Islamic Finance – Overview• Importance of Islamic Finance• Features of Islamic Finance• Traditional Islamic Contracts• Governing law
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 Bank of Britain PLC
August 2004 Yes
Islamic Current Account (qard);
Home Purchase Plan; Savings Accounts; and
Personal Finance
Discretionary Portfolio Service
European Islamic Investment Bank Plc
March 2006 NoTreasury 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 NoTreasury& 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
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Islamic Products in UK• Islamic Funds – leveraging• UK Islamic mortgages• UK Deposit Account• UK Current Account• UK Student financing• Takaful - Cobalt• SME financing
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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
Bank Client
Conventional
Islamic
Bank Client
money
money
money + money (interest)
Goods &
Services
Use of funds by Islamic financial institutions
DEBT BASED EQUITY BASED
The main contracts used in Islamic
financing activities
Murabaha /
Tawarruq
Istisna’a
Mudaraba
Musharaka
Ijarah
Wa’ad
Wakala
Traditional Islamic Contracts: Murabaha
Market
Bank(Financier)
Counterparty (Borrower)
Market
1. $100 Cost Price
(spot)
2. Assets (spot)
3. Assets (spot)
4. $110 Sale Price (deferred payment)
5. Assets (spot)
6. $100 Cost Price (spot)
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
Market
Bank(Financier)
Counterparty (Borrower)
Market
2. $100 Cost Price
(spot)
3. Assets (spot)
4. Assets (spot)
5. Sale Price calculated pursuant to formula (deferred
payment)6. Assets
(spot)
7. $100 Cost Price (spot)
1. Undertaking to purchase Assets in the future for a Sale Price calculated pursuant
to a formula
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
Lessee(Borrower)
Lessor(Financier)
Vendor
3. Grant of Lease
4. Rental Payments
1. Assets (spot)
2. Purchase Price
5. Grant of Put Option
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
Preliminary Structure Memorandum
Interim Fatwa
Due Diligence
Draft Documentation
Final Fatwa
Prepared by financiers, lawyers and accountants
Provided by Shariah Supervisory Board based on the preliminary structure memorandum
Analysis of legal, commercial, tax and credit risk etc.
Prepared by lawyers with input from financiers and, if necessary accountants
Provided by Shariah Supervisory Board based on the documentation
Informal discussions with Shariah Scholars
Informal discussions with Shariah Scholars
The Fatawa process
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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
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