Islamic Finance 2025 Comparisons

In the Kingdom of Saudi Arabia (KSA), Islamic finance operates under the general legal framework for financial services with additional Sharia compliance requirements. The Saudi Central Bank (SAMA) regulates banks and finance companies, while the Capital Market Authority (CMA) oversees securities and sukuk. Both regulators mandate Sharia governance frameworks including boards, audits and compliance structures.

Key Laws and Regulations

• Banking Control Law: Covers commercial banks, defines banking business, limits it to licensed entities, and sets governance and licensing standards.
• Finance Companies Control Law: Applies to non-bank financial institutions, mandates compliance with Sharia via internal committees, and sets licensing and conduct rules.
• Civil Transactions Law: Functions like a civil code, outlines contract formation and validity, and codifies profit-sharing and partnership contracts.
• Capital Market Law: Establishes the CMA and provides the legal basis for securities regulation.
• Securities Business Regulations: Define securities business and requires CMA licensing.
• Rules on the Offer of Securities and Continuing Obligations: Regulate securities offerings and ongoing disclosure obligations.
• Sharia Governance Regulations: Require Sharia boards and audits for banks, finance companies and capital market institutions.

Licensing Framework

There is no separate Islamic finance licence in KSA. Entities offering Islamic financial products must be licensed either as a bank or finance company by SAMA, or as a capital market institution by the CMA. Banks engaging in deposit-taking and lending require a SAMA banking licence under the Banking Control Law, while finance companies (including those offering Murabaha/Tawarruq or Ijara) are licensed under the Finance Companies Control Law. Sukuk arrangers or issuers must be authorised by the CMA.

Sharia Oversight Requirements

While no religious body issues licences, SAMA requires licensed banks and finance companies to maintain their own Sharia boards or external Sharia advisers, supported by internal compliance mechanisms. Each institution sets its own guidelines, allowing for discretion and variation in Sharia interpretation. SAMA does not issue fatwas but approves Sharia board appointments and monitors institutional compliance.

Capital Markets Regulation

In the capital markets sector, the CMA mandates that Sharia-compliant funds and sukuk issuers secure appropriate Sharia certification. For example, Sharia-compliant mutual funds must appoint a dedicated Sharia committee and comply with additional requirements under the Investment Funds Regulations.

Decentralised Sharia Certification

There is no centralised Sharia authority in KSA. Instead, each financial institution’s own Sharia committee is responsible for approving and certifying the Sharia compliance of its products.

Market Overview

The Islamic finance market in KSA is one of the largest globally, forming a major component of the domestic financial system. All major banks offer Sharia-compliant products, with institutions like Al Rajhi Bank and Alinma Bank operating fully on an Islamic basis. Even conventional banks and financing companies typically favour Sharia-compliant structures across their offerings.

Role in Vision 2030

Islamic finance plays a central role in advancing KSA’s Vision 2030. Major government funds across sectors such as housing, tourism and culture have widely adopted Islamic financing, using tools such as structured deposits, Murabaha/Tawarruq, Istisna’a and forward lease arrangements, in collaboration with leading banks. These funds also rely on Islamic liquidity tools such as Murabaha/Tawarruq-based deposits and Wakala structures to support the banking sector.

Retail Market Trends

Retail consumers have broad access to Islamic products, including Sharia-compliant mortgages, car finance and personal loans. Mortgage contracts are exclusively based on Islamic structures, typically Murabaha/Tawarruq for ready units and Istisna’a/Ijara Mawsoofah Bil Thimmah for construction finance. However, Murabaha/Tawarruq is increasingly preferred due to operational ease and alignment with SAMA’s collateral requirements.

Banking in KSA is now predominantly Islamic, and KSA continues to rank among the leading jurisdictions for Islamic finance worldwide.

Organic Growth, Not Incentives

Islamic finance in KSA has developed organically, driven by consumer demand and a Sharia-based legal framework. As a result, there are no special regulatory or legal incentives exclusive to Islamic finance; conventional and Islamic institutions operate under the same conditions.

Strategic Support Under Vision 2030

While no targeted incentives exist, Vision 2030 and the Financial Sector Development Program identify Islamic finance as a strategic growth area. These plans aim to strengthen the sector by enhancing regulation and encouraging innovation, signalling a high-level policy commitment rather than specific advantages.

Islamic Finance in Public Sector Practice

Major government funds implementing Vision 2030 objectives predominantly use Sharia-compliant structures. Given the scale of public funding, this has made Islamic finance a dominant market practice across project and infrastructure financing.

SAMA’s Role in Market Structuring

SAMA has played a key role in guiding banks to develop Sharia-compliant solutions, especially to address IBOR transition challenges, using Murabaha/Tawarruq and Ijara. It also helped develop a standardised Sharia-compliant repo agreement (Master Double Wa’ad Repo Agreement), reflecting GMRA provisions.

Regulatory Modernisation

Saudi regulators have improved efficiency and access in Islamic finance through measures such as streamlined sukuk issuance and support for fintech initiatives, further promoting Islamic financial market development.

KSA is advancing Islamic finance under Vision 2030 through the Financial Sector Development Program and the FinTech Strategy Implementation Plan, positioning itself as a leader in sustainable and digital Islamic finance.

Green Finance

In 2024, the Ministry of Finance launched the Saudi Green Financing Framework aligned with ICMA Green Bond Principles. In 2025, the CMA issued voluntary guidelines for green, social and sustainability-linked sukuk and bonds, encouraging clear disclosures and use of proceeds reporting. These efforts aim to build a robust sustainable finance market aligned with Vision 2030 and global standards such as the EU Green Bond Standard.

Islamic Fintech and Digital Innovation

By 2023, over 210 fintechs were operating in KSA, offering Sharia-compliant products including crowdfunding Murabaha/Tawarruq and sukuk. Platforms like Lendo and Tarmeez have supported over SAR2.5 billion in financing and digitised sukuk issuance. STC Bank and D360 Bank lead in Islamic digital banking. Regulatory sandboxes from SAMA and CMA have enabled innovations such as blockchain-based sukuk and peer-to-peer lending.

Infrastructure and Project Finance

Mega-projects such as NEOM and Red Sea Global are often financed through Islamic structures. In early 2025, PIF raised USD7 billion via Murabaha/Tawarruq financing through a syndicate of 20 institutions.

SME Finance

The Small and Medium Enterprises Loan Guarantee Program (Kafalah), established in 2004, is a state financial guarantee programme available to SMEs to support access to financing and business growth. In Q1 2025, it issued 1,900 guarantees worth over SAR4.8 billion. Kafalah covers Sharia-compliant credit facilities, including Tawarruq, granted by financiers to eligible SMEs.

Overview of Regulatory Approach

There are no specific legal or regulatory constraints in Saudi Arabia when structuring Islamic finance transactions. Rather, SAMA has actively encouraged banks to develop Sharia-compliant solutions, particularly in response to the global IBOR transition.

Structuring Responses to IBOR Transition – Murabaha

This shift to Risk-Free Rates (RFRs) presents complexities for structures such as Murabaha because Sharia principles prohibit changing the purchase price after sale and because RFRs are backward-looking rather than forward-looking like LIBOR. SAMA has guided banks to adopt new Sharia-compliant structures to mitigate these challenges. Key models include the following:

Successive Murabahas

• The facility is structured as a series of Murabaha contracts, each covering a profit period (eg three months).
• The first Murabaha is entered into at a deferred price comprising the principal and a spread; no RFR-based profit is included.
• At the end of each profit period, a successive Murabaha is entered into for the applicable principal amount, with profit based on the actual RFR observed over the prior period plus spread.
• The customer undertakes in advance to enter into each successive Murabaha up to final maturity and, on the last maturity date, to execute a final spot Murabaha covering the last period’s RFR.
• If the customer fails to enter a new Murabaha, it must compensate the bank for actual damages, capped at the value of the applicable RFR for the missed period.

High ceiling (capped) profit rate with undertakings/rebate structure

• The facility is documented as a single long-dated Murabaha for the full principal amount, with a deferred sale price that includes a high fixed profit rate encompassing a credit spread and a buffer above anticipated RFR levels.
• On each instalment date, the bank calculates the profit amount that would have applied based on the actual RFR for the relevant period.
• The customer undertakes to pay this actual RFR-based amount, which is typically lower than the high fixed rate agreed in the initial Murabaha.
• The bank separately undertakes to waive or rebate the excess between the high fixed rate and the actual RFR-based amount, either by contractual waiver or through a spot Murabaha in favour of the customer.
• If the actual RFR exceeds the high fixed rate, the customer provides an undertaking to pay the difference, which some banks document through an additional spot Murabaha at that time.

Dual tranche structure (fixed deferred rate Murabaha + spot profit Murabaha)

• The facility is divided into two components: a long-dated Murabaha (first tranche) and a series of spot Murabahas (second tranche).
• The first tranche is executed upfront as a fixed-rate Murabaha covering the principal amount and a pre-agreed credit spread, with the option to include a pricing buffer to accommodate future rate fluctuations.
• This first Murabaha is on a deferred payment basis and establishes the principal and the pre-agreed spread repayment obligation over the life of the facility.
• The second tranche consists of separate spot Murabahas entered into at the end of each profit period, each reflecting the actual RFR accrued over that period.
• The customer undertakes to enter into each spot Murabaha on the agreed dates, and failure to do so obliges the customer to compensate the bank for actual damages, capped at the RFR amount.
• If the actual RFR exceeds the fixed buffer used in the first Murabaha, the customer agrees to execute a spot Murabaha for the difference; conversely, if the buffer is higher than the actual RFR, the bank undertakes to waive or rebate the excess, ensuring Sharia compliance and commercial fairness.

In determining which of the above structures to follow, each bank will take into account key considerations, including its own Sharia board preference and operational feasibility.

Structuring Responses to IBOR Transition – Ijara

Ijara structures present unique documentation and operational challenges. There is no unified template for Ijara financings, and documentation must reflect the requirements of individual Sharia boards. Key structuring features include:

Structure 1. Master Ijara agreement with purchase/sale undertakings

• A master lease covers the full term for principal and profit.
• Daily rent is based on published RFRs and payable at the end of each rental period.
• The customer is given access to the rate calculation portal and may raise objections in the agreed manner.
• Early termination (mandatory/voluntary) is governed by a purchase/sale undertaking, with the exercise price incorporating outstanding principal and profit based on accrued rent.
• The sale agreement is structured to facilitate transfer of ownership from the financier to the customer.

Structure 2. Multiple rental periods

• The lease runs to final maturity but is divided into shorter sub-rental periods.
• At the start of each period, an estimated rate is used; at the end, the actual RFR is known.
• The differential is calculated to ensure profit reflects actual RFR.
• Any final adjustment is added to the asset purchase price (exercise price components) under the relevant undertaking exercised at early termination or maturity.

Structure 3. Two sub-rental periods

• Each rental period is divided into two sub-periods.
• The first sub-period uses an estimated profit rate for accrual.
• The second sub-period runs from expiry of the first sub-period until the end of the rental period and applies the actual RFR.
• The rental amount payable at period-end includes:

1. accrued rent based on the estimated rate for the first sub-period;
2. rent based on actual RFR for the second sub-period; plus
3. an adjustment to reflect any difference from the estimated rate.

Structuring Issues in Residential Financing

In retail home financing, many banks had used Istisna’a and Ijara Mawsoofah Bil Thimmah to fund property construction. However, these expose banks to delivery risk, as they act as lessors and can be liable if the developer fails to deliver – even where the bank is not at fault. As a result, banks have increasingly adopted Tawarruq structures, where the customer’s repayment obligation is not contingent on project completion. Tawarruq avoids direct contracting with the developer, limiting liability and aligning with SAMA’s risk management expectations. Banks secure repayment via suitable guarantees and collateral.

Structural Complexity not Driven by Regulation

These structuring innovations are not driven by regulation but by the nature of Islamic finance itself. SAMA has encouraged banks to resolve these challenges through market-led solutions. Sharia compliance is implemented institutionally via Sharia boards rather than by prescriptive law.

Legal Recognition of Islamic Finance

Saudi Arabia’s legal framework increasingly accommodates Islamic finance. The 2025 Close-out Netting and Related Collateral Arrangements Regulation issued by SAMA expressly recognises Islamic contracts such as Murabaha, Musawama and Wa’ad as Qualified Financial Contracts if they achieve an economically equivalent effect to conventional instruments listed in the annex. Similarly, the 2023 Civil Transactions Law includes detailed provisions on Islamic finance concepts such as Mudarabah, Musharakah and Kafalah, and sets out enforceability rules for unilateral promises (Wa’ad). These developments further strengthen the integration of Islamic finance into KSA’s legal infrastructure.

The primary source of law in KSA is Sharia, derived mainly from the Holy Qur’an and the Sunnah (the witnessed sayings and actions of the Prophet Muhammad). The Hanbali school of Islamic jurisprudence is predominantly followed, though principles from other schools may be applied by Sharia committees where deemed more aligned with the Qur’an and Sunnah. Sharia also forms the foundation of the Saudi constitution, known as the Basic Law of Governance.

Alongside Sharia, Saudi law includes enacted legislation in various forms, such as royal decrees, ministerial resolutions and circulars. All legislation is subordinate to Sharia: in cases of conflict, Sharia prevails; where legislation is silent, Sharia principles apply.

Financial disputes are typically adjudicated by the SAMA Banking Disputes Committee or the CMA Committee for Resolution of Securities Disputes, depending on the nature of the business. These bodies generally uphold contractual terms in line with international market standards, subject to compliance with applicable Saudi law and Sharia principles.

KSA’s financial regulatory architecture is composed of the following authorities tasked with oversight and enforcement, each with defined powers:

Saudi Central Bank (SAMA)

The Saudi Central Bank (still referred to as “SAMA” in reference to its former title, the Saudi Arabian Monetary Agency) is the regulator for banks and finance companies. Under the Banking Control Law and Finance Companies Control Law, SAMA supervises those institutions’ compliance with licensing requirements, prudential standards and market conduct. SAMA has robust enforcement powers: it can conduct examinations, issue binding rules and impose penalties. These penalties range from monetary fines and suspension of certain activities up to revocation of licences for serious breaches.

Capital Market Authority (CMA)

The CMA is the regulator for the capital markets, overseeing securities offerings, the Saudi stock exchange (Tadawul) and the compliance of brokerage and asset management firms and listed companies with their continuing obligations under the listing rules. Any offer of securities (such as equities or sukuk) falls under the CMA’s purview via the Capital Market Law and implementing regulations. The CMA similarly wields strong enforcement authority: it can investigate and sanction insider trading, market manipulation or breaches of disclosure rules, among other violations.

It may issue fines, suspend trading of a security, bar individuals from practice or revoke the licences of market intermediaries.

For issuances of financial instruments, the CMA reviews prospectuses to ensure compliance with CMA rules relating to documentation and disclosure requirements. While the CMA does not opine on Sharia, it does ensure the offering has a Sharia board’s approval if marketed as sukuk.

There are no dedicated Sharia courts for financial disputes in Saudi Arabia, but all courts may apply Sharia where relevant. Disputes are generally heard by specialised regulatory tribunals rather than ordinary civil courts. These bodies operate with procedural formality and issue binding decisions. Sharia is typically only applied where statutes are silent or ambiguous.

SAMA Banking Disputes Committee

This committee hears cases involving banks and finance companies regulated by SAMA. It functions similarly to a court, with claims, hearings and binding rulings. Appeals go to a designated appellate body. The committee enforces contracts according to their terms and international market practice.

CMA Committee for the Resolution of Securities Disputes (CRSD)

The CRSD handles disputes involving capital market institutions. It mirrors the process of the SAMA committee, and its decisions are appealable to a separate appellate committee for securities.

Other Forums

In some cases jurisdiction may shift; for example, if a government entity seeks to enforce a promissory note, the Administrative Enforcement Court will have jurisdiction (whereas the regular Enforcement Court will hear the matter where the application is made by a private entity).

In KSA, Islamic working capital financing is primarily offered through asset- and trade-based structures that comply with Sharia principles prohibiting interest (riba) and excessive uncertainty (gharar). The most widely used structures include the following:

Murabaha/Tawarruq (Cost-Plus Sale)

Murabaha/Tawarruq is the dominant structure for working capital. The financier purchases commodities and sells them to the client at a markup, with deferred payment terms. The client immediately resells the commodities to generate cash. Tawarruq denotes a sequence of sales to facilitate cash-based financing. These structures are widely accepted by Saudi banks and finance companies.

Ijara (Leasing)

Used for asset-based financing, Ijara involves the financier purchasing equipment and leasing it to the client. Rental payments serve as the financier’s return. Ownership may transfer to the customer at lease-end through a gift (hebah) or nominal sale, depending on the agreed terms.

Musharakah (Joint Venture Partnership)

Musharakah involves two or more parties contributing capital to a business or asset. Profits are shared per a pre-agreed ratio; losses are proportionate to each party’s capital contribution. A common form is “diminishing Musharakah”, often used in real estate, where the financier’s share is gradually bought out by the customer.

Mudarabah (Trust-Based Partnership)

In this structure, the financier (rab al-maal) provides capital, while the entrepreneur (Mudarib) manages the venture. Profits are shared by agreement; losses are borne by the financier unless due to the Mudarib’s misconduct. Mudarabah is often used in sukuk, including hybrid Murabaha/Mudarabah structures and sole Mudarabah arrangements for Tier 1 capital sukuk (AT1), where banks act as Mudarib on behalf of investors.

Wakala (Agency-Based Investment)

Less common in financing, Wakala is used for investment management. the financier (principal) appoints an agent (Wakeel) to invest on its behalf under agreed parameters. The agent may receive a fixed fee or performance-based incentive. Wakala is commonly used by state entities, through licensed institutions, to support Vision 2030 objectives.

Banks’ preferences for these structures depend on Sharia board guidance, operational capacity (eg, commodity brokerage in Tawarruq), asset availability and commercial strategy.

Securitisation remains relatively uncommon in KSA, but recent legal reforms have addressed many of the historic challenges.

Receivables can now be sold outright under the Civil Transactions Law. Article 238 allows for the assignment of creditor rights unless legally or contractually restricted. Article 240 requires the debtor to be notified for the assignment to be enforceable. Written consent is typically obtained in practice.

Additionally, under the 2020 Movable Property Security Law, receivables can be assigned as security in Islamic finance transactions such as Murabaha/Tawarruq. In these structures, the borrower pledges receivables from buyers to the financier. The Murabaha cost price reflects the discounted value of the receivables, while the deferred sale price corresponds to their face value.

The CMA has introduced rules for special purpose entities (SPEs), enabling the issuance of debt instruments, including sukuk. These SPEs can isolate asset risk from the originator’s balance sheet, supporting true securitisation structures.

Additionally, the Bankruptcy Law allows for the formal ranking of creditors, which facilitates the structuring of sukuk into tranches with different risk profiles.

Islamic securitisation can take the form of asset-backed sukuk, whereby:

• Sharia-compliant receivables are transferred to an SPE.
• The SPE issues asset-backed sukuk to investors entitled to cash flows from the asset pool.
• Risk is transferred from the originator to the sukukholders.

Digital Platforms and Marketplace Financing

Islamic fintech in KSA is rapidly expanding, offering Sharia-compliant working capital solutions via digital platforms. Licensed providers such as Lendo and Sulfah offer peer-to-peer SME financing through Murabaha, Tawarruq and Wakala structures, using automated KYC and credit scoring. These operate under SAMA’s rules for debt crowdfunding and microfinance. Open banking, enabled by SAMA’s Open Banking Framework, allows fintechs to access real-time banking data and offer tailored Islamic financial products based on company receivables or inventory.

Blockchain and Tokenised Assets

Blockchain is cautiously being explored for Islamic finance use cases, excluding cryptocurrencies. SABB has piloted blockchain-based Islamic trade finance. SAMA also partnered in Project Aber with the Central Bank of the UAE, testing a cross-border payment system using a jointly issued digital currency. Sandbox fintechs are trialling blockchain for asset tracking and tokenised sukuk.

Regulatory Oversight and Sharia Alignment

SAMA and the CMA regulate Islamic fintech through sandbox regimes and Sharia governance rules. Licensed fintechs must establish internal Sharia boards to ensure compliance. These frameworks, along with digital tools, are increasing access to Sharia-compliant finance for SMEs and supporting KSA’s leadership in Islamic digital finance.

While Saudi banks have successfully navigated Islamic finance challenges, working capital financing under Sharia remains complex. Unlike conventional finance, Islamic finance prohibits interest (riba) and requires asset-backed or risk-sharing structures. Financing must be structured through alternatives like Murabaha/Tawarruq (cost-plus sale), Tawarruq (commodity-based financing) or Ijara (leasing), each demanding a valid underlying trade and identifiable asset. For example, Ijara or Musharaka/Ijara structures require obligors to provide suitable assets for leasing, while high-value Tawarruq deals often face operational and cost inefficiencies due to commodity trade execution.

Operational Complexities and Limited Adoption of Risk-Sharing Models

Ensuring Sharia compliance involves avoiding disguised cash loans and conducting genuine asset trades. This can create timing and documentation risks in commodity execution. While models like Mudarabah and Musharakah promote profit-and-loss sharing, they are less commonly adopted due to financiers’ preference for fixed returns, leading to reliance on Murabaha/Tawarruq.

Overcoming Challenges Through Governance

To address these challenges, banks collaborate with law firms and Sharia committees to validate structures. Execution risks are mitigated by powers of attorney enabling banks to act on behalf of clients. Sharia audit frameworks further enhance compliance and practical viability.

Islamic project finance in KSA plays a key role in funding infrastructure, energy and industrial developments, with the most common structures being those set out below.

Istisna’a–Ijara (Construction + Lease)

Commonly used for greenfield projects, an Istisna’a (construction) contract governs the construction phase with phased disbursements. Upon completion, an Ijara (lease) is triggered, providing Sharia-compliant returns through rent.

• Financiers bear ownership risk during construction and lease.
• Risk is mitigated via parallel Istisna’a contracts and insurance.

Musharakah and Diminishing Musharakah

Islamic financiers invest equity alongside sponsors and profits are shared. In “diminishing Musharakah”, the sponsor gradually repurchases the financier’s share.

• Emphasises risk-sharing and asset-based returns.
• Often paired with Ijara to provide fixed lease payments.

Wakala–Ijara (Agency + Lease)

The project company acts as agent (Wakeel) to deploy funds during construction. After completion, an Ijara lease delivers financier returns.

• Provides construction-phase flexibility.
• Returns based on use of the asset.

Murabaha/Tawarruq (Asset Purchase Financing)

Used selectively for discrete asset purchases (eg, turbines or equipment). The financier buys the asset and sells it to the project company at a markup, payable over time.

• Suitable for short-term needs or bridging finance.
• Less ideal for full-scope project finance due to limited adaptability to phased construction draws.

Pricing, Risk-Sharing and Structural Considerations in Islamic Project Finance

Islamic finance structures such as Ijara, Murabaha/Tawarruq and Musharakah do not typically offer pricing advantages over conventional financing, as they must be asset-backed and cannot involve interest. In practice, pricing is often benchmarked to conventional rates, making Islamic financing commercially competitive but not cheaper. Musharakah structures, which involve profit and loss sharing, can be difficult to implement due to the complexity of aligning risk appetites and forecasting returns in long-term projects.

Tax and Regulatory Implications of Asset and Commodity Transfers

KSA generally provides equal tax treatment for Islamic and conventional finance. However, the transactional steps in Islamic financing, such as asset sales in Murabaha/Tawarruq or title transfers in Ijara, can trigger additional tax exposures. These include real estate transaction tax (RETT) for property transfers and VAT on commodities in Tawarruq. Without careful structuring, these elements may result in tax inefficiencies.

Regulatory Developments and Structural Solutions

Recent regulatory measures have helped mitigate these challenges. For example, RETT exemptions typically apply to property transfers undertaken solely for financing purposes, such as in Ijara. In Tawarruq, the use of set-off mechanisms and temporary ownership arrangements helps limit VAT exposure. Enhanced clarity from SAMA and the CMA, along with market standardisation, has made Islamic project finance more practical and efficient in the Saudi market.

Guarantees in Sharia-compliant project finance in KSA serve the same commercial functions as in conventional structures (such as credit enhancement, performance support and completion assurance). Under KSA law, the Civil Transactions Law now governs guarantee arrangements and integrates Sharia-aligned requirements.

In particular, Article 583 allows guarantees for future or conditional debts, provided the maximum liability is determinable in advance. This is typically addressed by setting a monetary cap; however, it would arguably also be satisfied by “all monies”-style wording, since that wording would ensure that the guarantor is fully aware of its potential liability.

Common guarantee structures include:

• sponsor completion guarantees;
• performance bonds or bank guarantees; and
• third-party guarantees, such as ECA or government guarantees.

These instruments provide economic protection while complying with both Sharia principles and Saudi statutory law, ensuring robust legal enforceability and ethical financing integrity.

Permissible Project Types

In KSA, Islamic finance structures such as Murabaha/Tawarruq, Ijara and Musharakah can fund a wide range of projects. However, Sharia principles prohibit financing activities deemed haram, including those involving alcohol, gambling, pork or conventional interest-based financial services.

Sharia Compliance Criteria

To qualify for Islamic financing, a project must be permissible in both purpose and operation. Financing must avoid:

• Riba (interest): Returns must be based on trade, lease or profit-sharing rather than interest.
• Gharar (excessive uncertainty): Contracts must be clear and tied to tangible assets or defined services.
• Maisir (speculation/gambling): Speculative or uncertain outcomes must be avoided.

Due Diligence Process

Islamic financial institutions conduct Sharia due diligence through internal Sharia committees. This includes reviewing contracts, business models and the use of funds to ensure all elements are compliant with Islamic principles.

Ongoing Sharia Governance

To maintain compliance throughout the project life cycle, institutions are required by SAMA and the CMA to establish Sharia committees, implement compliance frameworks and carry out Sharia audits and monitoring where applicable.

While Islamic finance provides structural flexibility, it imposes strict limitations on project type and financing execution to ensure adherence to Sharia and regulatory standards.

Sukuk are a key financing tool for sovereign, quasi-sovereign and corporate issuers in KSA. Unlike conventional bonds, sukuk are structured to provide returns derived from ownership or participation in Sharia-compliant assets, not interest-bearing debt. Asset-backed sukuk grant investors direct ownership and recourse to the underlying assets, while asset-based sukuk offer contractual rights linked to asset performance, with reliance on the obligor’s creditworthiness.

Hybrid Sukuk Structure (Murabaha + Mudarabah)

The most common structure in KSA is hybrid sukuk, combining Mudarabah and Murabaha elements:

• Mudarabah portion (≥51%): Proceeds are invested into a Sharia-compliant business portfolio managed by the issuer (Mudarib). Sukukholders, as capital providers, share profits based on a pre-agreed ratio and bear losses unless caused by the udarib’s fault.
• Murabaha portion (≤49%): Commodities are purchased and resold to the issuer at a markup with deferred payments, providing fixed returns.

This structure supports Sharia-compliant tradability by ensuring a majority share in tangible or partnership-based assets and enables predictable cash flows.

Profit Distribution and Risk Allocation

Periodic distributions to sukukholders are funded from both Mudarabah profits and Murabaha proceeds. A ring-fenced “Available Amount” ensures liquidity. Incentive fees to the Mudarib are paid only after sukukholders are fully redeemed. No capital or profit guarantee is provided, preserving Sharia-compliant risk-sharing.

Additional Uses

Mudarabah-only sukuk structures are also commonly employed, particularly when structuring perpetual Additional Tier 1 (AT1) capital sukuk under Basel III (see 3.1 Murabaha, Mudarabah and Musharakah).

Sukuk issuance in KSA is subject to a comprehensive regulatory framework overseen primarily by the CMA. Where the issuer is regulated by SAMA, SAMA’s approval will also be required.

• CMA role: The CMA oversees both public and private sukuk offerings, ensuring compliance with regulatory standards.
• Licensing requirements: While issuers do not need a licence, all arrangers, underwriters, dealers and custodians involved in public offerings must be licensed by the CMA as capital market institutions.
• Offering approvals: Issuers must obtain CMA approval by submitting a detailed application, including a base prospectus and final terms.
• Disclosure obligations: Issuers must comply with the OSCO Rules, including risk factors, use of proceeds, Sharia structure and ongoing financial reporting.
• Tadawul and Edaa compliance: For listed sukuk, approval from the Tadawul is needed, alongside submission of listing forms. Edaa (the Securities Depository Centre) handles registration, clearing and settlement, and assigns ISINs.

Core Sharia Principles

Islamic fintech in KSA must comply with fundamental Sharia principles, including the prohibition of interest (riba), excessive uncertainty (gharar) and unethical activities. Digital finance platforms, including crowdfunding, must use Sharia-compliant contracts such as Tawarruq or profit-sharing models.

Cryptocurrencies and Tokenised Assets

Cryptocurrencies and tokenised assets are currently prohibited in KSA. There is no regulatory framework in place, and the Ministry of Finance has issued warnings about their use. Banks and finance companies require prior SAMA approval to engage in crypto activities, but such approval is unlikely in the absence of clear regulations.

Sharia Concerns and Asset-Backed Tokens

Concerns remain about the speculative and anonymous nature of unbacked digital assets. However, Sharia-compliant treatment may be possible where digital assets are backed by real-world, tangible assets (eg, real estate) as they derive their value from identifiable, intrinsic sources rather than from speculation alone.

Need for Regulation

As innovation outpaces regulation, Saudi authorities are expected to act quickly to provide a solid legal foundation for fintech developments.

Regulatory Foundations for Digital Finance

Digital financial products in KSA have rapidly expanded, supported by active regulatory initiatives to ensure a sound legal foundation for fintech innovation.

• The Rules for Engaging in Debt-Based Crowdfunding (2022): Regulate SME finance platforms using Sharia-compliant models.

• The Rules for Microfinance Activity (2023): Govern small-scale Islamic consumer credit providers with mandatory Sharia frameworks.
• The Rules for Regulating BNPL Companies (2023): Oversee deferred payment consumer finance structures.

The CMA’s FinTech ExPermit Framework

The CMA’s Financial Technology Experimental Permit Instructions (2018, updated 2021) enable both licensed firms and start-ups to test fintech innovations under regulatory supervision, with certain exemptions from standard capital market rules, including sukuk issuance requirements.

Ongoing Market Enablement

Coupled with the new SPE rules (see 3.2 Securitisation), these developments provide clear entry points for fintechs. While cryptocurrencies remain restricted, frameworks for digital sukuk, P2P finance and Islamic fintech continue to evolve under close regulatory guidance.

Islamic digital finance in KSA is overseen through a decentralised Sharia governance model. Regulated financial institutions must establish internal Sharia boards responsible for certifying and supervising Sharia-compliant products, including digital offerings. There is no national central Sharia authority.

Regulatory Sandboxes and Innovation Oversight

To promote innovation, both SAMA and the CMA have launched regulatory sandboxes allowing fintechs to test products, including Sharia-compliant ones, in a controlled environment. While regulators do not conduct Sharia reviews themselves, sandbox participants offering Islamic products must maintain robust internal Sharia controls.

Role of AAOIFI and External Standards

External standards, such as those issued by AAOIFI and the IFSB, are not legally binding in KSA. However, institutional Sharia boards often consult these standards for guidance and international alignment. Some firms may voluntarily adopt AAOIFI standards to enhance internal governance or market credibility.

Contractual Complexity in Cross-Border Islamic Finance

Under Saudi law, cross-border Islamic finance transactions are subject to the same general tax framework as conventional financing, but their distinct contractual structures, such as Murabaha/Tawarruq (cost-plus sale), Ijara (leasing) and Mudarabah (profit-sharing), can create added complexity in determining tax liabilities. One of the primary challenges is ensuring that these transactions are not subject to multiple layers of taxation, particularly in jurisdictions that may not recognise the economic equivalence of Islamic and conventional finance.

Withholding Tax and Treaty Relief Mechanisms

Withholding tax (WHT) is another key issue, as payments made to non-residents (such as rental payments under Ijara or profit payments under Mudarabah) may attract WHT under Saudi tax law. The applicable rates vary depending on the nature of the payment and the existence of a double tax treaty (DTT) with the other jurisdiction. In practice, careful structuring and reliance on DTTs are used to mitigate or reduce WHT exposure.

Mitigating Jurisdictional Mismatches Through Interpretation

Additionally, differing tax treatments across jurisdictions, especially in countries where Islamic finance is not formally recognised, can lead to mismatches in characterising income (eg, as interest vs. profit), deductibility or tax timing. These challenges are typically addressed through legal opinions, tax rulings, or adjustments based on substance-over-form principles recognised by the Zakat, Tax and Customs Authority (ZATCA) in KSA.

Neutral Tax Treatment for Islamic Finance Structures

There are currently no formal tax incentives exclusive to Islamic finance transactions under Saudi tax law. However, the tax framework is generally designed to be neutral between Islamic and conventional finance to avoid disincentivising the use of Sharia-compliant products. For example, authorities recognise structures like Murabaha/Tawarruq and Ijara as economically equivalent to interest-based lending and thus apply comparable tax treatment in terms of deductibility of expenses and characterisation of returns.

Asset-Based Transactions and Tax Efficiency

Moreover, in asset-backed transactions, such as Ijara or sukuk, tax authorities typically consider the substance of the financing arrangement to ensure that intermediate asset transfers do not trigger additional RETT or VAT, particularly when conducted strictly for financing purposes. This approach allows Islamic finance to operate on a level footing with conventional alternatives.

Evolving Tax Landscape and Its Impact on Islamic Finance

Recent years have seen broader tax reforms in KSA, particularly with the introduction and enforcement of VAT (2018), RETT (2020) and enhanced transfer pricing regulations (2023). While not targeted specifically at Islamic finance, these reforms have impacted the structuring of Sharia-compliant products, especially those involving multiple contractual stages or asset transfers.

Regulatory Adjustments to Preserve Sharia Financing Viability

To mitigate the impact on financing arrangements, ZATCA has provided guidance and exemptions, most notably in the form of RETT exemptions for property transfers conducted for financing purposes. This has been especially relevant for Ijara-based real estate financing and sukuk issuances. These regulatory adjustments have helped maintain the competitiveness and practical viability of Islamic finance structures within KSA’s evolving tax landscape.

KSA is pursuing substantial regulatory reform in Islamic finance to support Vision 2030. Key anticipated changes include:

• Licensing reforms: SAMA has proposed amendments to the Finance Companies Control Law to reduce bank guarantee requirements from 100% to 20% of capital, aiming to attract new Sharia-compliant lenders and fintech entrants. This is expected to increase financing access for SMEs and consumers.
• Close-out netting frameworks: SAMA issued a new regulation in 2023 recognising the enforceability of close-out netting under QFCs, insulating them from insolvency set-off rules. The CMA also published a similar regulation in 2025. These moves align with ISDA standards and reduce credit risk, improving KSA’s attractiveness for Sharia-compliant derivatives and hedging.
• Sukuk reforms: The CMA is consulting on rules to enhance SPEs used in sukuk issuance. These reforms would enable broader issuer eligibility and improve governance. They follow earlier streamlining of sukuk offering requirements. Collectively, they aim to deepen local capital markets and support infrastructure financing.
• New Saudi banking law: A new law has been proposed to replace the 1966 Banking Control Law, giving SAMA broader regulatory powers, introducing stricter licensing rules and potentially introducing a deposit protection fund.
• Sharia Governance Modernisation: SAMA’s Sharia Governance Framework mandates internal boards and reporting, but a national-level standardisation project to create a central Sharia board may be undertaken by SAMA. A central Sharia board could harmonise fatwas and improve market consistency, mirroring models like Malaysia.

To support the sustainable growth and global integration of KSA’s Islamic finance sector, targeted legal and regulatory reforms are needed in three key areas:

• Islamic fintech regulation: While SAMA’s sandbox and the Financial Sector Development Program have advanced digital finance, there is limited regulatory engagement with blockchain-based Islamic finance. Clear guidance is needed on digital sukuk, tokenised assets and Sharia-compliant stablecoins.
• Securitisation framework: The absence of a dedicated securitisation law restricts banks’ ability to transfer assets to capital markets. A proper framework would enhance liquidity, reduce balance sheet risk and support capital efficiency. Key elements include true sale criteria, risk retention rules (eg, 5% originator interest) and clear disclosure and reporting obligations, including for Sharia compliance.
• Central Sharia governance: Reliance on institution-level Sharia boards leads to inconsistent product treatment. A centralised Sharia board could standardise approvals and promote uniform application of Sharia standards across the market.