Enforceability as Existential Risk: Why Islamic Finance Must Evolve or Face Irrelevance

Executive summary

Islamic finance has evolved into a trillion-dollar industry with widespread global adoption, but its doctrinal and legal architecture remains underdeveloped. As financial instruments grow more complex and market expectations rise, the enforceability of Islamic financial contracts has emerged as the core weakness that could undermine the industry’s integrity.

This article argues that without a radical shift in legal infrastructure, enforceability doctrine, and dispute resolution frameworks, Islamic finance will face increased litigation, investor skepticism, and reputational harm. Through case studies, critical legal analysis, and reform proposals, this article advocates for a jurisprudential pivot toward enforceability and legal realism as the basis for the next phase of Islamic financial reform.

The false comfort of growth metrics

Islamic finance often showcases its expansion in glowing terms: over USD3 trillion in assets under management, Sovereign Sukuk now mainstream, and Sharia-compliant fintech start-ups emerging globally. Yet these achievements mask a deeper, more urgent crisis. For general counsel (GCs) of multinational corporations and institutional investors, the question is no longer whether a transaction is labelled Sharia-compliant, but whether it is legally enforceable in the jurisdictions where rights must be protected.

This enforceability crisis has now surpassed doctrinal disputes in importance. Without the ability to reliably enforce contracts – particularly under Sharia-influenced legal systems – Islamic finance risks being seen not as an ethical alternative, but as a high-risk, unpredictable venture.

Understanding enforceability risk: the core legal vulnerability

Enforceability risk arises when a financial instrument, even if properly structured under secular law, is invalidated or rendered void by courts applying Islamic principles. This occurs most often when Sharia-compliant contracts replicate conventional features – guaranteed returns, and fixed-income profiles – and are later challenged in jurisdictions where Sharia principles are constitutionally or judicially recognised.

The legal question then becomes – can the terms of the contract survive both commercial litigation and religious scrutiny? In many instances, the answer is unclear. What begins as a secure investment instrument can devolve into legal limbo – especially when courts assert that substance must prevail over form and when subjected to a proper analysis under Islamic legal principles.

Dana Gas and the demise of illusory Sukuk

The Dana Gas case (see Dana Gas PJSC v Dana Gas Sukuk Ltd, DIFC Court of First Instance, CFI-043-2017; and England & Wales High Court (Chancery Division), Claim No HC-2017-002593) is widely recognised as a watershed moment. The UAE-based energy giant, following an initial restructuring and collection problems, led to the company declaring that its USD700 million Sukuk had become non-compliant with Islamic law, despite its original structure receiving approval from seemingly reputable Sharia boards. The company’s argument: the Sukuk functioned more like a conventional bond, with guaranteed principal and return and by making the company responsible for bearing the loss. Conceptually, Sukuk holders should bear the risk of loss like equity investors.

In English courts, the purchase undertaking (capital protection feature) was sought to be enforced. Yet in UAE courts, the focus shifted to Islamic law principles and the deeper questions relating to overall structural Sharia enforceability. While there was no final decision rendered in the UAE courts, adverse English court judgments were stayed pending the UAE court decision – leading to delays, inconsistent rulings, and reputational damage to the Islamic finance sector as a whole. The Dana Gas saga exposed a systemic weakness: Islamic finance products often are structured to resemble equity while retaining debt-like features; in the final analysis, they remain in substance conventional debt instruments.

The lesson is clear. GCs must look beyond Fatwas and examine whether Islamic instruments can withstand legal scrutiny in multiple jurisdictions – including those where Sharia principles are constitutionally binding.

Takaful and the Tabarru contradiction

The enforceability crisis is not limited to Sukuk. Takaful structures – often touted as the Sharia-compliant alternative to conventional insurance – also suffer from serious contractual ambiguity. Most Takaful schemes are based on the “Tabarru” (donation) model.

Here, policy holders donate their contributions, and the operator is to donate the insured amount back in the event of an insured event claim. But under Islamic jurisprudence, once a donation is made no counter-performance can be legally demanded. This undermines the contractual obligation to compensate – creating a potential black hole for enforceability.

While the Tabarru model may purport to avoid charges of “Gharar” or “Maisir”, it adds legal uncertainty. An article published in the UCLA Journal of Islamic and Near Eastern Law (see Oliver Agha, Taburru in Takaful: Helpful Innovation or Unnecessary Complication?, UCLA Journal of Islamic and Near Eastern Law, Volume 9, 2009–2010) (the “Note”) has criticised the reliance on Tabarru as unnecessary and structurally flawed. Without a contract of indemnity, courts may find Takaful arrangements unenforceable – especially in claims disputes. Additionally, that Note questions whether the actual risk in insurance is the same prohibited risk that the doctrine of Gharar (preclusion of tenuous transactions) seeks to preclude: insurance is procured to allay a contingent but absolute risk (the uncertainty is timing invariably, not occurrence) and not a contract that creates uncertainty in and of itself (eg, a contract to sell an unborn calf from a cow); the insurance contract encompasses the contingent uncertainty that already exists. Similarly, the Maisir concern (unjust enrichment) seems ill-informed given insurance companies requiring insurable interest/business purpose before underwriting insurance policies.

A legal and jurisprudential divide: common law vs Islamic law

Some of the enforceability dilemma stems from the fundamental differences between Western and Islamic legal systems. Common law courts prioritise contract clarity and predictability. If the terms are unambiguous, enforcement typically follows. By contrast, Islamic jurists may refuse to enforce a contract – even a clear one – if enforcement results in manifest injustice or violates the higher objectives of the Sharia (“Maqāṣid al-Sharīʿah”). This doctrinal divergence is not merely theoretical. It manifests in real-world cases – such as cases in Swiss courts (recent Geneva Appellate Court decision on discretionary trusts, unpublished summary, 2025) where decisions have upheld the exclusion of beneficiaries from discretionary family trusts. Under Islamic law, the same exclusions could have been invalidated due to breaches of ʿadl (justice), family cohesion (silat al-raḥim), or inheritance rules (farāʾiḍ). Thus, Islamic law introduces a higher threshold for contractual legitimacy – beyond mere formal clarity – to ensure ethical substance and equitable outcome.

Cross-border pitfalls: when jurisdictional risk meets doctrinal risk

Islamic finance is increasingly structured across multiple jurisdictions: a Sukuk governed by English law, underwritten in Dubai, marketed in Malaysia, and enforced in Saudi Arabia.

This multi-jurisdictional architecture introduces a compounded enforceability problem. A clause deemed valid under one legal system may be invalid – or even void – under another where Islamic legal principles apply. For instance, a purchase undertaking governed by English law might be upheld in London but rejected in Riyadh if it is seen as a disguised interest-bearing obligation. Islamic instruments governed by English law made deferential to Islamic in conflict create another set of issues given English courts’ refusal to effect such clauses in part because of lack of codification. GCs must ensure that enforceability is assessed not only by contract drafters, but through the prism of the lens of judges likely to review the transaction. This reinforces the need for not only multi-jurisdictional enforceability opinions, but also for Islamic legal opinions and a new generation of legal risk assessments tailored to Islamic finance instruments. Ignoring this layer of risk is akin to underwriting in a vacuum.

A hypothetical: when enforcement fails in practice

Consider a hypothetical Sukuk issuance for a renewable energy project in a Gulf jurisdiction. The issuer defaults and the investor seeks to enforce a binding English-law governed purchase undertaking. The local court, however, refuses to enforce the clause against locally based assets, citing the judgment’s incompatibility with core Islamic principles of risk-sharing, notwithstanding the clear language in the contract. The investor is now trapped. Recovery is delayed, value deteriorates, and reputational fallout extends to the arranger, legal counsel, and issuer. The underlying cause? A structure optimised for issuance – not for enforcement. This is no longer hypothetical. Similar patterns are emerging, quietly settled or buried. Again, the lesson is clear: Islamic finance cannot afford to separate theology from legal engineering.

For general counsel: key questions before an Islamic investment

For GCs tasked with managing cross-border risk and ensuring contract enforceability, the following checklist is critical.

• Is there a Sharia legal opinion and legal enforceability opinion in each of the jurisdictions where assets are located?
• Has the governing law of the contract been tested in jurisdictions applying Islamic law?
• Can your rights survive judicial scrutiny under both secular and Islamic legal principles?
• Are contractual remedies (eg, guaranteed returns, or capital protection features) valid under the chosen legal framework?
• Has the transaction structure evolved in line with new regulatory standards such as AAOIFI Sukuk Standard 62?

Toward an infrastructure of enforcement: the five pillars of reform

Islamic finance cannot afford to delay systemic reform. The following measures must be prioritised across jurisdictions.

1. Codification of Islamic commercial law – drawing from AAOIFI, ISRA, and classical jurisprudence, a unified Islamic commercial code must be developed and adopted. Legal clarity is impossible without standardised black letter law.

2. Creation of hybrid dispute resolution fora – specialised tribunals combining commercial judges and enshrining Sharia principles are essential. These bodies must possess the dual competency to adjudicate on both legal and religious dimensions of financial instruments.

3. Engineering of Sharia boards – in line with AAOIFI prescriptives, legal practitioners must sit alongside jurists on Sharia boards to ensure that spiritual compliance accompanies legal enforceability. Fatwas without enforceability assessments are inadequate.

4. Transparency and legal reasoning mandates – all Sharia rulings and Fatwas must be published with accompanying legal reasoning. This allows for market predictability, academic peer review, and reduced legal ambiguity.

5. Adoption and iteration of AAOIFI Standard 62 (see AAOIFI Shariah Standard No 62 (Sukuk), Accounting and Auditing Organization for Islamic Financial Institutions, 2020) – standard 62 marks a shift toward enforceable Islamic equity. It emphasises risk-bearing for reward, moving Sukuk away from disguised debt. Regulatory and judicial bodies should accelerate its adoption and refine it based on litigation feedback.

Conclusion: enforceability as the ethical imperative

Islamic finance is at an inflection point. Its continued success depends not on branding or market penetration, but on its ability to deliver legally enforceable, ethically sound instruments that can withstand judicial review across jurisdictions. This is not a niche concern for Islamic jurists – it is a foundational issue for every GC tasked with preserving institutional capital. Without enforceability, Islamic finance loses credibility. With enforceability, it gains not only legitimacy but global strategic relevance. The next decade must be one of legal realism, infrastructural reform, and doctrinal transparency. Only then can Islamic finance fulfil its promise as a durable alternative to conventional finance, rooted in justice and enforceable equity.