Sharia Coordination Department
Real Estate Financing and Sukuk
Mian Muhammad Nazir
Senior Vice President
Dubai Islamic Bank PJSC
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Sharia Coordination Department
Real Estate Financing and Sukuk
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Overview
Commonly used modes in Real Estate Financing
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Murabaha – ready property
Ijara – ready property
Forward Ijara – under construction property
Istisna – under construction property
Mudaraba
Agency – Wakala
Musharaka
Sukuk
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Sharia Coordination Department
Real Estate Financing and Sukuk
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Sharia offers various structures for Real Estate Financing based
on the requirements of the respective parties
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Each Sharia compliant mode of financing distinctly exemplifies
the essential feature of ownership and risk
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Growth witnessing assets exceeding $1.7 trillion and expected
to reach $2.7 trillion by 2010.
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In year 2007, 76% of corporations’ non-loan fundings were
Sharia compliant in the MENA region.
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2008 shows slow growth due to credit crunch.
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Sharia Coordination Department
Real Estate Financing and Sukuk
Commonly Used Modes
Murabaha
(ready property)
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Sharia Coordination Department
Real Estate Financing and Sukuk
Murabaha
(Only in case of ready property)
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Step by Step
Customer
Step 5
Sale of Property to
Customer on Murabaha
basis
Title and Possession
to the Property
Step 1
Promise to
Purchase
Owner/Developer
Step 3
Purchase of Property
through purchase agreement
Step 6
Sale Price
Deferred
Step 4
Purchase Price
Step 2
Purchase Offer
Title & Possession to
the Property
Islamic Bank
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Sharia Coordination Department
Real Estate Financing and Sukuk
Murabaha
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Murabaha is widely used mode of finance in Islamic Finance
Industry in general and for Real Estate Financing in
particular.
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However, it can only be used for:
• ready property;
• for a shorter financing tenor for the reason of fixed
return
Involves less risks as it creates debt obligation on the
customer – No ownership risk.
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Sharia Coordination Department
Real Estate Financing and Sukuk
Murabaha
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The Bank buys the Property and sells it to the customer on
Murabaha (cost + profit) basis.
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Murabaha sale price is paid normally on a deferred basis.
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Liability is known from day one – No surprises or uncertain
exposure.
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Sharia Coordination Department
Real Estate Financing and Sukuk
Ijara
ready property
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Sharia Coordination Department
Real Estate Financing and Sukuk
Purchase and Ijara
ready property
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Step by Step
Customer
Step 5
Lease of the Property
to the customer through
Lease Agreement
Usufruct of the Property
Step 1
Promise to
lease
Owner / Developer
Step 3
Acquisition of the Property
through purchase agreement
Step 6
Lease
Rental
Step 4
Purchase Price
Step 2
Purchase Offer
Title & Possession to
the Property
Islamic Bank
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Sharia Coordination Department
Real Estate Financing and Sukuk
Ijara
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Ijara is less risky as compared to other financing structures
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Strict compliance with Sharia and the applicable law is required for
enforceability.
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Best suited for Islamic Financial Institutions – conventional institutions
may have some regulatory problems in Ijara
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It is generally perceived that notwithstanding Sharia requirements, the
documentation should be in accordance with the applicable law which
is not free from risk from Sharia compliance perspective.
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Sharia Coordination Department
Real Estate Financing and Sukuk
Ijara
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Liability is known from day one – No surprises or uncertain
exposure.
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Unlike conventional finance, Sharia has a special treatment
to issues such as increased cost, mandatory cost, asset
ownership, taxes, major maintenance, asset insurance and
remedies in the event of total or partial loss.
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Sharia Coordination Department
Real Estate Financing and Sukuk
Ijara
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Ijara structure involves purchasing an asset from the
customer or a third party and leasing the same to the
customer.
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Care needs to be taken in order to ensure that the
transaction does not become a conditional sale or a contract
of Inah.
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Sharia requires extraordinary caution in putting together a
rental framework for a lease transaction which involves a
variable element of rental
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Sharia Coordination Department
Real Estate Financing and Sukuk
Ijara
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Ijara: Two types
• Ijara Muntahia Bittamleek (Finance lease)
• Operating Lease
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In Ijara Muntahia Bitammaleek, transfer of ownership at the
expiry of lease term must be through a unilateral
undertaking to be exercised at the expiry of the lease term
and the transfer should either take the form of sale at
nominal price or gift.
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Appropriate structure for all purpose financing needs
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Sharia Coordination Department
Real Estate Financing and Sukuk
Forward Ijara
under construction property
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Sharia Coordination Department
Real Estate Financing and Sukuk
Forward Ijara
for under construction property
Step by Step
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Customer
Step 5
Lease of Property
on the basis of
Forward Ijara
Delivery of Leased
Property to Customer
at completion
Owner / Developer
Step 1
Step 3
Purchase of the described Property
through Istisna Agreement
Promise to
Lease on
Forward Ijara
basis
Step 6
Lease
Rental
Step 4
Istisna Purchase Price
Step 2
Purchase Offer
Delivery of the described
Property after completion
Islamic Bank
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Sharia Coordination Department
Real Estate Financing and Sukuk
Ijara Mousoofa Fizzimma (Lease of specified item(s) which are to
be delivered after manufacturing or construction)
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Ijara in respect of an asset under construction takes the form
of Ijara Mousoofa Fizzimma.
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Lease of the underlying assets starts on the date of delivery
of the asset to the lessee and the lessee’s obligation to pay
rental triggers with the commencement of the lease.
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An investor receives return on its investment out of the
amount received from the lessee on account of rental which
is adjusted against the actual rental.
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Sharia Coordination Department
Real Estate Financing and Sukuk
Ijara Mousoofa Fizzimma
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Although investment in assets under construction through
Ijara Mousoofa Fizzimma may not be free from certain
downsides, it still has potential to serve both the parties, i.e.
customer and financier – addressing the Project Financing
requirements.
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Appropriate structure for project financing. Example:
• QREIC Sukuk (Qatar)
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Sharia Coordination Department
Real Estate Financing and Sukuk
Istisna
under construction property
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Sharia Coordination Department
Real Estate Financing and Sukuk
Istisna
for under construction property
Step by Step
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Customer
Step 5
Sale of the described
Property on Parallel
Istisna basis
Delivery
to the Customer after
at completion
Owner / Developer
Step 1
Step 3
Purchase of the described Property
through Istisna Agreement
Promise to
Purchase on
Parallel Istisna
basis
Step 6
Step 4
Istisna Purchase Price
Parallel Istisna
Purchase
Price
Step 2
Purchase Offer
Delivery of the described
Property after completion
Islamic Bank
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Sharia Coordination Department
Real Estate Financing and Sukuk
Istisna
• In Istisna sale, the seller sells a described property to be
delivered to the purchaser once the same is completed.
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Istisna requires combination of either lease of the purchased
assets back to the seller or sale of the purchased assets to the
customer, provided that the purchase is not from the same
customer.
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Used in QREIC Sukuk involving purchase of the described
assets by sukuk-holders and leasing back to the Seller.
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Sharia Coordination Department
Real Estate Financing and Sukuk
Mudaraba
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Sharia Coordination Department
Real Estate Financing and Sukuk
Mudaraba
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Step by Step
Islamic Bank (Rab Al Mal)
Mudaraba Agreement
Project
Step 1
Business
Plan
Rab al Mal’s
Share
Step 6
Mudaraba
Capital
Step 3
Joint Capital (after commingling of
Mudaraba Capital with Net Assets
Of Mudarib if any)
Mudarib Profit
Developer (Mudarib)
Net Profit
Mudarib’s
Share
Mudaraba Profit
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Sharia Coordination Department
Real Estate Financing and Sukuk
Mudaraba
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Mudaraba is a very flexible real estate financing structure.
• Mudaraba can be of two types:
• Project basis – no need for Sharia compliance of financial ratio,
however, underlying activities must be Sharia compliant.
• Unrestricted Mudaraba on commingling basis which requires Sharia
compliance of the customers’ business activities as well as the
financial ratio.
• Mudaraba operates on trust which means a partnership in profit.
• The Mudaraba capital can be cash and/or tangible assets.
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Sharia Coordination Department
Real Estate Financing and Sukuk
Mudaraba
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Mudaraba financing is an investment, therefore, it requires an investment
plan.
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Mudarib’s performance is assessed on the basis of the Investment Plan it has
provided to the financier in order to obtain financing.
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In 2007, Mudaraba was considered to be a preferable financing structure
because it does not involve sale of the assets. (Example: DIFC Sukuk)
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However, recent discussions amongst Sharia scholars on redemption
through purchase undertaking resulted in reduction of the use of Mudaraba
structure.
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Sharia Coordination Department
Real Estate Financing and Sukuk
Agency
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Sharia Coordination Department
Real Estate Financing and Sukuk
Agency
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Step by Step
Islamic Bank (Principal)
Agency Agreement
Step 1
Investment
Plan
Project
Agency
Fee
Step 6
Investment
Amount
Developer (Agent)
Step 3
Investment Amount
Incentive
Profit
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Sharia Coordination Department
Real Estate Financing and Sukuk
Agency (Wakala)
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Investment agency structure for real estate financing is
another flexible structure.
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It operates on the principal similar to Mudaraba except the
Profit distribution.
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However, this structure is less used in real estate financing
due to certain academic discussions amongst the Sharia
scholars.
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Sharia Coordination Department
Real Estate Financing and Sukuk
Musharaka
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Sharia Coordination Department
Real Estate Financing and Sukuk
Musharaka (two structures)
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Sharikatul Aqd (Contractual Partnership)
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Musharaka Mutanaqisa (Diminishing Musharaka)
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Normal Musharaka (Example: JAFZA Sukuk)
Sharikatul Milk (Co-ownership).
• Volcano Sukuk, DIB Sukuk, and EIB Sukuk
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Sharia Coordination Department
Real Estate Financing and Sukuk
Musharaka Mutanaqisa
• Step by Step
Purchase of Units in Musharaka
Purchase Undertaking
Islamic Bank
Customer / Developer
Contribution
Cash
Musharaka Agreement
Contribution
Cash + Kind
Profit
Musharaka Entity
Profit
Profit
+
Incentive
Investment
Project
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Sharia Coordination Department
Real Estate Financing and Sukuk
Musharaka – Bank leases its share in Musharaka to the Customer
• Step by Step
Lease of Bank’s Share
Lease Rental
Islamic Bank
Customer / Developer
Contribution
Cash
Musharaka Agreement
Contribution
Cash + Kind
Profit
Musharaka Entity
Profit
Profit
+
Incentive
Investment
Project
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Sharia Coordination Department
Real Estate Financing and Sukuk
Musharaka – Sharikatul Milk (Ready Property)
• Step by Step
Periodic Purchase of Undivided Share
Purchase Undertaking
Islamic Bank
Customer / Developer
Contribution
Cash
Contribution
Cash
Musharaka Agreement
Lease
Rental
Lease
Rental
Purchase
Price
Ready Property
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Sharia Coordination Department
Real Estate Financing and Sukuk
Sukuk (Islamic Bonds)
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Sharia Coordination Department
Real Estate Financing and Sukuk
Sukuk (Islamic Bonds)
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Sukuk certificates represent ownership in the underlying
assets, usufruct and services or the assets of particular
projects or investment activities.
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The ownership must be real, not beneficial, i.e. economic
benefits or entitlements. (AAOIFI’s resolution).
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Provides viable alternative to conventional bonds and
securities.
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Receivables cannot be underlying assets for Sukuk.
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Sharia Coordination Department
Real Estate Financing and Sukuk
Sukuk (Islamic Bonds)
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Global Sukuk issuance reaches $109 billion.
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Indicating impressive growth in MENA region.
MENA Bond issuance
Sukuk vs. Conventional Bonds
Global Local Currency and Dollar Sukuk Issued by
Country (2007)
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Sharia Coordination Department
Real Estate Financing and Sukuk
Sukuk (Islamic Bonds)
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Sukuks are issued on any of the foregoing Sharia contracts.
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For real estate, Sukuk can be issued using any of the Sharia
contracts for the following:
(i) the development of a particular real estate project; or
(ii) the working capital or the construction cost
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Sharia Coordination Department
Real Estate Financing and Sukuk
Sukuk (Islamic Bonds)
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Choosing a structure for a Sukuk depends on the following:
• Purpose for which the money is required;
• Assets which will be used to raise money;
• Income stream and payment; and
• Tenor
Using a right structure in view of the transaction
requirements is a real Sharia issue.
• Examples: Al Dar, Nakheel, Tamweel, PCFC and DCA.
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Sharia Coordination Department
Real Estate Financing and Sukuk
Sukuk (Islamic Bonds)
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Sukuk are more economical than conventional financing
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Investor gets comfort from the fact that, being a public
transaction, the structure, commercial issues and
documentation may have gone through the eyes of experts
(including Sharia scholars)
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Tradability of Sukuk depends on the assets’ ownership and
the Sharia structures on which they are based.
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Most of the Sukuk structures are tradable.
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Sharia Coordination Department
Real Estate Financing and Sukuk
Sukuk (Islamic Bonds)
• Increase in volume and popularity throughout the world would
definitely make the Sukuk a better alternative for Project
Financing.
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However, in order to make Sukuk less expensive and preferable
financing choice, standardization and regulation at local and
industry level is very much required.
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Sukuk is also suitable for closely held family real estate
development businesses.
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In view of the recent academic controversies, new structures
such as Sharika tul Milk, Asset Purchase and Lease Back, have
become increasingly popular.
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Sharia Coordination Department
Thank You
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