3. Nature of Shari’ah
Sources
• Qur’an
• Sunnah
• Hadith
• Ijma
Schools
• Hanafi
• Hanbali
• Maliki
• Shafi
Saudi Arabia
Basic Law of Governance
Article 1:
The Kingdom of Saudi Arabia is a
sovereign Arab Islamic State. Its
religion is Islam. Its constitution is
Almighty God's Book, The Holy
Qur'an, and the Sunna (Traditions)
of the Prophet (PBUH).
4. Nature of Shari’ah
Sources
• Qur’an
• Sunnah
• Hadith
• Ijma
Schools
• Hanafi
• Hanbali
• Maliki
• Shafi
Saudi Arabia
Basic Law of Governance
Article 55:
The King shall rule the nation
according to the Sharia. He shall also
supervise the implementation of the
Sharia, the general policy of the
State, and the defense and protection
of the country.
5. Principles of Shari’ah
Unjust enrichment
• “receiving a monetary
advantage without giving
a countervalue”
• undue influence
• duress
• payments to charity
Surah Baqarah:
“O ye who believe! Give of the good
things which we have (honourably)
earned, and of the fruits of the earth
which we have produced for you,
and do not even aim at getting
anything which is bad, in order that
out of it ye me give away something,
when ye yourselves would not
receive it except with closed
eyes.”
6. Principles of Shari’ah
Riba
• “a monetary advantage
without a countervalue
which has been
stipulated in favour of
one of the two
contracting parties in an
exchange of two
monetary values”
• excess in quantity
• delay in performance
Abu Sa'id al-Khudri, citing the
Prophet:
“Do not sell gold for gold, except if
they are equivalent in amount, and
do not sell a lesser amount for a
greater one. Do not sell silver for
silver except if they are equivalent in
amount, and do not sell a less
amount for a greater one…”
7. Principles of Shari’ah
Riba
• “a monetary advantage
without a countervalue
which has been
stipulated in favour of
one of the two
contracting parties in an
exchange of two
monetary values”
• excess in quantity
• delay in performance
Abu Sa'id al-Khudri, citing the
Prophet:
“Do not sell gold for gold, except if
they are equivalent in amount, and
do not sell a lesser amount for a
greater one. Do not sell silver for
silver except if they are equivalent in
amount, and do not sell a less
amount for a greater one…”
8. Principles of Shari’ah
Gharar
• hazard
• there must be no doubt
concerning the
obligations undertaken by
the parties to a contract
• undue or excessive risk or
uncertainty in a trade
Ibn Mas'ud, citing the Prophet:
“Do not buy fish while it still exists
in the water, as it is Gharar.”
9. Principles of Shari’ah
Gharar
• hazard
• there must be no doubt
concerning the
obligations undertaken by
the parties to a contract
• undue or excessive risk or
uncertainty in a trade
Ibn Mas'ud, citing the Prophet:
“Do not buy fish while it still exists
in the water, as it is Gharar.”
10. Principles of Shari’ah
Darura
• necessity
Profit and loss sharing
• prohibition on hoarding
Segregation of activities
• carrying on haram activities
Shari’ah supervisory boards
• indoor management
11. Islamic financial products
Takaful
• insurance
Ijara
• lease
Murabaha
• sale with deferred payment
Musharaka
• partnership
Sukuk
• bonds
Istisna’a
• manufacture and sale
12. Takaful
• gharar
• mutual insurance
• P&I club
• contributions to central pool
• distribution of surplus
• possibility of future calls
• darura: non-takaful reinsurance
13. Takaful
• gharar
• mutual insurance
• P&I club
• contributions to central pool
• distribution of surplus
• possibility of future calls
• darura: non-takaful reinsurance
14. Murabaha
FinancierSupplier Customer
First contract
• sale of asset from supplier to financier
• payment of purchase price
• financier may act by agent
• financier takes possession
• supplier cannot be customer or his agent
• asset must not be gold, silver or currency
• asset must not be subject of earlier murabaha
15. Murabaha
FinancierSupplier Customer
Second contract
• sale of asset from financier to customer
• must post-date first contract
• payment of purchase price + profit
• profit must be certain and disclosed
• payment may be by instalments
• ownership must pass immediately
• default fees not permitted
• extending date of payment not permitted
• financier responsible for defects
17. Reserve commodity murabaha (tawarruq)
Commodities
Exchange
First contract
• sale of commodity
• immediate delivery
• immediate payment
Second contract
• sale of commodity
• immediate delivery
• deferred payment
• price + mark-up
Third contract
• sale of commodity
• immediate delivery
• immediate payment
Commodity
broker
IFI providing
finance
Commodity
broker
IFI requiring
finance
18. Reserve commodity murabaha (tawarruq)
Commodities
Exchange
Conditions
• contracts separate
• commodity must be
real and identifiable
• not gold, silver or
currency
• customer must take
delivery
• must not be sold
back to the seller
Commodity
broker
IFI providing
finance
Commodity
broker
IFI requiring
finance
19. Reserve commodity murabaha (tawarruq)
Commodities
Exchange
AAOIFI Shari’ah Standard 30,
Monetization (Tawarruq):
“Monetization is not a mode of
investment or financing. It has been
permitted when there is a need for it,
subject to specific terms and
conditions. Therefore, the institutions
should not use Monetization as a
means of mobilizing liquidity for their
operations, and exert no effort for
fund mobilization through other
modes such as Mudaraba, investment
proxy, Sukuk, investments funds, and
the like. The institution should resort
to monetization only when it faces the
danger of a liquidity shortage that
could interrupt the flow of its
operations and cause losses for its
clients.”
Commodity
broker
IFI providing
finance
Commodity
broker
IFI requiring
finance
22. Sukuk al-Ijara
Originator
• SPV incorporated
• SPV issues sukuk
• investors subscribe for sukuk and pay proceeds to SPV
• originator sells certain assets to SPV
• SPV leases assets back to originator
• originator makes rental payments to SPV
• SPV issues Periodic Distribution Amount to Investors
23. Sukuk al-Ijara
SPVOriginator
• SPV incorporated
• SPV issues sukuk
• investors subscribe for sukuk and pay proceeds to SPV
• originator sells certain assets to SPV
• SPV leases assets back to originator
• originator makes rental payments to SPV
• SPV issues Periodic Distribution Amount to Investors
24. Sukuk al-Ijara
SPVOriginator Investor
• SPV incorporated
• SPV issues sukuk
• investors subscribe for sukuk, pay proceeds to SPV
• originator sells certain assets to SPV
• SPV leases assets back to originator
• originator makes rental payments to SPV
• SPV issues Periodic Distribution Amount to Investors
25. Sukuk al-Ijara
SPVOriginator Investor
• SPV incorporated
• SPV issues sukuk
• investors subscribe for sukuk, pay proceeds to SPV
• originator sells certain assets to SPV
• SPV leases assets back to originator
• originator makes rental payments to SPV
• SPV issues Periodic Distribution Amount to Investors
26. Sukuk al-Ijara
SPVOriginator Investor
• SPV incorporated
• SPV issues sukuk
• investors subscribe for sukuk, pay proceeds to SPV
• originator sells certain assets to SPV
• SPV leases assets back to originator
• originator makes rental payments to SPV
• SPV issues Periodic Distribution Amount to Investors
27. Sukuk al-Ijara
SPVOriginator Investor
On default
• SPV exercises option to sell assets back to Originator
at “Exercise Price”
• SPV pays Dissolution Amount to Investors
28. Sukuk al-Ijara
SPVOriginator Investor
On default
• SPV exercises option to sell assets back to Originator
at “Exercise Price”
• SPV pays Dissolution Amount to Investors
39. Sukuk al-Mudaraba
Originator
• SPV incorporated
• SPV issues sukuk
• investors subscribe for sukuk, pay proceeds to SPV
• SPV and Originator enter into Mudaraba Agreement:
Mudaraba enterprise
• SPV contributes principal amount
• Originator contributes expertise and skills
• agreed profit-sharing ratio
• SPV uses profits to pay periodic returns to investors
40. Sukuk al-Mudaraba
SPVOriginator
• SPV incorporated
• SPV issues sukuk
• investors subscribe for sukuk, pay proceeds to SPV
• SPV and Originator enter into Mudaraba Agreement:
Mudaraba enterprise
• SPV contributes principal amount
• Originator contributes expertise and skills
• agreed profit-sharing ratio
• SPV uses profits to pay periodic returns to investors
41. Sukuk al-Mudaraba
SPVOriginator Investor
• SPV incorporated
• SPV issues sukuk
• investors subscribe for sukuk, pay proceeds to SPV
• SPV and Originator enter into Mudaraba Agreement:
Mudaraba enterprise
• SPV contributes principal amount
• Originator contributes expertise and skills
• agreed profit-sharing ratio
• SPV uses profits to pay periodic returns to investors
42. Sukuk al-Mudaraba
SPVOriginator Investor
• SPV incorporated
• SPV issues sukuk
• investors subscribe for sukuk, pay proceeds to SPV
• SPV and Originator enter into Mudaraba Agreement:
Mudaraba enterprise
• SPV contributes principal amount
• Originator contributes expertise and skills
• agreed profit-sharing ratio
• SPV uses profits to pay periodic returns to investors
43. Sukuk al-Mudaraba
SPVOriginator Investor
• SPV incorporated
• SPV issues sukuk
• investors subscribe for sukuk, pay proceeds to SPV
• SPV and Originator enter into Mudaraba Agreement:
Mudaraba enterprise
• SPV contributes principal amount
• Originator contributes expertise and skills
• agreed profit-sharing ratio
• SPV uses profits to pay periodic returns to investors
44. Sukuk al-Mudaraba
SPVOriginator Investor
On maturity
• Mudaraba enterprise dissolved
• SPV calls on Originator to buy back Mudaraba
interest at (market) value
• SPV uses profits to pay periodic returns to investors
45. Sukuk al-Mudaraba
SPVOriginator Investor
On maturity
• Mudaraba enterprise dissolved
• SPV calls on Originator to buy back Mudaraba interest
at (market) value
• SPV uses profits to pay periodic returns to investors
53. Sukuk
AAOIFI Statement, February 2008
• It is not permissible for the Mudarib to re-purchase the
assets from Sukuk holders or from one who holds them,
for its nominal value, when the Sukuk are extinguished, at
the end of its maturity.
• It is not permissible for the Manager of Sukuk to
undertake to offer loans to Sukuk holders, when actual
earnings fall short of expected earnings.
• Shari'ah Supervisory Boards should not limit their role to
the issuance of fatwa on the permissibility of the
structure of Sukuk.
55. Caselaw
Albaraka International Bank Limited v Meliti
1992 CoA (unreported)
• Woolf, Leggatt LJJ
• possession action
• murabaha financing a property portfolio
• ultra vires
• collateral contract
• mistake
56. Caselaw
Islamic Investment Company of the Gulf (Bahamas) Ltd
v Symphony Gems NV and others 2002 QB (Comm)
(unreported)
• Tomlinson J
• murabaha financing jewel purchase
• consequence of mere non-compliance
• illegality
• ultra vires
• misrepresentation
57. Caselaw
Shamil Bank of Bahrain v Beximco Pharmaceuticals Ltd
and others
[2003] EWHC 2118 (Comm)
• Morison J
• $30m (reverse?) murabaha
• choice of law
[2004] EWCA Civ 19
• Potter LJ
• choice of law
• incorporation
58. Caselaw
Riyad Bank and others v Ahli United Bank (UK) plc
[2005] EWHC 279 (Comm)
• duty of care owed by adviser to ijara fund
59. Caselaw
Musawi v RE International (UK) Ltd and others
[2007] EWHC 2981 (Ch)
• David Richards J
• dispute of agreements relating to land
• choice of law
• s46 Arbitration Act 1986
60. Caselaw
The Investment Dar Company KSCC v Blom Developments
Bank SAL [2009] EWHC 3545 (Ch)
• HHJ Purle QC
• Blom investment in TID wakala fund
• TID fail to repay
• ultra vires TID
• restitution
61. Conclusion
• lack of consensus on shari’ah compliance
• legal effects of non-compliance
• choice of law
• incorporation
• ultra vires
• collateral contract
• mistake
• illegality
• misrepresentation
• estoppel
• regulatory claims
