Introduction to Islamic Finance - David Simpson - 3 Verulam Buildings
-
Upload
david-simpson -
Category
Documents
-
view
152 -
download
3
Transcript of Introduction to Islamic Finance - David Simpson - 3 Verulam Buildings
Introduction to Islamic FinanceDavid Simpson3VB
Nature of Shari’ah
Sources• Qur’an• Sunnah• Hadith• Ijma
Schools• Hanafi• Hanbali• Maliki• Shafi
Nature of Shari’ah
Sources• Qur’an• Sunnah• Hadith• Ijma
Schools• Hanafi• Hanbali• Maliki• Shafi
Saudi ArabiaBasic 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).
Nature of Shari’ah
Sources• Qur’an• Sunnah• Hadith• Ijma
Schools• Hanafi• Hanbali• Maliki• Shafi
Saudi ArabiaBasic 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.
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.”
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…”
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…”
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.”
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.”
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
Islamic financial products
Takaful• insuranceIjara• leaseMurabaha• sale with deferred paymentMusharaka• partnershipSukuk• bondsIstisna’a• manufacture and sale
Takaful
• gharar• mutual insurance• P&I club• contributions to central pool• distribution of surplus• possibility of future calls• darura: non-takaful reinsurance
Takaful
• gharar• mutual insurance• P&I club• contributions to central pool• distribution of surplus• possibility of future calls• darura: non-takaful reinsurance
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
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
Murabaha
FinancierSupplier Customer
Murabaha Documentary Credits
Shares Murabaha Finance
Reserve commodity murabaha (tawarruq)
Commodities Exchange
First contract• sale of commodity• immediate delivery• immediate paymentSecond contract• sale of commodity• immediate delivery• deferred payment• price + mark-upThird contract• sale of commodity• immediate delivery• immediate payment
Commodity broker
IFI providing finance
Commodity broker
IFI requiring finance
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
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
Reserve commodity murabaha (tawarruq)
Sukuk
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
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
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
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
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
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
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
Sukuk al-Ijara
Sukuk al-Ijara
Sukuk al-Ijara
Sukuk al-Ijara
Sukuk al-Ijara
Sukuk al-Ijara
Sukuk al-Ijara
Sukuk al-Ijara
Sukuk al-Ijara
Sukuk al-Ijara
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
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
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
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
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
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
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
Sukuk al-Mudaraba
Sukuk al-Mudaraba
Sukuk al-Mudaraba
Sukuk al-Mudaraba
Sukuk al-Mudaraba
Sukuk al-Mudaraba
Sukuk
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.
Caselaw
Caselaw
Albaraka International Bank Limited v Meliti1992 CoA (unreported)
• Woolf, Leggatt LJJ• possession action • murabaha financing a property portfolio• ultra vires• collateral contract• mistake
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
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
Caselaw
Riyad Bank and others v Ahli United Bank (UK) plc [2005] EWHC 279 (Comm)
• duty of care owed by adviser to ijara fund
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
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
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
Thank you