Synthetic Commodity TransactionsShari’a Issues and ChallengesSayd FarookPhD,BBus,LLB,CIPASenior Consultant | Structuring a...
Global Leader in Islamic Financial Innovation<br /><ul><li>Launched in 2004, Dar Al Istithmar is a venture between Russell...
Independent from its shareholders, Dar Al Istithmar offers:
Shari'a Consultancy Services
Shari'a Monitoring / Purification Services
Shari’a Compliance Reviews
Islamic Finance Arranging and Advising *
Dar Al Istithmar’s Shari'a Supervisory Board comprises world renown scholars
Dar Al Istithmar won the Euromoney awards for the “Best Islamic Assurance and Advisory Services” for two consecutive years...
Commodity transactions growth directly aligned with Treasury and Derivatives evolution<br />2010-2020<br />Global Islamic ...
Commodity MurabahaGrowth Drivers<br />Growth <br />Increased use of Shari’a compliant derivative equivalents (SCDE):<br />...
5<br />Execute Master Hedging Agreement  (T0)<br />Customer requiring variable rate and paying fixed rate <br />Multinatio...
Upcoming SlideShare
Loading in …5
×

Lme And Commodity Murabaha

2,988 views

Published on

A Presentation I delivered alongside Simone Carminati discussing some of the Shari\'a issues related to LME metals based commodity murabaha/reverse murabaha/tawarruq transactions from a very practical perspective, while attempting to explain the rationale of the International Fiqh Academy.

0 Comments
2 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
2,988
On SlideShare
0
From Embeds
0
Number of Embeds
50
Actions
Shares
0
Downloads
0
Comments
0
Likes
2
Embeds 0
No embeds

No notes for slide
  • 4/2 The commodity sold should be well identified so as to become distinct from other assets of the seller. 4/5 …Moreover, the commodity should not return back to the seller by virtue of prior agreement or collusion between the two parties, or according to tradition.4/7 The client should not delegate the institution or its agent to sell, on his behalf, a commodity that he purchased from the same institution and, similarly, the institution should not accept such delegation. 4/8 The institution should not arrange proxy of a third party to sell, on behalf of the client, the commodity that the client purchased from the institution.4/9 The client should not sell the commodity except by himselfor through an agent other than the institution, and should duly observe the other stipulations.
  • Lme And Commodity Murabaha

    1. 1. Synthetic Commodity TransactionsShari’a Issues and ChallengesSayd FarookPhD,BBus,LLB,CIPASenior Consultant | Structuring and Legal06 December 2009<br />
    2. 2. Global Leader in Islamic Financial Innovation<br /><ul><li>Launched in 2004, Dar Al Istithmar is a venture between Russell Wood and Oxford Islamic Finance
    3. 3. Independent from its shareholders, Dar Al Istithmar offers:
    4. 4. Shari'a Consultancy Services
    5. 5. Shari'a Monitoring / Purification Services
    6. 6. Shari’a Compliance Reviews
    7. 7. Islamic Finance Arranging and Advising *
    8. 8. Dar Al Istithmar’s Shari'a Supervisory Board comprises world renown scholars
    9. 9. Dar Al Istithmar won the Euromoney awards for the “Best Islamic Assurance and Advisory Services” for two consecutive years.</li></ul> * Subject to FSA approval. Expected in 2010<br />
    10. 10. Commodity transactions growth directly aligned with Treasury and Derivatives evolution<br />2010-2020<br />Global Islamic Treasury Market<br />Real Time Transactions<br />Exchange traded Profit Rate Swap<br />Islamic Credit Default Takaful<br />2002-2010<br />Wakala/Mudaraba<br />Forward Wa’d FX<br />OTC Profit Rate Swap<br />Market players<br />Conventional banks and technology platforms bringing about market makers to trade real-time<br />1975-2001<br />Interbank Commodity Murabaha<br />Spot FX<br />Market players<br />Entrance of conventional financial institution treasuries with global liquidity and FX capabilities<br />Market players<br />Islamic banks transacting with each other<br />Islamic Finance Treasury v1.0 -> v2.0<br />3<br />
    11. 11. Commodity MurabahaGrowth Drivers<br />Growth <br />Increased use of Shari’a compliant derivative equivalents (SCDE):<br />Profit Rate Swap<br />FX Forward<br />FX Option<br />Increase in Shari’a compliant syndicated and debt financing<br />Liquidity management where wakala is not a viable alternative<br />Decline<br />Shari’a preference for alternatives to commodity based transactions:<br />Wakala<br />Sukuk<br />4<br />
    12. 12. 5<br />Execute Master Hedging Agreement (T0)<br />Customer requiring variable rate and paying fixed rate <br />Multinational Bank (MB) offering variable rate and receiving fixed rate <br />1<br />Undertakings to sell commodity for notional value + fixed rate at each exchange date TX (T0)<br />2<br />Undertakings to sell commodity for notional value + variable rate (T0) at each exchange date TX (T0)<br />3<br />At each exchange date (TX), sell commodity for notional value + variable rate (Tx) <br />4<br />At each exchange date (TX), sell commodity for notional value + fixed rate (Tx) <br />5<br />The payments are netted off with and one parties pays the other the difference between the fixed and floating (Tx) <br />6<br />Commodity in Profit Rate SwapWa’d Application<br />
    13. 13. Commodity in Profit Rate SwapMurabaha Application<br />6<br />Multinational Bank (MB) as principal offering variable rate and receiving fixed rate <br />First Leg: Provides revolving “variable rate” US100m Murabaha financing every 6 months for 5 years <br />1<br />4<br />Variable Rate Profit + Principal every six months are notionally distributed to MB<br />Customer requiring variable rate and paying fixed rate <br />Net-off: Difference between Variable rate and fixed rate (3-4) are netted off and counterparty pays /receives the difference between variable and fixed<br />5<br />Fixed Rate Profit + Principal every six months are notionally distributed to Customer<br />Multinational Bank (MB) as AGENT for Customer<br />3<br />2<br />Second Leg: Invests the funds through “fixed rate” 6 month revolving Murabaha<br />
    14. 14. Shari’a PerspectivesAAOIFI Shari’a Standard No. 30 Monetization<br />Common Shari’a compliance issues <br />4/2 Identification and distinction<br />4/5 No return of commodity to original seller and no collusion<br />4/7 No delegation to counterparty or agent of counterparty to sell commodity purchased from counterparty<br />4/8 No proxy of third party should be arranged<br />4/9 Sale should be arranged first hand or through agent (not appointed or nominated by counterparty)<br />7<br />
    15. 15. International Council of Fiqh Academy19th Session, 26-30 April 2009<br />8<br />1. …Technically, according to the Fiqh jurists, tawarruq can be defined as: a person (mustawriq) who buys merchandise at a deferred price, in order to sell it in cash at a lower price. Usually, he sells the merchandise to a third party, with the aim to obtain cash. <br /> This is the classical tawarruq, which is permissible, provided that it complies with the Shari’ah requirements on sale (bay’).<br />2. The contemporary definition on organisedtawarruq is:  when a person (mustawriq) buys merchandise from a local or international market on deferred price basis. The financier arranges the sale agreement either himself or through his agent. Simultaneously, the  mustawriq and the financier executes the transactions, usually at a lower spot price.<br /> Reverse tawarruq: it is similar to organisedtawarruq, but in this case, the (mustawriq) is the financial institution, and it acts as a client.<br /> …It is not permissible to execute both tawarruq (organised and reversed) because simultaneous transactions occurs between the financier and the mustawriq, whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation. This is considered a deception, i.e. in order to get the additional quick cash from the contract. Hence, the transaction is considered as containing the element of riba.<br />
    16. 16. Permissible application of Tawarruq<br />9<br />LME BROKER D<br />LME BROKER C<br />No collusion is allowed between the brokers<br />(4)<br />A sells commodity to D for spot delivery and spot payment<br />(5) <br />A instructs C to transfer commodity to D<br />(1) <br />B purchases commodity from C for spot delivery and payment<br />BANK A<br />(Requires liquidity)<br />BANK B<br />(Surplus Funds)<br />(2) B sells to A for deferred payment and spot delivery<br />(3) B instructs C to transfer commodity to A’s account with C <br />
    17. 17. Contentious application of Tawarruq<br />10<br />LME BROKER D<br />LME BROKER C<br />(3)<br />B sells to D on behalf of A<br />(3a)<br />B instructs C to credit the commodity to D <br />(3b) <br />B instructsD to transfer proceeds to A’s account<br />(1) <br />B purchases commodity from C for spot delivery and spot payment<br />BANK B<br />(Surplus Funds)<br />BANK A<br />(Requires liquidity)<br />(BANK Bacting as agent) <br />(2)B sells to A for deferred payment and spot delivery<br />(2a) B instructs C to transfer commodity to A account held with C <br />
    18. 18.
    19. 19. Disclaimer<br />This document is the sole property of Dar Al Istithmar Ltd. No unauthorised reproduction, copying, translation or other similar act is permitted without the explicit written consent of Dar Al Istithmar Ltd. Any such permission may only be granted upon receipt of written request for the same.<br />This document contains preliminary Sharia advice only and in no way should be considered as a Fatwa on the issues discussed. DI does not recommend structuring and marketing any product based on the information contained in this document without obtaining relevant prior legal documents conforming Sharia approval and before DI has at least issued provisional Sharia approval from its Sharia Supervisory Board.<br />The information contained in this document is based on material we believe to be reliable; however, we do not represent that it is accurate, current, complete, or error free. Assumptions, estimates and opinions contained in this document constitute our judgment as of the date of the document and are subject to change without notice. Any projections are based on a number of assumptions as to market conditions and there can be no guarantee that any projected results will be achieved. Past performance is not a guarantee of future results. <br />DI SPECIFICALLY DISCLAIMS ALL LIABILITY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OR OTHER LOSSES OR DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY YOU OR ANY THIRD PARTY THAT MAY ARISE FROM ANY RELIANCE ON THIS DOCUMENT OR FOR THE RELIABILITY, ACCURACY, COMPLETENESS OR TIMELINESS THEREOF. <br />Copyright© 2009 Dar Al Istithmar Limited<br />

    ×