“There are also various combinations of these instruments,” says Robert Newman at Stephenson Harwood. “There are also property deals, for example, where there has been some Islamic finance and some other real estate financing.
“The structure then tends to get more and more complicated, because sometimes you will have traditional debt as well. There might be the equity side going through an Islamic structure and then a ‘wall’ between that and the bank debt on the other side. The two parts have to be kept separate, and that of course leads to challenges and costs.
“The downsides of Islamic financing are the complexity and cost of doing this compared to more traditional financing. Also, it is easier to price more traditional financing.”
However, once the deal is approved and agreed, the document and what it contains are commercial transactions which stand on their own feet. They are governed by and comply with the law of whatever country the deal is happening in. “It is compliant with Sharia law but it isn’t governed by it; you don’t have to go to a Sharia court to sort out a dispute.
“There does tend to be more documents and stages to a transaction in Islamic financing. But I do think we will see it increase – especially in the financing of larger projects, which justify the extra cost and complexity.”