While Shariah-compliant funds represent an important component of Islamic finance, the development of sukuk has arguably played an even more transformative role in integrating Islamic finance with global capital markets. Frequently described as “Islamic bonds”, sukuk serve a similar economic function to conventional debt instruments but are structured in a fundamentally different way in order to comply with Shariah principles.
In conventional financial markets, bonds are debt securities through which an issuer borrows capital from investors and commits to repaying the principal together with periodic interest payments. Since the payment of interest is generally prohibited under Islamic law, such instruments are incompatible with the foundational prohibition on riba. Sukuk were developed as an alternative financing mechanism capable of raising capital without violating this prohibition.
Unlike traditional bonds, sukuk represent proportional ownership interests in underlying assets, projects or investment activities. Investors are therefore not creditors in the conventional sense but participants in the economic performance of the asset pool backing the instrument. Returns are typically derived from the income generated by these assets, such as lease payments, project revenues or profit-sharing arrangements, rather than from interest payments linked to the mere passage of time.
Over the past two decades, sukuk have grown into a substantial segment of global capital markets. Sovereign governments, financial institutions and large corporations have utilised sukuk structures to finance infrastructure development, energy projects, real estate investments and other capital-intensive initiatives. Their asset-based nature and risk-sharing characteristics have also attracted investors interested in ethical or asset-backed investment models beyond traditional Islamic markets.
Recognising the growing international relevance of these instruments, Malta has taken steps to establish a regulatory framework capable of accommodating sukuk issuance within its capital markets infrastructure. In July 2025, the MFSA issued a public consultation proposing amendments to the Capital Markets Rules governing the Institutional Financial Securities Market (“IFSM”). Among other objectives, the consultation seeks to clarify how sukuk may be issued, admitted to trading and regulated within Malta’s wholesale securities market.
The proposed reforms pursue two complementary objectives. First, they modernise the regulatory rulebook applicable to the IFSM by streamlining outdated provisions and enhancing clarity regarding the operation of Malta’s institutional securities market. Second, they introduce specific regulatory considerations tailored to sukuk instruments, acknowledging their structural differences from conventional debt securities.
Providing explicit regulatory recognition to sukuk structures carries significant implications for issuers and investors alike. For potential issuers, including sovereign entities, multinational corporations and financial institutions, regulatory clarity reduces legal uncertainty regarding the treatment of Shariah-compliant instruments within a European financial jurisdiction. At the same time, investors benefit from enhanced transparency and disclosure standards that align Islamic capital market instruments with established European regulatory practices.
Nevertheless, structuring sukuk transactions remains inherently complex. Because investor returns must be linked to the performance of underlying assets rather than fixed interest obligations, sukuk structures often involve sophisticated contractual arrangements, special purpose vehicles and carefully designed asset transfer mechanisms. Legal advisers must therefore reconcile the requirements of Shariah jurisprudence with European securities law, disclosure standards and investor protection obligations.
If successfully implemented, Malta’s regulatory framework could position the jurisdiction among a relatively small group of European financial centres capable of facilitating sukuk issuance within a clearly defined legal environment. In doing so, Malta would strengthen its role as a bridge between Islamic capital markets and the broader European financial ecosystem.
For promoters and investment managers seeking to establish Shariah-compliant investment structures in Malta, navigating both regulatory and Shariah governance considerations requires specialised expertise. With professional certification in Islamic finance and experience advising on Maltese regulatory frameworks, our team at Zerafa Advocates is well positioned to assist clients in structuring Shariah-compliant funds within Malta’s established collective investment schemes regime.
As regulatory frameworks for sukuk issuance continue to develop in Europe, issuers and financial institutions require legal advisers capable of bridging Islamic financial principles with conventional securities regulation. We, at Zerafa Advocates assists clients in assessing the feasibility of sukuk structures, navigating regulatory requirements, and structuring transactions that align with both Shariah principles and applicable European capital markets rules.
