Step by Step Guide to create an Islamic Finance Contract including Transaction steps and diagrams, issues and risks along with the certificates for Shariah and Legal Reviews. Follow the update on #TRGuidanceNotes The guidance notes are available on http://www.zawya.com/shariah-legal/listing/legaldocuments/

1. FX-SPOT AND FORWARD
CONTRACT: WA’D BASED
AUTHORS:
Badrul Hasan and Tarek El Diwany
Legal Review by Shariah Review by Produced by

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Contents
About this Product Guidance Note and Documentation ....................................................................................................................................3
About Thomson Reuters...................................................................................................................................................................................................4
About Zawya Islamic..........................................................................................................................................................................................................5
About Freshfields Bruckhaus Deringer........................................................................................................................................................................6
About Shariyah Review Bureau......................................................................................................................................................................................7
Freshfields Bruckhaus Deringer certificate................................................................................................................................................................8
Shariyah Review Bureau certificate..............................................................................................................................................................................9
Introduction....................................................................................................................................................................................................................... 10
Transaction steps and diagrams................................................................................................................................................................................. 10
Key differences between the equivalent Islamic and secular products....................................................................................................... 13
Key Islamic provisions in the principal documents.............................................................................................................................................. 14
Regional practices in the Middle East and South East Asia regions.............................................................................................................. 16
Shariah issues and risks.................................................................................................................................................................................................. 16
Basic commercial issues typically negotiated between parties...................................................................................................................... 18
Appendices......................................................................................................................................................................................................................... 19
Master Agreement for FX Spot and Forward contract: Wa’d Based............................................................................................................... 21

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About this Product Guidance Note and Documentation
In accordance with the Islamic faith, and to cope with international markets voluminous FX trading,
a need emerged for Sharia compliant foreign exchange contracts. This guidance note illustrates the
particular steps with simplifying diagrams of foreign exchange transactions, with a special focus onWa’d
(Promise) structure. The two principal wa’d structures employed to produce the economic effect of an
FX forward are duly explained: the single wa’d structure and the double wa’d structure. This guidance
note has been reviewed and certified by Freshfields Bruckhaus Deringer and Shariyah Review Bureau to
ensure its legal and Sharia compliance.
Product Guidance notes and documents available
Sharia compliant asset & housing finance: Ijara and forward Ijarah based contract
Sharia compliant asset finance: Murabaha based
Sharia compliant deposit products: Saving and current accounts
Sharia compliant trade finance : L/C facilities
Sharia compliant credit cards: Fee or tawarruq based
Sharia compliant guarantee contract
Sharia complaint overdraft facility
Treasury Placement: Wakala based
FX-spot and forward contract: Wa’d based
Working capital finance: Mudaraba Based
Investment Sukuk – Sukuk al Wakala, Sukuk al Musharaka and Sukuk al Mudaraba structures
Islamic syndicated financing: Mudaraba based
Islamic Project finance: Istisna plus forward Ijara based
Islamic Project finance: Musharaka and diminishing Musharaka based

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About Thomson Reuters
Thomson Reuters is an integrated knowledge services provider that assists the Islamic Finance industry
through providing solutions that enhance transparency, clarity and accessibility of Islamic Finance to
the global audience of businesses and professionals. We are proud to have been at the heart of Islamic
banking since the first commercial Islamic bank was launched in 1975.
OurknowledgesolutionshelpyougainclarityandtransparencyintherapidlyemergingIslamicfinanceindustrybyprovidingyouwithdata
services, research products and consulting services.
DATA SERVICES
Thomson Reuters Eikon and Zawya products provide access to a full spectrum of all relevant Islamic asset classes and content sets to give
us¬ers the best of class research capabilities.
RESEARCH
Built on the back of the world’s most extensive data capabilities, Thomson Reuters leverages its global network to provide primary source
in¬telligence on markets, industries and institutions relevant to Islamic finance.
CONSULTING
Thomson Reuters can provide bespoke service harnessing our global knowledge network com¬bined with our deep expertise
in Islamic finance.
ISLAMIC FINANCE GATEWAY COMMUNITY
Islamic Finance Gateway (IFG) Community is the one dedicated knowledge Gateway for profes¬sionals from across different countries to
convergeandinteractonindustryissuesthatmatterinordertogenerateactionableoutcomestoshapeandspeeduptheindustry’sgrowth.

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About Zawya Islamic
Our comprehensive platform provides the transparency and clarity of information you need to
conduct business more effectively. We also provide you with tools you can use to better shape
investment decisions.
Our intelligence includes all Islamic finance and Shariah-compliant asset classes, databases, research, news and market data, and is
supported by other data that serves as a benchmark against conventional fundamentals.
Zawya Islamic addresses the needs of any investment manager or consultant – Islamic or otherwise – by giving you access to the full
spectrum of legal, Shariah and market information.
We are powered by data from Thomson Reuters and also partner with other global Shariah and Islamic finance market players, standard
setters and authorities. We have developed for your use a well-connected and networked platform that makes Shariah-compliant
investment and decision making easier. Zawya Islamic is all of the following on one single platform:
• Fatawa,standards,regulations,legaldocumentationandproductguidancenotes,intelligentlyconnectedwithscholarsandinstruments;
• Deep fundamental data on global sukuk, Islamic funds, Islamic banks and financial institutions, and Shariah -compliant equities;
• Islamic finance news, research, indices, money market and benchmark rates; and
• The ICD Thomson Reuters Islamic Finance Development Indicator and the Islamic Finance Gateway Community.
www.zawya.com/Islamic-finance

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About Freshfields Bruckhaus Deringer
Freshfields was founded in 1743 in the City of London, making it the oldest existing law firm in the world.
Today, we are host to over 2,500 lawyers located across 28 offices in 16 countries throughout the Middle
East, Europe, the Americas and Asia.
While we have offices in all the main financial and regulatory centres globally, over 30 per cent of our
work is in countries where we do not have an office. Therefore our lawyers are deeply experienced in
workingoutsidetheirhomemarkets.Moreover,theproportionofourworkoutsideour“homemarkets”is
growing, and is likely to continue to do so, as businesses invest in those places which are growing faster
than the developed world.We are focused on being able to provide our advice where our clients need it,
not just where we happen to have an office.
Our market leading practice areas
Our firm is organised into nine international practice groups in line with our clients’business needs – they include Finance (both Islamic
and conventional); Corporate; Antitrust, Competition and Trade; Dispute Resolution; Employment, Pensions and Benefits; Environment,
Planning and Regulatory; Intellectual Property and Information Technology; International Tax; and Real Estate (including Construction).
We are proud of the fact that all our practice groups and many of our lawyers are consistently recognised by the most renowned legal
research directories and market commentators to be among the market leaders in their respective areas of law.
What sets us apart from our competitors is that on every instruction on a profoundly consistent basis, we bring to bear the unique
benefits and advantages of our global coverage, comprehensive platform, true integration and client-centric mindset. We are
committed to excellence in the legal advice and support we provide to our clients for their entrepreneurial decisions – no matter the
geography, scope or mandate.

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About Shariyah Review Bureau
Shariyah Review Bureau (SRB) is the Corporate World’s leading Shari’a Advisor with scholarly presence
in more than 12 countries from US, Europe, Africa, GCC and Asia. The breadth of geographical reach
crossing national boundaries makes it a unique Shari’a consultancy body that can meet clients true
international business requirements.
Licensed by the Central Bank of Bahrain it is a natural proxy to institutes seeking Shari’a Compliant Funds and Islamic windows and
transactions. Apart from clients in UK, Canada, France, Australia, Hong Kong, Switzerland and the GCC, it is the Shari’a Advisor for 21%
of the Co-operative Insurance Firms Listed on the stock-exchange market in the Kingdom of Saudi Arabia. SRB also serves 12% of the
Saudi Investment Companies licensed and regulated by the CMA and has a diverse set of experience in Islamic banking and non-banking
institutions, including securities firms, Shari’a compliant national banks, energy firms and information providers. It also has an extensive
experience in helping clients cover a wide spectrum of transactions ranging from Sukuk’s, Private Equity Funds, Equity projects, Trade
Finance transactions, Margin Trading, Real Estate Developments, Land Funds, ICT Deals, Money Market, Textile, Sports and Pharma Funds.
With almost a decade experience of Shari’a Advisory and Shari’a Audit, srb has sustained a record in innovation and impact for transactions
in Shari’a compliant Corporate debt, Sukuks and Islamic equity markets, initial public offerings screening & Investment Banking Practice.
To learn more visit www.shariyah.com

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Freshfields Bruckhaus Deringer certificate

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Shariyah Review Bureau certificate

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2 Transaction steps and diagrams
The following steps and accompanying diagrams describe the process by which FX spot and FX wa’d trades are implemented. Depending
on the customer’s requirements, the parties may enter into an FX spot trade, or an FX FX wa’d trade, or both a spot and wa’d trade in order
to create an FX swap. The latter is simply a spot currency transaction that is reversed by an offsetting wa’d transaction on a predetermined
future date.
For example, a Customer has GBP1,000,000 available in a London account and wishes to utilise it to meet a funding requirement of
USD1,500,000 for three months in the United States without exposing itself to foreign exchange risk. This can be achieved if the Customer
enters into an FX swap to give GBP in return for USD from the Bank at T0 (the“near”date) at the spot (or any other agreed rate) and then
swap the currencies back at T90
(the“far”date) at a rate agreed at the outset between the parties.
Two principal wa’d structures are employed to produce the economic effect of an FX forward: the single wa’d structure and the double
wa’d structure.
2.1 THE SINGLE WA’D STRUCTURE
Step 1: The Master Agreement
Bank Master Agreement Customer
The Customer enters into a Master Agreement for FX Spot and FX Wa’d Transactions (the“Master Agreement”) with the Bank.
Step 2: The spot trade
Bank
Transaction Offer
Transaction Acceptance
Customer
On or prior to the near date, the Customer discusses the commercial terms of the spot trade with the Bank, for example, to trade
1 Introduction
Foreign exchange (FX) trades in which both countervalues are exchanged for spot settlement are usually
documented and implemented by Islamic financial institutions in a manner similar to their secular
counterparts as there are usually no major objections relating to such trades under Shariah.
The Shariah regards the deferment of one or both countervalues in a currency exchange transaction as a form of usury and it is therefore
prohibited in principle to transact an FX forward. Despite this, some Shariah scholars in the modern day Islamic finance industry have
permitted participants to create the economic effect of an FX forward trade so long as the intention is to hedge against the risk of currency
fluctuations to which at least one counterparty is exposed. It is also required that such a transaction is not used for purposes of speculation
or for creating or swapping interest bearing loans across currencies. One of two stratagems is adopted to achieve this economic effect: the
commodity murabaha structure and the wa’d (promise) structure.This practice note and accompanying Master Agreement for FX Spot and
FX Wa’d Transactions relate to the wa’d structure.
The wa’d structure involves the use of a unilateral wa’d given by one or both of the counterparties in favour of the other to enter into
a currency trade on a future date.
Like their secular finance counterpart, Islamic FX spot and FX wa’d transactions are usually documented in a master agreement with
separate trade confirmations whose content and format is specified in the appendices to the master agreement, but there are also some
key differences.