Islamic Finance through the Romanian Law Lens: more than legal equivalence​​

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Discussions of Islamic finance in non-Muslim jurisdictions often begin with an exercise in legal translation. A murabaha is explained by reference to sale; ijarah by reference to lease; musharakah by reference to partnership or joint venture; wakalah by reference to agency; and sukuk by comparison with bonds or other capital-market instruments. From the perspective of a Romanian lawyer, many of these contractual building blocks are therefore not conceptually foreign. Sale, lease, mandate, co-ownership, partnerships, guarantees and special-purpose vehicles all have counterparts within Romanian or, more broadly, continental European private law. That observation is useful, but incomplete.

The distinctive feature of Islamic finance does not lie simply in the existence of unfamiliar contractual forms. In many cases, there is indeed a conventional-law instrument capable of accommodating the transaction. What distinguishes Islamic finance is the additional normative layer imposed by Shariah: a transaction must not only be legally valid under the applicable state law, but must also satisfy principles governing why a financial return may legitimately arise, what risks must accompany that return, what may be financed and how closely finance must remain connected to an identifiable economic activity.

Islamic finance is therefore better understood not as a parallel catalogue of contracts, but as a different architecture for financial relationships.

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1. From legal equivalence to economic legitimacy

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A conventional comparative-law analysis naturally asks: what is the Romanian-law equivalent of this Islamic finance instrument?

Shariah introduces another question: what makes the economic return generated by this transaction legitimate?

Under conventional finance, the provision of capital may itself generate a contractual entitlement to interest. In Islamic finance, the prohibition of riba means that money cannot simply generate a predetermined return merely because it has been made available for a period of time. A legitimate return must instead be connected to another recognised basis: trade, ownership, use of an asset, investment, entrepreneurial activity, provision of services or assumption of relevant commercial risk.

This explains why apparently familiar private-law institutions acquire a much greater significance in Islamic finance.

A sale is not merely a legal technique used to replicate a loan. Ownership and transfer of the asset matter because the seller's entitlement to profit is connected to the sale transaction. A lease is not simply an alternative mechanism for calculating financing payments: rent derives from granting the usufruct of an asset. Participation in a musharakah generates profit because the participant contributes to an enterprise while assuming exposure to its economic outcome.

The legal form and the economic justification for the return are therefore connected.

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2. The principle that return should accompany risk

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One of the most distinctive ideas underlying Islamic finance is that entitlement to economic gain should be accompanied by exposure to risk. This represents more than a prohibition on interest. It affects the allocation of risk between the parties.

A conventional lender will generally seek to isolate itself, as far as possible, from the commercial performance of the asset or business financed. Its principal and interest are contractually payable irrespective of whether the financed activity ultimately proves profitable.

Islamic finance starts from a different premise. Depending on the relevant structure, the financier may have to assume ownership risk, asset risk or entrepreneurial risk before becoming entitled to the corresponding return.

The distinction can be seen particularly clearly in profit-and-loss-sharing structures such as mudarabah and musharakah. The return cannot simply be guaranteed in advance independently of the performance of the underlying venture. Profit is connected to economic success and risk accompanies participation.

Even structures that economically resemble conventional credit, such as murabaha, remain conceptually anchored in an underlying transaction. The financier acquires and sells an asset rather than merely lending money against an interest-bearing obligation.

This principle changes the conceptual status of the financier. Depending on the structure, the financier is not merely a creditor. It may temporarily become an owner, seller, lessor, investor, partner or principal.

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3. The asset is not merely collateral

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This leads to another important difference. In conventional lending, an asset frequently appears in the transaction as security. The loan exists independently, while the mortgage, pledge or other security interest improves the creditor's position if the debtor defaults.

In Islamic finance, the asset may perform a more fundamental role: it can constitute the legal and economic basis of the financing itself.

The World Bank describes Islamic finance as asset-based and risk-sharing and notes that funds generally move in connection with ownership or usufruct of underlying assets. Structures may therefore be equity-based, sale-based, lease-based or fee-based.

This distinction is subtle but significant.

In an ijarah, for example, the existence and usability of the leased asset are integral to the transaction generating the financier's return. In a murabaha, the financier's profit arises from a sale at a disclosed mark-up. In istisna', financing is organised around the manufacture or construction of an identified asset.

The real economy is consequently not merely the destination of the financing. It is incorporated into its legal architecture.

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4. Shariah regulates not only interest, but uncertainty

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Perhaps one of the most important aspects lost when Islamic finance is reduced to "interest-free banking" is the concept of gharar. Shariah does not focus exclusively on the price of money. It is also concerned with excessive uncertainty concerning essential elements of a transaction. This has consequences for contractual drafting.

The subject matter of the transaction, price, essential obligations and relevant characteristics of the asset must be sufficiently ascertainable. The issue is not that every commercial uncertainty is prohibited, commercial activity necessarily involves risk, but rather that a contract should not be constructed around excessive uncertainty or ambiguity capable of turning the transaction into speculation over an unknown outcome.

This creates an important distinction between commercial risk, which Islamic finance can accept and indeed requires in certain structures, and contractual uncertainty, which Shariah seeks to constrain.

The two concepts should not be confused. Islamic finance is not a system designed to eliminate risk. On the contrary, it accepts economically meaningful risk while restricting forms of uncertainty and speculation regarded as disconnected from productive economic activity.

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5. The prohibition of maysir: limits on financialisation for its own sake

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The prohibition of maysir, generally associated with gambling and games of chance, reinforces this distinction. Together with the rules on gharar, it places limits on transactions whose economic substance is predominantly speculative.

This gives Islamic finance a distinctive perspective on financial innovation. The relevant question is not merely whether a sophisticated financial exposure can be documented and enforced. It is also whether the transaction represents legitimate economic activity or has become essentially a wager on the movement of a price, event or variable.

That does not mean Islamic finance prohibits risk-taking. Entrepreneurship necessarily involves risk. What matters is the relationship between risk and productive economic activity.

This distinction between taking risk in order to conduct economic activity and trading risk as the principal object of the transaction—is one of the most conceptually interesting features of Shariah finance.

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6. The financed activity itself matters

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Conventional financial regulation generally focuses on the legality of the customer and transaction, prudential requirements, sanctions, anti-money-laundering rules and sector-specific restrictions. Subject to those limits, a financial institution is ordinarily neutral regarding the moral character of a lawful business.

Shariah compliance introduces an additional filter. A transaction may be perfectly lawful under Romanian law and nevertheless be unsuitable for Shariah-compliant financing because of the nature of the underlying activity. Financing connected with sectors such as gambling or alcohol is the obvious example.

The object of Shariah review therefore extends beyond the financing contract itself. It can require examination of the economic activity to which capital is ultimately directed.

This is a major conceptual difference. Islamic finance contains an element of substantive investment screening built into the legal-financial model itself. The question is not simply whether the transaction is lawful, but whether the way in which the profit is generated and the activity producing that profit are permissible.

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7. Shariah compliance is a continuing governance issue

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Another feature without an exact equivalent in an ordinary conventional financing institution is Shariah governance.

Compliance cannot necessarily be established once, when the transaction documents are signed, and then forgotten. Institutions offering Islamic financial services require mechanisms for obtaining Shariah rulings, reviewing products and monitoring continuing compliance.

International standards consequently treat Shariah governance as a separate governance function. The Islamic Financial Services Board's principles expressly address compliance with Islamic Shariah rules and principles, alongside conventional corporate-governance concerns.

This produces a form of dual compliance. An Islamic financial institution operating in a European jurisdiction may simultaneously have to ask: Is the transaction valid and enforceable under the governing national law? and Does the transaction, throughout its relevant lifecycle, comply with the applicable Shariah principles?

The second question cannot necessarily be answered by the national regulator or ordinary courts. It requires a separate institutional framework involving Shariah scholars, boards or advisers. Consequently, Shariah compliance becomes not merely a characteristic of a product but a component of the institution's governance architecture.

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8. Shariah non-compliance creates a category of risk of its own

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This dual framework also generates a distinctive type of legal and operational risk. A contract might remain enforceable under its governing secular law while an element of the transaction is subsequently regarded as non-compliant with Shariah.

From the standpoint of ordinary contract law, nothing may have happened to invalidate the agreement. From the standpoint of the Islamic financial institution, however, the consequences can be significant.

International regulatory literature therefore recognises Shariah non-compliance risk as a risk specific to Islamic finance. It may affect recognition of income and create operational and reputational consequences.

This illustrates why Shariah cannot simply be translated into a list of equivalent Romanian-law contracts. Two transactions may have identical enforceability under Romanian law and nevertheless have materially different positions from the perspective of Shariah compliance.

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9. Substance matters alongside form

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Perhaps the most interesting question for lawyers is what happens when a transaction reproduces almost exactly the cash flows of conventional financing while technically using sale, lease or partnership contracts.

This is where Islamic finance becomes more intellectually demanding than an exercise in contractual engineering. A structure may use contracts individually recognised by Shariah, yet still raise questions if the combination of those contracts effectively removes the ownership, commercial exposure or economic substance that justified their use in the first place. The central tension is therefore between formal compliance and substantive compliance.

This tension also explains why Islamic finance continues to contain internal debates between different scholars, institutions and jurisdictions. The issue is not always whether a particular contractual form exists in Islamic jurisprudence, but whether the transaction constructed from it remains consistent with the economic principles underlying that form.

For a conventional lawyer, this is perhaps one of the closest points of contact with doctrines concerning substance over form, abuse of law or the economic reality of a transaction, although none is an exact equivalent.

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10. A different conception of finance rather than a different vocabulary

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Islamic finance can therefore coexist relatively comfortably with a legal system such as Romanian law at the level of private-law technique. Sale, lease, agency, partnership, guarantees, ownership and special-purpose structures provide much of the legal vocabulary required to implement Islamic financing arrangements. But equivalence of legal instruments should not be mistaken for equivalence of financial philosophy. The distinctive contribution of Shariah lies one level deeper.

It asks whether profit corresponds to ownership, investment, services or economically meaningful risk; whether contractual uncertainty has exceeded acceptable limits; whether speculation has displaced productive economic activity; whether the underlying activity itself is permissible; whether the financial transaction remains connected to the real economy; and whether compliance is continuously supervised through an appropriate governance structure.

The World Bank accordingly characterises Islamic finance not merely as interest-free finance but as equity-based, asset-backed, ethical and risk-sharing finance linked to the real economy and social welfare.

Seen from this perspective, the most useful comparative-law question is no longer: "What is the Romanian-law equivalent of a Shariah-compliant instrument?" It is: "What additional constraints does Shariah impose on an otherwise legally valid financial transaction, and how do those constraints change the allocation of ownership, risk, return and responsibility between the parties?"

That shift in perspective reveals what is genuinely distinctive about Islamic finance. Its originality does not depend on every contractual instrument being unknown to conventional legal systems. It lies in the fact that familiar legal instruments operate within a different normative framework, one in which the legitimacy of financial return is inseparable from the economic substance, risk allocation and ethical boundaries of the transaction.

Islamic finance is therefore more than conventional finance expressed through different contracts. It is an attempt to impose a particular theory of legitimate economic exchange on the architecture of finance itself.

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Platform Lead: Casiana Dusa - President of RAIH

casiana.dusa@islamicbusinessromania.com

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