For example a bank can offer Shariah-compliant services through a separate subsidiary, which will be a separate legal entity with its own capital and operations policies but still operates under the overall strategy of its parent company Citi Islamic Investment Bank is an example of a separate entity operating in this manner.Īlternatively, a bank can offer Shariah-compliant services through a branch model where a separate branch of the institution offers Shariah-compliant services with separate accounts, operation policies and capital for example, HSBC Amanah operates in this way, a windows based model where Shariah-compliant services are offered through the same distribution channel as traditional services, but accounts and capital are still separated, or on a transaction-by-transaction basis where individual transactions are assessed by a Shariah advisory board this latter approach is more popular with investment banks, such as Morgan Stanley.ĮSG, which stands for “environmental, social and governance”, refers to a set of principles that may be used by companies to evaluate the societal impact of an investment. It is worth noting that financial services institutions that are not bound by Shariah law can offer Shariah-compliant services through different models.

These Islamic financial institutions may be Shariah-compliant because they are looking to provide a service to Shariah-compliant customers or they may be part of a banking system which is wholly Shariah-compliant for example, the banking systems in Iran and Sudan, where Shariah law has been codified into legislation. Where the term ‘Islamic financial institutions’ is used in this article, it is a reference to financial services providers (for example lenders, fund managers and insurance providers) that operate in compliance with Shariah law. Shariah law dates back over a thousand years, but the recent growth in Islamic finance over the last few decades has made understanding it in that context increasingly relevant for lenders and borrowers alike. In general, Shariah law encourages investment as it helps grow the economy but places a focus on investing in a manner that will facilitate projects and development that benefit society as a whole.

'Shariah’, which literally translates from Arabic as ‘the path to water’, is a set of principles derived from Islamic sources including the Quran and Sunnah which govern all areas of life, including financial transactions in the Muslim community. In the context of capital call facilities, where investors are unwilling to participate in certain investments due to ESG or Shariah law concerns, these investor restrictions (and the related excuse rights bestowed on such investors) can impact how lenders evaluate investors for purposes of calculating a borrowing base.

Sharia compliant lending