Islamic finance risk-sharing contracts are at the heart of a new collaborative initiative by the Islamic Development Bank Institute (IsDBI) and IE University aimed at transforming startup financing in civil law jurisdictions.
The project seeks to develop Shari’ah-compliant, legally enforceable contracts tailored to early-stage ventures operating in legal systems where conventional equity and convertible instruments may be difficult to implement.
Startups across Europe, North Africa and the Gulf often struggle to secure investment because many risk-sharing instruments widely used in common law jurisdictions, such as convertible notes, simplified convertible preferred shares and SAFE agreements, are not readily compatible with civil law frameworks.
These instruments have been credited globally with reducing negotiation friction, lowering legal costs and enhancing investor-entrepreneur alignment.
The new partnership combines comparative legal research, contract design expertise and Islamic finance principles to create a suite of financing tools that are both Shari’ah-compliant and fully enforceable under Spanish and European Union law, with adaptability to other civil law countries.
Civil law jurisdictions, which govern business law in many parts of continental Europe as well as in North Africa and the Gulf, lack widespread legal precedent for popular startup financing mechanisms that are common in common law systems such as the United States and the United Kingdom.
This gap has hindered some investors from entering early-stage markets in countries where civil law is predominant.
Islamic finance, grounded in principles of risk-sharing, fairness and ethical economic activity, emphasizes financial arrangements where both investors and entrepreneurs share profits and losses rather than relying on interest-based debt.
While this ethos has broad appeal among socially conscious investors, integrating it into civil law contract frameworks has posed challenges.
“There is a pressing need for practical, flexible legal instruments that can work across legal systems while upholding the core values of Islamic finance,” said Dr. Celia de Anca, Deputy Dean at IE University and a leading expert in Islamic finance driving the project.
“These contract models will provide entrepreneurs with better access to suitable financial tools, which is essential for sustainable economic development.”
The joint initiative is grounded in detailed comparative analysis of existing risk-sharing financing models and an assessment of their potential fit within civil law frameworks.
One priority has been to identify enabling legal features and regulatory constraints that either support or impede the adaptation of such instruments.
The ongoing project will culminate in the publication of a set of contract templates fully compliant with Shari’ah principles and compatible with EU civil law regimes.
These contracts are designed to be economically efficient, legally robust and adaptable across multiple jurisdictions, with Spanish law serving as the initial anchoring framework.
By making the instruments adaptable to civil law countries beyond Europe; including parts of the Middle East and North Africa, the initiative aims to bolster entrepreneurship in regions where Muslim communities and Islamic finance stakeholders are increasingly active.
Experts involved in the initiative believe the project could have ramifications beyond startup financing. By embedding risk-sharing mechanisms into broader economic systems, the contracts may support a more ethical, inclusive and socially responsible investment landscape.
“Translating the principles of Islamic finance into actionable legal instruments for modern startup ecosystems represents a significant step in strengthening the industry globally,” said Dr. Sami Al-Suwailem, Acting Director General of the IsDB Institute.
“Anchoring these solutions in European legal frameworks supports the development of Islamic finance in Europe and offers scalable models for countries with civil law or hybrid legal systems.”
The project resonates with broader shifts within global finance toward ethical investment frameworks and sustainable economic development, themes reflected in other IsDBI initiatives such as participation in international conferences on ethical finance and collaboration with institutions worldwide.
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