Islamic finance
Farmida Bi
Partner
Norton Rose Fulbright LLP
28 October 2013
Islamic Finance – Overview
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Importance of Islamic Finance
Features of Islamic Finance
Traditional Islamic Contracts
Governing law
Importance of Islamic Finance
• Demographics
• Emerging economies
• Political identity
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Incorporation of Shariah law into English law
• Tax changes
• Regulatory changes – CIS, deposit protection scheme, status of
SSB
• AFIBs
• London Stock Exchange
• English law and courts
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Islamic finance in UK
Name
Date Licensed
Retail
Products Offered
Islamic Current Account
(qard);
Islamic Bank of Britain
PLC
August 2004
Yes
Home Purchase Plan;
Savings Accounts; and
Personal Finance
Discretionary Portfolio
Service
European Islamic
Investment Bank Plc
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March 2006
No
Treasury and Capital
Markets
Bank of London and
the Middle East
July 2007
No
Corporate Banking,
Wealth Management,
Islamic Capital Markets
Products
QIB (UK) PLC
January 2008
No
Treasury& Corporate
Finance/ Asset/Wealth
Management
Gatehouse Bank Plc
April 2008
No
Treasury & Corporate
Finance
Lloyds TSB
-
Yes
Islamic Current Account
HSBC Amarah
(ceased trading in
September 2012)
Yes
Islamic Current Account
Islamic Products in UK
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Islamic Funds – leveraging
UK Islamic mortgages
UK Deposit Account
UK Current Account
UK Student financing
Takaful - Cobalt
SME financing
Examples of Islamic financing in the UK
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Shard
Battersea
Chelsea Barracks
IIT
Aston Martin
Features of Islamic Finance
• Riba (usury or unjust enrichment)
• Gharar (uncertainty)
• Maisir (speculation)
• Assured Profit
• Unethical Investment
Features of Islamic Finance (cont)
The Nature of Money
• Money is a means of exchange only
• Money is not a commodity
• Money can only be exchanged for the same par value
The basic difference
Conventional
money
Client
Bank
money + money (interest)
Islamic
Bank
Goods &
Services
money
Client
Use of funds by Islamic financial institutions
DEBT BASED
Murabaha /
The main contracts
used in Islamic
financing activities
EQUITY BASED
Musharaka
Tawarruq
Mudaraba
Istisna’a
Wakala
Ijarah
Wa’ad
Traditional Islamic Contracts: Murabaha
Bank
(Financier)
3. Assets (spot)
Counterparty
(Borrower)
4. $110 Sale Price
(deferred payment)
1. $100
Cost Price
(spot)
2. Assets
(spot)
Market
5. Assets
(spot)
6. $100
Cost Price
(spot)
Market
Traditional Islamic Contracts: Murabaha (cont)
Cost-plus financing:
• terms are fixed from the outset of the agreement (in particular
quantum of payment)
• in the event of early termination, no discount applied for early
settlement
• rebate on the deferred sale price permitted, but at the discretion
of the financier
Traditional Islamic Contracts: Wa’ad
1. Undertaking to purchase Assets in the
future for a Sale Price calculated pursuant
to a formula
Bank
(Financier)
4. Assets (spot)
Counterparty
(Borrower)
5. Sale Price calculated pursuant
to formula (deferred payment)
2. $100
Cost Price
(spot)
3. Assets
(spot)
Market
6. Assets
(spot)
7. $100
Cost Price
(spot)
Market
Traditional Islamic Contracts: Wa’ad (cont)
Wa’ad (unilateral promise):
• allows for flexibility in future cashflows
• due to the unilateral nature of the promise, only the
issuer of the undertaking is bound to perform
• consideration from the recipient of the promise is
generally not permitted
Traditional Islamic Contracts: Ijara
1. Assets (spot)
Lessor
(Financier)
3. Grant of
Lease
4. Rental
Payments
5. Grant of
Put Option
Lessee
(Borrower)
Vendor
2. Purchase Price
6. Grant of Call
Option
Traditional Islamic Contracts: Ijara (cont)
Ijara (leasing):
• allows for flexibility in future cashflows through the mechanism to
calculate rent on a periodic basis
• Financier holds a proprietary interest in the asset during the term
of the financing. Financier takes on risk that may not exist in a
conventional transaction
Governing Law
• Shariah law
– non-national system of law
– applies to all aspects of life and behaviour
– Different schools of thought as to how principles
should be interpreted or applied
• English law
– has a well-known and developed jurisprudence
– not open to doubt on basis of religious or
philosophical principles
Governing law: Shamil Bank v Beximco
• Leading case in the United Kingdom
– High Court & Court of Appeal judgements
• Background
– Shamil operated in accordance with the principles of
Shariah law
– Shamil’s commercial activities supervised by its Religious
Supervisory Board and audited each year
Governing law: Shamil Bank v Beximco (cont)
• Court of Appeal, Lord Justice Potter’s leading judgement in
January 2004 concluded:
– when interpreting governing law clauses court should lean
against a construction that would defeat the commercial
purpose of the agreements
– there could not be two governing laws
– although possible to incorporate provisions of Shariah law
the general reference to Shariah law here did not identify
any specific aspects which the parties intended to
incorporate
Governing law: Best practice
• Non binding statement in recitals
• Representation from each party as to Shariah compliance
• Covenant / undertaking that it will raise no objection as to
matters of Shariah compliance
• Submission to single governing law
• Fatwa from Shariah Supervisory Board
The Scholars
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Limited number
Different jurisdictions
SSB
Annual audit
Fatwa
The Fatawa process
Preliminary Structure
Memorandum
Prepared by financiers, lawyers and accountants
Informal discussions with Shariah Scholars
Interim Fatwa
Provided by Shariah Supervisory Board based on the preliminary structure
memorandum
Due Diligence
Analysis of legal, commercial, tax and credit risk etc.
Draft Documentation
Prepared by lawyers with input from financiers and, if necessary accountants
Informal discussions with Shariah Scholars
Final Fatwa
Provided by Shariah Supervisory Board based on the documentation
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The future of Islamic finance
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9th WIEF: 29-31/10/13
UK government Sukuk
Changes in global economy – move east/developing markets
Legislation normally needed to accommodate Islamic finance
Demographic and political factors
Equity investment
Infrastructure funding
BD#19060212-3