree at term sheet stage whose Sharia committee approves the documents and how later amendments will be approved. A refinancing or waiver can stall for weeks if each lender's committee must sign off separately and nobody planned for it.
Tax, property and takaful points
The UAE's corporate tax and VAT regimes contain provisions aimed at treating qualifying Islamic financial instruments in line with their conventional equivalents, so that a sale and lease-back is not taxed as an outright disposal. The conditions are technical, so confirm treatment with the Federal Tax Authority rules before closing. See our page on corporate tax in the UAE.
Real estate structures interact with land registration rules in each emirate. Ijara and diminishing musharaka home finance require the financier's interest to be registered properly, as explained in our guides to real estate finance in the UAE and taking security over assets. Takaful operators are supervised under the 2025 Central Bank law alongside conventional insurers; our page on insurance and reinsurance covers that framework.
Retail and SME customers: conduct and consumer protection
Islamic finance in the UAE reaches households and small businesses through home finance, auto finance, credit cards and personal finance. These products are subject to the Central Bank's consumer protection framework in the same way as conventional products, and the 2025 Central Bank law strengthened requirements on disclosure, fair treatment, complaint handling and fraud prevention.
For providers, the practical consequence is that Sharia approval is not enough. Key facts statements must explain the profit rate, total amount payable, late payment arrangements and early settlement terms in plain language, in Arabic and English where required. Sales staff and digital journeys must not present a murabaha or ijara as if it were an interest-bearing loan, or omit costs such as takaful premiums and registration fees.
For customers, the documents to read are the early settlement clause, which often contains a rebate mechanism rather than a fixed discount, and the clauses on what happens if the asset is damaged or lost. SMEs taking Islamic working capital facilities should check whether personal guarantees or post-dated security cheques are requested, and how they can be released when the facility is repaid.
How TRW & Co helps with Islamic finance in the UAE
We advise borrowers, investors, family offices and financial institutions on structuring, documentation and disputes, working with Sharia advisers and, where representation before UAE onshore courts or the DIFC/ADGM Courts is required, alongside locally licensed advocates and registered practitioners.
Structuring
We help choose between murabaha, ijara, musharaka, istisna and wakala structures for the asset and purpose, and map the tax and registration consequences.
Documentation
We draft and negotiate master agreements, undertakings, agency and security documents, and coordinate Sharia committee approvals.
Sukuk and funds
We support sukuk and Islamic fund projects with structure papers, disclosure review and coordination with CMA, DFSA or FSRA requirements.
Regulatory compliance
We review product governance, marketing and outsourcing against the 2025 Central Bank law and the DIFC and ADGM Islamic finance rules.
Restructuring and disputes
We advise on defaults, refinancing and enforcement, including Sharia arguments raised in court or arbitration, and coordinate counsel in each forum.
Cross-border coordination
We align UAE structures with requirements in Bangladesh, Saudi Arabia, the UK and Singapore through TRW & Co's network.
See also banking and finance in the UAE, project finance, securities regulation and all our practices.
Checklist for decision-makers
- Which structure fits the asset and purpose, and who owns what at each stage?
- Whose Sharia committee approves the deal, and how will later amendments be approved?
- Do late payment, early settlement and default terms comply with Sharia and UAE law?
- Are asset title, registrations, insurance or takaful and security perfected?
- Has the tax treatment of the Islamic finance in the UAE structure been confirmed for corporate tax and VAT?
- Does the regulated party meet the 2025 Central Bank law and, where relevant, CMA, DFSA or FSRA rules?
- Is the governing law and forum clear, and is enforcement planned against assets in each country?
- Are operational records kept to prove each purchase, sale and lease step?
To discuss a transaction or dispute, contact TRW & Co at info@trw.co or +971 58 942 1012.
Frequently asked questions
01Who regulates Islamic finance in the UAE?
Onshore Islamic banks, finance companies and takaful operators are licensed and supervised by the Central Bank of the UAE under Federal Decree-Law No. 6 of 2025, with the Higher Sharia Authority setting binding Sharia rulings. Public sukuk offers and listings on ADX and DFM fall under the Capital Market Authority (formerly the Securities and Commodities Authority). In the DIFC the Dubai Financial Services Authority applies its Islamic Finance Rules, and in the ADGM the Financial Services Regulatory Authority applies its own rules for Islamic financial business.
02Is an Islamic finance facility more expensive than a conventional loan?
Not necessarily. Profit rates are usually priced by reference to market benchmarks, so headline pricing is often comparable. Costs can be higher where structures need asset transfers, registrations, commodity trades or Sharia review fees, and on smaller deals those fixed costs matter more. Some structures have tax or registration consequences that need managing. Compare the full cost, including fees, takaful, registration and early settlement terms, rather than the profit rate alone.
03What happens if an Islamic finance customer pays late?
Islamic documents cannot charge interest on arrears. Most include an undertaking to pay a late payment amount that the financier gives to charity, and some allow the financier to claim its actual loss separately. The financier can still enforce the debt and any security through the courts or arbitration. Customers should check the late payment and early settlement clauses before signing, and financiers should apply the charity mechanism exactly as the Sharia committee approved it.
04Can a UAE company issue sukuk?
Yes. Companies and financial institutions can issue sukuk privately or publicly, onshore or through the DIFC and ADGM. A public offer or listing in the UAE needs approval from the relevant regulator and compliance with its prospectus and disclosure rules. The issuer needs suitable underlying assets or a business venture, a Sharia pronouncement, a special purpose vehicle and documents such as purchase undertakings. Structure, governing law and investor base should be decided together at the outset.
05Does the 2025 Central Bank law affect existing Islamic finance contracts?
The law gave existing institutions a one-year period from September 2025 to reconcile their positions, which the Central Bank can extend. It states that regulations issued under it do not, of themselves, have retroactive effect on agreements already made with customers. Existing contracts generally continue, but institutions must bring their governance, product terms, marketing and consumer protection practices into line, which may lead to amendments on renewal or refinancing.
06Can a Sharia argument be raised to avoid paying?
Borrowers sometimes argue that a structure was not Sharia-compliant and is therefore invalid. Under English law, courts have generally refused to let Sharia principles override the chosen governing law. Under UAE law the court will examine whether the contracts are valid under UAE civil and commercial law, and how the transaction was actually carried out. A clear Sharia pronouncement, accurate documents and evidence of each step are the best defence against these arguments.
Sources and official materials
- Central Bank of the UAE: Legislation — Central Bank laws and regulations
- CBUAE Rulebook — Regulations and standards for licensed financial institutions
- UAE Legislation: New Central Bank Decree-Law — Federal Decree-Law No. 6 of 2025 announcement
- Capital Market Authority (formerly SCA) — Onshore sukuk offers and listings
- Dubai Financial Services Authority — DIFC Islamic Finance Rules
- ADGM rules and regulations — FSRA rulebook including Islamic finance
- Federal Tax Authority — Tax treatment of Islamic financial instruments
General information only, current as at 27 October 2026. It is not legal advice and does not create a lawyer–client relationship. UAE law differs between the onshore jurisdiction, the DIFC, ADGM and the free zones, and changes frequently; check current official sources and take advice on the facts of your matter.
