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Islamic Finance Investment & Capital Considerations Overview

Explore key investment and capital considerations in Islamic finance. Learn about debt-to-equity ratios, interest income limits, industry dynamics, and practical conditions for Sharia compliance. Delve into capital uses, limitations, and regulatory challenges in expanding Islamic finance globally.

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Islamic Finance Investment & Capital Considerations Overview

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  1. Islamic Finance Investment & Capital Considerations – An overviewPresented By: Amr El-Husseini

  2. Investment Considerations (1) • Debt to Equity Ratio • Ratio should be below 33% in case of non sharia compliant debt structure. • Exceptions: when debt is expected to be restructured into sharia compliant. • Interest income as a percentage of total income • Interest bearing income not to exceed 5% of total revenues. • Industry and Nature of operations • Exceptions only in case of turnaround within three years, during which profits are retained in equity.

  3. Investment Considerations (2) • Practical conditions in case of conversion of a conventional bank into a sharia compliant one: • Turnaround within three fiscal years. • Renegotiation and modification of existing contracts. • Disposal of non sharia compliant assets & liabilities • Amendment of equity structure by eliminating non sharia compliant items such as bonds & preferred shares. • Non sharia compliant income to be distributed to charity • Change of governance structure (sharia committees) • Impact on valuation of potential acquisition targets

  4. Capital Considerations • Ordinary shares / preferred shares • Uses of Capital in Islamic Banks – Theory vs. Practice • Concept of Profit / Loss sharing • Profit Equalization reserve • Differences in treatment of restricted and unrestricted investments by central banks. • Priority deposits take over equity

  5. Major Limitations to Expansion of Islamic Finance into new geographies • Taxation issues: • Double taxation • Property transfer tax • Central Bank Regulations: • Legal reserve requirement and its remuneration • Consumer laws: • Protection of deposits (deposit insurance). • Ability to define sharia compliant structures under existing financial vehicles i.e. impact on commercial laws.

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