Islamic finance

1. Islamic finance • Farmida Bi • Partner • Norton Rose Fulbright LLP • 28 October 2013

2. Islamic Finance – Overview • Importance of Islamic Finance • Features of Islamic Finance • Traditional Islamic Contracts • Governing law

3. Importance of Islamic Finance • Demographics • Emerging economies • Political identity

4. 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

5. Islamic finance in UK

6. Islamic Products in UK • Islamic Funds – leveraging • UK Islamic mortgages • UK Deposit Account • UK Current Account • UK Student financing • Takaful - Cobalt • SME financing

7. Examples of Islamic financing in the UK • Shard • Battersea • Chelsea Barracks • IIT • Aston Martin

8. Features of Islamic Finance • Riba (usury or unjust enrichment) • Gharar (uncertainty) • Maisir (speculation) • Assured Profit • Unethical Investment

9. 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

10. The basic difference • Bank Conventional money Client money + money (interest) Islamic Bank Client Goods & Services money

11. Use of funds by Islamic financial institutions The main contracts used in Islamic financing activities DEBT BASED EQUITY BASED Murabaha / Tawarruq Musharaka Mudaraba Istisna’a Wakala Ijarah Wa’ad

12. 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) 6. $100 Cost Price (spot) 5. Assets (spot) Market Market

13. 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

14. Traditional Islamic Contracts: Wa’ad 1. Undertaking to purchase Assets in the future for a Sale Price calculated pursuant to a formula Bank (Financier) Counterparty (Borrower) 4. Assets (spot) 5. Sale Price calculated pursuant to formula (deferred payment) 2. $100 Cost Price (spot) 7. $100 Cost Price (spot) 3. Assets (spot) 6. Assets (spot) Market Market

15. 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

16. Traditional Islamic Contracts: Ijara 1. Assets (spot) Lessor (Financier) Vendor 2. Purchase Price 3. Grant of Lease 4. Rental Payments 5. Grant of Put Option 6. Grant of Call Option Lessee (Borrower)

17. 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

18. 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

19. 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

20. 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

21. 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

22. The Scholars • Limited number • Different jurisdictions • SSB • Annual audit • Fatwa

23. Prepared by financiers, lawyers and accountants Provided by Shariah Supervisory Board based on the preliminary structure memorandum The Fatawa process Informal discussions with Shariah Scholars Analysis of legal, commercial, tax and credit risk etc. Preliminary Structure Memorandum Prepared by lawyers with input from financiers and, if necessary accountants Interim Fatwa Provided by Shariah Supervisory Board based on the documentation Due Diligence Informal discussions with Shariah Scholars Draft Documentation Final Fatwa 23

24. The future of Islamic finance • 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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