The design of a solar protection system that can minimize solar gains while maximizing daylight and view to the outside is particularly challenging in arid climates, such as in the Middle-East, where sand, wind and corrosion impose specific constraints. We propose a system that provides a trade-off for three requirements: (i) maximize diffuse sunlight and view to the outside, (ii) efficiently block direct sunlight and (iii) transform a fraction of it into diffuse light for indoor daylighting. Compliance with this last requirement provides a solution for the common problem of insufficient daylighting even in the presence of abundant solar radiation, which often forces occupants to fully close their shading system and use electric lighting. In addition, our design potentially copes well with these extreme environmental conditions and preserves local architectural character (mashrabiya-inspired design). In this paper, we establish quantitative specifications for these three requirements, provide the working principle of our shading and daylighting system and its design, which consists of a shape variable mashrabiya (SVM). We calculate and analyze the annual daylighting performance of our SVM and benchmark it against the performance of Venetian blinds and diffuse sunlight alone. Finally, we provide the minimum reflectance required for the SVM to comply with our third requirement. We built a mock-up of our SVM to investigate the validity of our simulation model.