The Shariah has played a significant role in the growth of family enterprises in the Arabian Gulf. In this article, Peter Hodgins, Naji Hawayek and Shahbaz Khan discuss certain Islamic principles and touch on the various Shariah matters that certain family enterprises encounter in their business operations. This article also highlights the valuable contribution made by professional advisors and Islamic scholars in the development of the products and mechanisms used by those family enterprises to facilitate Shariah compliance.

The prohibition on hoarding

"And let those who hoard gold and silver and do not spend in the way of Allah know that a severe and painful punishment is awaiting them." [the Holy Qur'an, Chapter 9, Verse 34]

Since the advent of Islam in the Arabian Peninsula over fourteen centuries ago, the Shariah has played a vital role in preserving and developing society in the region. Each tenet of the Shariah, founded on the revelations of the Holy Quran and the Sunnah1, is underpinned by the ideal of providing benefit to the ummah, or society, as a whole.

The Shariah recognises that enterprise and trade are central to the development of a progressive, prosperous ummah. Enterprise and trade are directly linked to creation of wealth and opportunities for exchange which, in turn, stimulate employment and economic growth. It is for this very reason that the Shariah rejects the concept of hoarding and places an obligation upon Muslims to spend in the way of society through acts of charity, entrepreneurship and investment.

New wealth

It was not until the discovery of oil a few decades ago that family enterprises began to experience the rapid growth which would prove instrumental in cementing their standing as major organisations in the Gulf region. This discovery set in motion the influx of riches which sparked the birth of a booming economy in the Gulf.

The new found wealth gave the region opportunities to improve standards of living and with it, increased opportunities for trade and enterprise. Adhering to the Islamic law principles of non-hoarding and using wealth to benefit society, family enterprises started to move away from traditional mercantile trading carried out for centuries by their forefathers. Instead, they began to put their capital into diverse projects, improving the quality of life in their native lands and entering the sectors of retail, construction, healthcare and education, to name a few.

Today, a considerable number of family enterprises in the region carry out their business operations in accordance with the Shariah. Accordingly, as lawyers we are often asked to advise on Shariah related issues which family enterprises may be faced with. These may typically include:

1. M&A / investments

In the field of mergers & acquisitions, family enterprises may often require specialised due diligence to be conducted on a potential target to ensure that its business is Shariah compliant. It is common practice to look at both qualitative and quantative factors when screening investment opportunities. On the qualitative side we will often be asked to report on whether the revenue of the target is derived from trade in haram, or forbidden, products such as pork related products, alcohol, weapons, conventional finance, tobacco, entertainment or gambling. We may also work with the family enterprises' financial / accountancy advisors to consider quantative factors arising in relation to the financial activities of the potential target. This will include a consideration of whether the target has entered into loan facilities or other forms of financing / investments which may not be deemed Shariah compliant and the extent of such debt-based financing relative to the capitalisation of the target. However, it will also include consideration of the extent of the cash and interest-bearing securities of the target relative to its capitalisation and the accounts receivables.

This screening process can give rise to unexpected complications. Family enterprises investing in the hotel and leisure industry will often find that there is sale of alcohol that is incidental to the business or the acquisition of a shopping mall that leases premises to a cinema complex that shows 18 rated films.

In such circumstances we will often work with Islamic scholars and financial advisors to determine the percentage of profit generated from haram activities and certain Islamic scholars will, on the premise that the turnover from such activities only constitutes a minor percentage of the business' profit, approve such an investment on the condition that the investor 'purifies' its profits by giving away any income generated from the those activities to charity.

The market also recognises the need to provide greater clarity for investors looking to make Shariah compliant investments, particularly with respect to equity investments in listed entities which may derive a small percentage of profit from haram products or which concern business that have an element of conventional debt finance. The Dow Jones Islamic Market Index provides a helpful guidance in this area listing businesses that satisfy the qualitative and quantative screens.

Aside from assisting with Shariah due diligence, family enterprises will also instruct lawyers to advise on Shariah investment funds, especially with respect to structuring an investment fund and drafting its information memorandum and other fund documentation so as to comply with the applicable Shariah rules.

2. Finance

"Allah has allowed trading and forbidden riba (usury)...[and]...Allah does not bless riba." [the Holy Qur'an, Chapter 2, Verses 275-276]

Historically, borrowing money from banks has always presented a challenge for family enterprises. This is because the Shariah vehemently prohibits usury. Today, however, thanks to the development by banks of Shariah compliant structures over the decades, family enterprises are now able to obtain facilities to fund some or all of their business activities and investments and are increasingly using mudarabah, murabaha and ijara structures, to name a few, to secure equivalent financing to that obtained through conventional debt finance. Often, family enterprises will seek our assistance to negotiate Shariah compliant documentation with banks.

It is essential that the family enterprises have proper understanding of the Islamic financing structures to which they are a party. Sadly, the global financial crisis revealed considerable uncertainty as to the intention and operation of many Shariah compliant facilities. This led to considerable wasted costs restructuring and, sadly (in some cases) litigating over the terms of facilities. In this regard, we are required to ensure that the facilities are clearly documented and that our clients fully understand their obligations. 

The introduction of the sukuk over the last decade or so has also opened up another means for raising Shariah compliant capital/finance. Such sukuk are comparable in nature to conventional bonds and are typically structured so as to provide the noteholders with an undivided interest in the income stream generated by an underlying group of assets. Sukuk represent a considerable opportunity for family enterprises as there is increasing demand for medium to long term fixed income securities in the Islamic world. As a consequence, this is another area where we expect to see significant additional activity within family businesses. 

3. Setting up

Many family enterprises are a conglomerate of a number of companies and will need to establish entities for entering into new ventures or jurisdictions. In such instances, we will often draft the articles of association and shareholders' agreements for such new entities in accordance with the Shariah. Family enterprises will occasionally request that the objects clause in the articles of association of the company clearly define what type of activities the entity will carry out and, equally, what activities it will be prohibited from engaging in.

When setting up entities for family enterprises, we are also frequently instructed to prepare appropriate internal policies and procedures for the purposes of establishing a Shariah compliant corporate governance structure. In some instances, family enterprises may refer to the auditing standards of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) for guidance with respect to corporate governance and establish a Shariah coordinator / internal audit team responsible for monitoring the implementation of Shariah rulings within the organisation.

Furthermore, we have seen that certain family enterprises like to implement a Shariah monitoring committee or board which will oversee the business and investments made. Lawyers may be asked to tailor a company's articles to provide for the role and authority of such committees.

4. Dispute resolution

Since the judgment in the English case of Shamil Bank of Bahrain v Beximco Pharmaceuticals, certain family enterprises, especially those with a Shariah focused business model, have shown a desire towards enforcement of their contractual rights in accordance with the Shariah. Whereas it was common, prior to Shamil Bank judgment, to see contracts governed in accordance with the Shariah, we have now noticed a trend towards implementing clear Shariah compliant dispute resolution mechanisms, with contracts often stipulating a requirement to appoint a Shariah specialist arbitrator to resolve disputes.

In view of the Shamil Bank case, we, as lawyers, endeavour to codify the relevant Islamic principles in the agreement itself, in order to ensure that an English court would interpret such agreement in accordance with the Shariah. This would typically include generic provisions stating that the agreement is intended to comply with Shariah principles and that it is not the intention of the parties for any provision to be interpreted in a manner that would be fundamentally inconsistent with Shariah. However, ultimately it is incumbent upon the parties and their advisors to ensure that the agreements are clearly drafted so as to avoid ambiguities in this regard.

5. Shariah compliant insurance (Takaful)

The boom of Shariah compliant finance has been vital in the development of takaful based products over the past decade. Family enterprises in the Gulf have been keen to move away from products offered under conventional insurance models and have assisted such clients to take out takaful based products.  This move has been encouraged by the fact that conventional insurance has been criticised by scholars as not being Shariah compliant. This is on the basis that conventional insurance involves the investment of policy premiums by the insurer in riba based products and inevitably also includes elements of gharar investments, both prohibited under Shariah.

Under the takaful model, all participants (policyholders) agree to guarantee each other and, instead of paying premiums, make contributions to a mutual fund, or pool. The pool of collected contributions creates the takaful fund which is managed and administered on behalf of the participants by a takaful operator (whose remuneration will be determined by reference to the takaful model utilised; typically, this will be a percentage of the contribution or a share in the investment returns generated by the pool or a combination of both). Any claims made by participants are paid out of the fund and remaining surpluses are either paid out to the participants in the fund in the form of cash dividends or distributions, alternatively in reduction in future contributions. There are now numerous takaful operators established across the Gulf through whom Shariah compliant insurance protections can be arranged.

Bahrain and the financial centres in Dubai (the DIFC) and Qatar (the QFC) have also established rules for Islamic captive insurance companies. For family enterprises with an annual insurance premium in excess of US$1 million the establishment of a captive insurance company can create significant efficiencies by allowing access to the (cheaper) reinsurance and retakaful market, protection of risks that are commercially uninsurable, retention of favourable risk and through the risk mitigation strategies that such captives facilitate. Such captives can readily be structured to be Shariah compliant.

In house scholars

Given the increase in Shariah compliant requirements in the region, it is not uncommon for large family enterprises to have an Islamic scholar 'in-house' to review and give opinions on the Shariah compliance of documents or operations. Additionally, family enterprises will frequently engage lawyers specialised in Shariah to work with their in-house scholar when making new investments or taking on new ventures, thereby ensuring that all issues are scrutinised under the highest standards to ensure that the relevant transaction and documents comply with the Shariah.

Over the past few years, professional advisors and scholars have played an instrumental role, through their extensive work on Shariah related matters, in the development, understanding and application of Shariah in today's business world. This has, in turn, provided family enterprises, particularly those in the Gulf, with the opportunity to diversify and expand their operations, without having to compromise on their religious principles. With the region continuing to show signs of strong growth and the rising demand for better infrastructure to meet the needs of the people, it is clear that the foreseeable future holds promise of plenty of opportunities for family enterprises; and Shariah compliance will continue to be at the heart of any decisions made when pursuing such opportunities.


1. The teachings and sayings of the Prophet Mohammad

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.