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The National Assembly last month adopted the measure to allow Sharia-compliant financing despite opposition from the Socialists who asked the Constitutional Council to rule on its legality.
Opposition deputies had complained that staunchly secular France must not allow principles of Sharia law to be recognized in legislation.
The measure would have provided a legal basis for Islamic "sukuk" bonds, which are asset-based and do not pay interest. Investors receive coupons corresponding to part of the profits earned by the asset underpinning the bond.
Under Sharia law, making money by means such as charging interest is not permitted and investment in companies involved in alcohol, gambling and tobacco is strictly off limits.
The Constitutional Council ruled that the provision should not have been lumped into a broader bill on financing for medium and small businesses as it was a separate issue.
A statement from the Council stressed that the provision was being challenged "not on the grounds of its content but rather over the procedure followed in parliament."
Finance Minister Christine Lagarde has been spearheading a drive to turn Paris into the European capital of Islamic finance, tapping into billions of euros from investors, mostly in the Gulf.
A government report last year estimated that France could tap into EUR 120 billion (USD 179 billion) in capital from Islamic finance by making adjustments to its tax and banking laws.
Home to Europe’s biggest Muslim minority, France is hoping to unseat London as the European hub for Islamic banking, offering products that comply with Sharia law.
AFP/Expatica