Islamic Finance Structures

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An introduction to most commonly used structures in Islamic Finance.

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  • Islamic Finance Structures

    1. 1. Islamic Finance Structures Islamic Finance Advisory Board Junaid Mirza – junaidmirza@gmail.com May 1, 2008
    2. 2. Introduction <ul><li>Just another structure, with different limitations </li></ul><ul><li>Making financial arrangement in accordance with Islamic principles </li></ul><ul><ul><li>For our discussion, Islamic finance is only applicable to debt structures due to the prohibition of Interest and undue uncertainty in Islam </li></ul></ul><ul><li>Islamic finance encourages risk sharing through equity based arrangements. </li></ul><ul><ul><li>Most commonly used equity-based structures are described in the following slides and are listed below: </li></ul></ul><ul><ul><ul><li>Musharakah </li></ul></ul></ul><ul><ul><ul><li>Murabaha </li></ul></ul></ul><ul><ul><ul><li>Mudarabah </li></ul></ul></ul><ul><ul><ul><li>Ijarah </li></ul></ul></ul>
    3. 3. Introduction <ul><li>Two main points to take-away from this presentation </li></ul><ul><ul><li>Islamic finance structures can be economically similar to the conventional structures </li></ul></ul><ul><ul><ul><li>An alternate structure exists or can be created for almost every type of conventional finance structure </li></ul></ul></ul><ul><ul><li>Opportunities exist for North American businesses to benefit from the liquidity problem in the Middle East </li></ul></ul>
    4. 4. Middle Eastern Liquidity Problem <ul><li>By some estimates Middle East has US$1.4 trillion of parked capital </li></ul><ul><li>Canada is considered a favourable investment destination—but with unfavourable tax rates </li></ul><ul><li>Though Islamic finance structures are not a necessity to access capital in the Middle East, it multiplies the number of opportunities </li></ul>
    5. 5. Simple Musharakah Structure Musharaka Party A Party B Management Funds, Equipment Management Funds, Equipment
    6. 6. Simple Murabaha Structure Seller Financial Institution Buyer (2) Sale of tangible property to financial Institution for a spot payment at the time of sale (3) Sale by financial institution to buyer with a mark-up and deferred or installment payments <ul><li>Promise to purchase tangible property </li></ul>
    7. 7. Simple Mudarabah Structure Mudarabah (Joint Venture) Rabb al-Maal (Investor) Mudarib (Manager) Project Management Funds
    8. 8. Islamic Bonds: Sukuk <ul><li>Though each of the structures described so far can be used to issue Sukuk—Islamic bonds--there are two most common types of Sukuk structures: </li></ul><ul><ul><li>Sukuk al-Mudarabah </li></ul></ul><ul><ul><li>Sukuk al-Ijarah </li></ul></ul>
    9. 9. Sukuk al-Mudarabah SPV (Mudarib) Sukuk Subscribers (Rabb al-maal) <ul><li>Upon completion SPV hands over project to owner </li></ul><ul><li>Mudarib collects regular profit payments and final capital proceeds from project activity for onward distribution to investors </li></ul><ul><li>SPV enters into an agreement with project owner for construction of project </li></ul>Project owner Project <ul><li>SPV issues Sukuk to raise funds </li></ul>
    10. 10. Sukuk al-Ijarah Structure Sukuk holders (Investors) Obligor as Seller Obligor leases Back assets As lessee (Issuer/Lessor) Special purpose company to hold the assets in Trust for the Sukok holders Title to assets Sukuk proceeds Sukuk proceeds Periodic rentals And capital amount distributions Periodic rentals And Capital Amount payments Lease agreement For a fixed period Of time
    11. 11. Sukuk al-Ijarah Structure – Cont’d Funds taker SPV Sukuk holders Funds taker SPV Sukuk holders Funds taker SPV Sukuk holders Day 1 Periodic Payments Maturity Asset sale agreement Ijarah (Lease) agreement Transfer of Sukuk pool Lease rentals Transfer of Sukuk pool $ $ Issue of Sukuk securities $ Lease rentals Redemption Of Sukuk $
    12. 12. Raising Capital in the Middle East <ul><li>Relationships and contacts </li></ul><ul><li>Minimization of foreign taxation </li></ul>
    13. 13. Example of a Tax Efficient Structure Investors Offshoreco Canco Real Estate Fund Head lease interests Sub-lease interests Tenants Various countries Shares Shares Advamces Offshore Country Canada Sub-lease Head lease & Call /put options On Sub. LP interest
    14. 14. <ul><li>Junaid Mirza </li></ul><ul><li>Director, Islamic Finance Advisory Board </li></ul><ul><li>[email_address] </li></ul><ul><li>(647) 221-4233 </li></ul>

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