Sukuk – A Path for Islamic Private Credit Investors?

This article was first published in IFN Volume 23 Issue 4 dated the 28th January 2026.

Following the global financial crisis in 2008, the introduction of a raft of new regulations relating to the amount of regulatory capital to be held by banks and lending operations more generally has led to a considerable tightening in lending standards. Businesses in sectors of the economy which would have once been able to tap bank funding today might struggle to find the same liquidity or the right pricing. This has ushered in a new wave of private lending led by specialist investment funds, family offices and lending arms of private equity sponsors. According to Preqin, European private credit assets under management rose from $93 billion in December 2013 to $505 billion in December 2023. This begs the question, is there any piece of the pie remaining for Shariah sensitive investors?

Unfortunately, the Shariah compliant private credit funds sector remains relatively nascent. Although there are funds based in the UK and elsewhere with some exposure to Shariah compliant private credit, they remain few and far between. Nevertheless, several hundred million pounds worth of Shariah compliant facilities have been originated in the UK by non-bank financial institutions ("NBFIs") in the last few years alone, predominantly in the commercial and residential property finance sectors. This indicates marked demand for alternative funding sources more generally and the potential opportunities that lie ahead for funders and clients alike.

However, under current rules many Islamic NBFIs and their customers could face adverse tax consequences if a Sukuk is not built into the institution's funding structure. This is especially the case if the NBFI in question is unregulated. In this article, we unpack how Shariah compliant private capital providers can overcome this hurdle to accessing the market through the use of an innovative closed ended Sukuk structure that leverages the UK's alternative finance investment bond ("AFIB") tax framework.

Why Sukuk?

Sukuk are a useful tool for NBFIs looking to access the UK Islamic finance sector without triggering prohibitive tax rules not originally designed to apply to Islamic finance products. This is largely due to the UK's alternative finance tax regime ("AFTR"), which we discuss in more detail below. 

A core principle of Islamic finance is that profit can only be justified by taking on asset or business risk (excluding credit risk). As such, Shariah compliant structures will invariably involve either a sale, a lease, an investment or a combination of the three. Unfortunately, this often produces unfavourable tax outcomes in jurisdictions not accustomed to such financing techniques. For example, if an Islamic financial institution ("IFI") acquires an asset which it then sells at a mark up to a client seeking to purchase that asset on credit, it could potentially trigger a capital gains tax liability. Because conventional banks would ordinarily finance the purchase of that same asset by simply lending money at interest, they would not face the same tax consequences, putting IFIs at a notable disadvantage.

This used to be the case in the UK prior to the introduction of AFTR, which made significant changes to UK tax law in the spirit of creating a level playing field for the Islamic finance sector. Broadly speaking, this has resulted in many recognised Islamic finance structures becoming subject to the same tax treatment as their conventional counterparts. In the example given above, this means that the client may deduct the cost of purchasing the asset as a financing expense while the IFI books the profit from the trade as finance income. The result is a more efficient structure that frees both IFIs and their clients from incurring additional taxes which would not ordinarily apply to conventional borrowers and lenders.

Despite considerable progress, gaps still remain. For instance, the tax provisions implementing AFTR only apply to transactions involving what the legislation classifies as a 'financial institution'.[1] The meaning of this term is generally restricted to regulated institutions or certain affiliated entities. However, the term also includes a Sukuk issuer who complies with the UK's AFIB tax framework. Therefore, depending on how arrangements are structured, funders can originate Shariah compliant private credit assets through a Sukuk vehicle without them or their customers having to face adverse tax consequences.

Launching a Private Credit Platform with a Sukuk Programme

The most common structure deployed in the market involves an NBFI incorporating a special purpose vehicle ("SukukCo") for the purposes of establishing a Sukuk programme. This allows the NBFI to issue multiple tranches of Sukuk quickly, flexibly and with minimal further documentation by using a master trust structure. Broadly, this involves drawing up a master declaration of trust and a set of customisable terms and conditions which the NBFI envisions could apply to any issue under the programme. Once the NBFI decides to draw down under the programme, it will simply need to specify the final terms of the issue (such as the applicable profit rate) in a pricing supplement that references the master terms and conditions. The funds raised from each issue can then be deployed by SukukCo via any of the Shariah compliant structures approved by the AFIB tax framework, the most common being commodity murabaha and diminishing shared ownership arrangements.

Although these Sukuk programmes tend to be closed ended with the only investors subscribing for the Sukuk being funds or entities managed by the NBFI in question, a prospectus or listing particulars will be required. This is due to another key requirement of the UK's AFIB tax framework, which provides that for Sukuk to qualify as AFIBs, they must be listed on an exchange which is designated by HMRC as a "recognised stock exchange" or admitted to trading on a multilateral trading facility operated by one. This will often mean having to instruct a listing agent and incurring listing and other fees as part of the transaction, but NBFIs can shop around to find more competitive offerings depending on their requirements. For this reason, offshore exchanges such as The International Stock Exchange (also known as TISE) remain popular destinations for listing closed ended Sukuk of this kind affordably. Moreover, establishing a Sukuk programme is likely to preclude the need to prepare a prospectus on each drawdown, thereby saving additional costs.

Subject to all other AFIB tax framework requirements being met, the Sukuk arrangements and the underlying facilities should receive substantially the same tax treatment as their conventional counterparts. Crucially, this would mean that payments made under the underlying finance agreements should be deductible for tax purposes. That being said, other regulatory factors may still require analysis in light of the fact that Sukuk issued in compliance with the UK's AFIB tax framework will not always qualify as AFIBs under the UK's AFIB regulatory framework, which avails issuers of separate regulatory exemptions.

How Foot Anstey Can Help

Foot Anstey's Islamic finance sector team is well equipped to advise you on establishing your own closed ended Sukuk programme through which you can access the UK Islamic private credit market. In particular, our expertise broadly covers the following areas:

• Shariah and English law structuring of the Sukuk programme and the underlying financing arrangements;
• regulatory perimeter advice;
• end-to-end product development for the underlying financing arrangements;
• drafting the required documentation for establishing and operating the Sukuk programme;
• liaising with your tax advisors to ensure compliance with AFTR and to facilitate the recommended tax structure; and
• working with your appointed listing agent to draft a prospectus/listing particulars and manage the listing process.

If you would like to setup your own closed ended Sukuk programme or organise a standalone issuance, please contact Imam Qazi on [email protected] or 0117 915 4913 or Adnan Shafi on [email protected] or 01752 675 106.

[1] See Section 564B, Income Tax Act 2007, section 151I, Taxation of Chargeable Gains Act 1992, section 502, Corporation Tax Act 2009, Finance Act 2003 and various other provisions in subsequent Finance Acts.