How Brazil Can Profit from US$80 Billion – Rich Islamic Bonds

images15Papers of companies and governments issued according to Islamic financial systems – the Sukuk bonds – currently under negotiation on the foreign capital markets totaled around US$ 80 billion. This according to Alexei Remizov, of HSBC Amanah, the Islamic branch of bank HSBC, talking in Brazil.

Remizov was participating in the seminar promoted by the São Paulo Stock Exchange (Bovespa) “The financial and capital markets of the Islamic world: opportunities and challenges.” .

He pointed out that, despite certain deceleration due to the international financial crisis and to the lower oil prices, perspectives for growth of this market are good, specially in the countries of the Gulf Cooperation Council (GCC).

Therese Rabieh, the representative of bank West LB, which also has strong operation in the region, pointed out that operations with sukuk bonds have been growing exponentially in recent years, rising from a volume of US$ 569 million in 2000 to US$ 18.8 billion from January to November 2007.

This year, despite the deceleration, the total volume of business with these papers reached US$ 13.4 billion by November. Rabieh pointed out that, despite the growth, the Islamic financial market represents just 1% of the global financial market, with the number of Muslims equivalent to 20% of the global population. “That is, there is great potential for growth,” she said.

The possibility of expanding Islamic finance is not, however, restricted to the Muslim market. Companies in non-Islamic countries, like Brazil, may develop operations of the sort if their organization follows the Sharia, the set of rules and customs that guide the daily life of the Muslims. In the same way, investors do not need to follow the Islamic religion to invest their money in a transaction of the kind.

The seminar served to show the Brazilian market that it is possible to make use of instruments of the Islamic financial system to collect funds, especially in a moment of global credit crisis. To the specialists participating in the event, Brazilian companies may issue sukuk bonds abroad despite the financial and tax legislation in the country not being adapted to such operations.

“It is possible to seek investment abroad,” said the director of bank ABC Brazil, Angela Martins, a specialist who has already published a book on Islamic finance. Rabieh pointed out, however, that institutions interested in the sector cannot be opportunist and expect immediate results, it is necessary to have patience to structure the business, await the return and maintain continued operations to grant market security.

“In Brazil this may be important, as the country is trying to explore new markets and has substantially expanded its trade relations with the Islamic countries,” said Martins. “This is certainly a market with great potential for growth of Brazilian (bond) issues and for investors from Brazil, who may invest in Islamic products released in other countries,” she added.

The representative of West LB declared that companies that operate in exports and imports of goods have advantages in this kind of business. According to Anthony Saint, an executive at Gatehouse Bank, an Islamic bank from the United Kingdom, this is due to the fact that Islamic financial contracts are greatly based on tangible assets.

The system does not allow, for example, the making of money on money, through interest. “A good Muslim must make money move for the good of the community,” said Saint.

In this respect, Martins mentioned Petrobras as an example of a Brazilian company that may operate in the Islamic market, as the company buys and sells goods in Muslim countries, and these may be used to guarantee the business, and the company also has subsidiaries and assets abroad, which avoids operations having to be adapted to the rules of the Brazilian market.

To Nik Ramlah Mahmood, the representative of the Securities and Exchange Commission (SEC) of Malaysia, a country in which Muslims represent 60% of the population and which is very advanced in the Islamic financial system, the potential for Brazilian companies to issue papers “is tremendous”. He added that “the quality, the name” of the issuer of the papers is essential.

In this respect, the director of the Bank of Brazil office in Dubai, Renato Gerundio de Azevedo, added that, during his experience in the United Arab Emirates, he has noticed that business with Brazilian companies is very welcome. “When I show them the companies and banks of Brazil, their satisfaction is very great,” he said. “We have many opportunities to show,” he added.

He pointed out, however, that Brazil is not as well known in the Middle East as are other emerging nations, like Russia, India, China and countries in Central Asia. In this respect, greater exhibition of the possibilities in the country is essential.

Azevedo added that, more than banks, sovereign funds from the Middle East hold great liquidity and are not restricted to contracts designed according to the Sharia, also doing business on the conventional system.

“These funds will play an important part in development of the global economy,” he said. “There are interesting activities to be promoted in Brazil with regard to investment in the Middle East. Even after the crisis, in all the talks I have, a minimum limit is always mentioned, not a ceiling. So it is necessary to think big, to see what may be built here and to sell the projects abroad,” he added.

Anthony Saint, of Gatehouse bank, said that the Islamic system represents a new source of resources and may coexist in parallel with the conventional market. That is what takes place in many Muslim countries. Offering operations that respect Sharia represents, in this sense, something more that the institution can offer its potential clients.

He pointed out that there is appetite for investment opportunities in the Gulf region, and that Brazil has good potential for attraction, as there is special interest in the areas of natural resources and foods, and also due to the need for these countries to supply their domestic markets.

“I would be surprised if these funds are not here in five years,” he said. Fernando Iunes, of Itaú BBA, which has a brokerage office in Dubai, said that the bank has already attracted investors from the Gulf to public offers in Brazil.


Sharia is based on the Koran, the holy book of the Muslims, and on the Hadit, that which Mohammed did and said. That is, it is a kind of manual that guides the life of the faithful, in all aspects. The interpretation of the texts and their tradition and application to the daily life, in countries that adopt the Sharia, is done by Muslim scholars and legal consultants in the matter, and this often causes the rules to vary from country to country.

Islamic banks have a Sharia council, that informs the institutions what operations may or may not be accepted. According to Angela Martins, this results in no international standardization. Thus, Islamic contracts have to be custom made for each business. Gatehouse bank, for example, has a council that meets every quarter, but there is always a councilor at the organization to advise with regard to the everyday operations.

In Malaysia, according to Nik Ramlah Mahmood, there is a Sharia council that operates alongside regulators, guaranteeing national standardization. “It is made up of scholars, legal councilors and people who have technical knowledge of the market,” he said. Malaysia, according to Alaxei Remizov, of HSBC, is responsible for two thirds of the sukuk bond issues in the world, but two thirds of the funds applied to the business come from the Middle East.

The Islamic financial system does not include just the issuing of sukuk bonds, but also a series of operations, like financing of purchase and sales, leasing and insurance. According to Therese Rabieh, all these transactions have a turnover of around US$ 700 billion worldwide.

José Alexandre Vasco, Investor Protection and Guidance supervisor at the SEC of Brazil, said that, in case there is market interest, the organization may take the theme of adoption of the Islamic system in the country to talks at the Committee for Regulation and Inspection of Financial, Capital, Insurance, Pension and Capitalization Markets (Coremec), which includes the SEC, the Central Bank, the Revenue Service, and other regulators.

“The committee may establish a workgroup, with the participation of the private sector, to evaluate possible adjustment of legislation in the country,” he added.

ABC Maintains Liquidity

Bank ABC Brazil, a subsidiary of the Arab Banking Corporation (ABC), headquartered in Bahrain, is not having liquidity problems in these times of financial crisis, different from other medium sized financial institutions in the country.

“ABC Brazil has a great advantage in having a strong shareholder,” said the director of the bank, Angela Martins, referring to the headquarters, controlled by the sovereign funds of Abu Dhabi and Kuwait and by the Central Bank of Libya.

According to her, ABC Bahrain has separated US$ 150 million for possible use in the Brazilian subsidiary, a value that may later be expanded to US$ 300 million, guaranteeing the irrigation of lines of credit in Brazil. “A crisis like this one clearly shows the solidity and support of our shareholders,” she said.

Angela pointed out that the liquidity of the bank is so good that ABC Brazil should return the unused US$ 100 million to the head office before the end of the year. Despite not having loaned all the money, the asset portfolio in the “middle market” sector for financing to companies with revenues of between 30 million Brazilian reais and 250 million reais, has grown 27% in the third quarter of this year. Operations with the “upper-middle market”, with revenues between 250 million reais and 2 billion reais, grew 3%.

According to the executive, the bank decided to leave the consigned credit market and concentrate on loans for business clients. In this area, the institution plans to strengthen its operations in the sector of medium companies, which currently represent 17% of assets. Angela pointed out that the participation of these companies should grow to something between 20% and 25%.

During the crisis, according to her, the bank should maintain its size, maintaining the current client portfolio. As the cost of capital has grown in recent months, the current base is enough to guarantee profitability to the institution without it needing to loan all funds available. This tendency should remain at least until 2010.

This means that new operations should be mainly with customers the bank already has. “Maybe with some growth in the ‘middle market’ sector and reduction in the ‘upper-middle market’ sector,” she said.

ABC, according to her, does not have difficulties in offering loans to exporters in the Advances on Exchange Contracts (ACC), or in pre-shipment contracts, greatly used by foreign trade operators, which have become scarcer in recent months. “We have been receiving great demand for ACCs, and are renewing all the mature ones with our clients,” she said. “We are not denying the renovation of contracts.”

Islamic Banks

In a scenario of lack of international credit, according to Martins, ABC Brazil should seek greater volumes of funds on the Islamic financial system and should fight to convince Islamic banks to participate in operations that are not headed by the institution itself, but by third parties. She added that she has partners in this enterprise, like Gatehouse, an Islamic bank in the United Kingdom.

The executive pointed out that, in the crisis, financial institutions in general are becoming more conservative, but that there is still interest in Brazil. As the country’s regulatory system is not yet adapted to the Islamic system, he now believes in the possibility of Brazilian companies launching operations of the sort on the foreign market.

 Written by Alexandre Rocha

HSBC Amanah reaching out with Corporate Social Responsibility (CSR)

HSBC Amanah, the global Islamic finance services arm of the HSBC Group, recently announced it has entered into a partnership with Islamic Relief, a major international relief and development charity to offer a pilot Islamic microfinance scheme in Pakistan.

As per this partnership, HSBC Amanah will be providing funding towards Islamic Relief’s microfinance projects in Rawalpindi, Pakistan.    HSBC Amanah will also assist Islamic Relief as required in developing the Shariah structure for financing models and contracts and providing Islamic finance training to Islamic Relief staff.

Islamic Relief will, in turn, manage microfinance projects, identify and screen beneficiaries, set out eligibility criteria, encourage entrepreneurs to come forward with lucrative business ideas for investment and provide financial and social reports to HSBC Amanah.

Nabeel A Shoaib, Global Head of HSBC Amanah  said:

“We are extremely  excited to partner with Islamic Relief in this ground-breaking initiative to bring greater financial inclusion to Pakistan’s poor and empower hundreds of families to capture good economic opportunities. We are confident that Islamic microfinance can be a promising finance tool that can help reduce poverty and accelerate economic growth and financial inclusion, particularly in impoverished rural areas.”

“HSBC Amanah is keen to encourage the development of the Islamic microfinance sector and to promote the production of a commercially viable microfinance business model with high social impact. Based on the results of this pilot project, HSBC Amanah will be rolling out other Shariah compliant microfinance schemes in other locations,’ Nabeel added.

Saleh Saeed CEO, Islamic Relief commented:  ” We’re pleased to be part of this unique initiative, which combines HSBC Amanah’s Islamic finance expertise with Islamic Relief’s understanding of the dynamics of less privileged environments and constant interaction with the poor.

“Islamic Relief has experience of implementing microfinance projects in Pakistan as well as other countries in Asia and Eastern Europe. These projects help to alleviate poverty by providing people with the means to establish sustainable livelihoods. We are excited about the prospect of working with HSBC Amanah and look forward to replicating this model in other parts of the world where there is a pressing need to build financial inclusion for the entrepreneurial poor.”

source : optimist world

Germany: Fertile Grounds for Islamic Banking

images27The German economy is considered the strongest in the Eurozone [15-country bloc that uses the Euro currency] and the level of German exports surpassed China for the fifth year running in 2007, achieving a record export of €969 billion. Its imports amounted to €770 billion, giving Germany a trade surplus of €198 billion. According to the German Foreign Ministry, the Eurozone is Germany’s number one economic partner, and Eurozone imports and exports constitute two-thirds of German trade figures.

Germany managed to acquire this position thanks to its geographical location at the heart of Europe allowing it to attract international companies. Berlin was awarded the title of ‘City of the Future’ in 2006/07 by the fDi [Foreign Direct Investment] magazine affiliated to the Financial Times Group. The award is given annually to the European region or city that offers the best opportunities for foreign investment. Germany is also renowned for the number of its scientific research centres that encourage creativity and innovation. Companies with distinctive brand-names such as Daimler-Benz, BMW, and Siemens invest €250 million into scientific research and development on an annual basis. Due to this cooperation between economic activity and scientific research, Berlin ranked second in the European Innovation Index. The city is also renowned for its social stability and rule of law.

According to the 2007 census, the number of Muslims in Germany amounts to 3.4 million, and constitutes 4.1% of the German population of 82 million. This makes Islam the second largest religion in Germany, after Christianity, and Germany has recently demonstrated its responsiveness to the Islamic faith with an average of one man and one woman converting to Islam per week.

Germany went down in Islamic banking history as the first European country to issue sovereign Sukuk when in 2004 the German federal state of Saxony-Anhalt issued Islamic Sukuk worth €100 million. Islamic financial services had begun even before that in Germany with Commerzbank launching the Al Saqur investment fund targeting the Gulf region. However, this fund was later closed after its assets declined from an initial €40 million in 2000 to just €4 million in 2005. The largest private bank still active in this area is Deutsche Bank, which offers five Shariah-compliant mutual funds in Dubai, although they are not German-market orientated.

In addition to this, some insurance companies also offer Islamic Takaful insurance services outside of Germany. The Hannover Re Group is considered the first European insurance company to offer full Takaful insurance to Islamic Takaful insurance companies. Therefore, we can see that all the Islamic financial services offered by German financial companies target foreign markets, especially the Gulf States and Malaysia. This leaves the Muslim community in Germany, which owns a high capacity of savings, lacking Islamic financial institutions offering services like Islamic banking and Islamic insurance.

Due to Germany’s geographical location and its economic potential, Islamic financial institutions, which will develop in Germany without doubt, will serve both the German Muslim community, as well as the Muslim community of the entire Eurozone, the population of which is estimated at 18 million.

As a result of the global financial crisis, perhaps the world has become more open-minded towards an Islamic financial system.

Perhaps now is the time for Islamic financial institutions and Muslim investors to make their move.

By Lahem Al Nasser

source : asarq online


Islamic Banking in Turkey

images16Islamic banking in Turkey dates back to 1985, when the government, led by the late Turgut Özal, passed legislation for interest-free banking. The first “participation bank” was Albaraka Türk, established in February 1985, followed by Faisal Finans two months later.

Islamic banks offer customers profit-sharing proceeds instead of interest, and charge borrowers participation-sharing, instead of loan interest.

They operate two types of accounts to collect funds from depositors. One is a “current account” that does not provide any type of return, but offers conventional services such as cheque books, money transfers and documentary collection.

The second is a profit-loss sharing participation account, that can be opened in U.S. dollars, euros or liras for a minimum of 30 days. The holders of accounts share the profits and the losses as a result of an investment in funds.
source: Hurriyet daily news

Meet the New Bosses of the Lending World

By Sam Hopkins
If you’ve been praying for the stock market to turn back to positive territory over the past several weeks, you’re probably part of the largest congregation in the world.

But economics and religion don’t just connect when recession looms. Many faiths prohibit one member of the community from charging interest to another. So where does that leave faith-based finance in the era of the credit crunch? You may be surprised…

A Look Into Islamic Finance

On the shores of the Persian Gulf, the emirate of Qatar sits atop the world’s #3 natural gas reserves. Qatar is the smallest oil producer in OPEC, but its location between Saudi Arabia and Iran makes the small monarchy hugely important.

Now, Qatar is turning into a financial force to be reckoned with. That’s because Islamic Shariah law, and its restrictions on how money can be invested, is gaining notice around the world as the safest way to save.

Bloomberg puts the case simply:

Shariah requires that investors profit only from transactions based on the exchange of assets, not money alone, so interest is banned. Bankers sell Islamic bonds, or sukuk, by using property and other assets to generate income equivalent to interest they would pay on conventional debt. The money can’t be used to finance gambling, guns or alcohol.

Qatar International Islamic Bank welcomed in billions more in the past year, logging a profit jump of 44%.

In the United Arab Emirates, Abu Dhabi Islamic Bank reported its quarterly results on Monday, just like any secular Wall Street firm would do…

But in a time when lending houses from Charlotte to Reykjavik are hemorrhaging debt, Abu Dhabi’s #2 bank just reported a year-on-year Q3 profit increase of 58%.

The reason is clear: Western banking, with its emphasis on risky innovation, has failed to provide financial security.

Persian Gulf monarchies like the United Arab Emirates and Saudi Arabia have made fortunes in petroleum products. In the UAE, foreign workers outnumber locals and wealthy oil heirs can zoom in their Ferraris to and from classes at local branches of American universities or the Guggenheim museum. They can also ski indoors, right there at the desert’s edge.

Dubai’s sovereign wealth fund managers even dove deep into the stock market game last year, teaming up with Nasdaq to buy the northern European company OMX, which operates a family of Nordic exchanges. There are also thousands of Gulf natives who have been educated in the U.S., the U.K., and elsewhere, taking stories of stock market fortune to heart and working hard to create similar equity opportunities at home.

Fact is, the traditional underpinnings of Islamic finance provide shelter from the international financial storm.

Moving Into the Mainstream

It’s important to note that Islamic banking is every bit as formalized and efficient as secular banking, it not more so.

There’s an Islamic Interbank Money Market, based in Malaysia, which acts like the London forum where global banks lend to each other and set the LIBOR rate (which has skyrocketed lately as credit tightens).

Kuwait Finance House, one of the world’s largest Islamic banks, predicted in a report this week that Islamic finance will soon move from the periphery to the center of the lending world:

In the current financial turmoil, it is interesting to note that Islamic financing may have prevented a majority of the mess created by the conventional banking and financial institutions…The outlook for Islamic financing is bright and will likely take the lead in terms of providing funding for major projects as the conventional banking system reevaluates its business model.

Indeed, the biggest banks in the world already have Islamic finance divisions: HSBC (NYSE:HBC), Barclays (NYSE:BCS), Citigroup (NYSE:C), and Standard Chartered (LON:STAN) all have advisory boards of Islamic scholars who vet investments.

How to Get in on the Action

Understand, it’s not easy investing directly into Islamic banks. Since the governments that often back them have so much money, public listings are unnecessary.

Fortunately, Dow Jones features a growing array of Islamic indices focused on different regions. You can view those here: Dow Jones Islamic Indices.

And the knowledge that the world’s top financial brass are listening to a new sort of lending logic should provide some comfort to investors in Islamic financial stocks. If you hold any banking shares, it’s worth checking up on what those companies are doing.

You should also look into buying some Islamic bonds for yourself. Non-Muslims can buy Islamic bonds, use Islamic credit cards, and even access some carefully crafted derivatives…

In fact, Kuwait Finance House’s Malaysian unit says a full half of its customers are non-Muslims!

While we’re still trying to sort out the subprime trainwreck, a little ethics and common sense may be just what every boardroom and portfolio needs to move forward and avoid another systemic catastrophe.

Egyptian Saudi Finance Bank Chooses Misys for Islamic Banking


Leading Islamic solution to drive innovation in banking.

Cairo-based Egyptian Saudi Finance Bank (ESFB) has chosen the Equation 3.9 solution from Misys (London) for its 11 branches across Egypt. The solution is the latest version of the widely-used retail banking solution from Misys and will help ESFB to provide better and more innovative Islamic services to its customers, says the company. ESFB selected the Misys Equation 3.9 with advanced Islamic Banking capabilities because it is pre-integrated with the trade finance solution, Misys Trade Innovation. The resulting integrated solution will deliver significant benefits to the bank, enabling it to manage processes more efficiently and deliver new and innovative products to customers.

Islamic finance sector needs more sharia scholars

images28by Tom Heneghan

Experts says there is a shortage of scholars qualified in both sharia and finance. (Getty Images)As the world financial industry sheds jobs by the tens of thousands, the $1 trillion Islamic banking sector has a growing load of work for sharia scholars but few candidates coming forward to do it.

Experts steeped in the Muslim scriptures are critical to Islamic finance, which requires a religious stamp of approval before a bond, mortgage contract or other financial product can be marketed as moral according to the standards of the Koran.

But qualifying for this work takes much more time and effort than other jobs in finance require. Candidates must first study Islamic law or sharia for many years, and then master finance.

“Globally, and especially in Europe and America, there is a shortage of scholars familiar with both fields,” said Mufti Abdul Kadir Barkatulla, an Indian-born imam in London who sits on sharia boards for six banks including Lloyds TSB Bank.

“A few scholars are going around the world [advising banks] and new scholars are not being trained fast enough to take their place,” he said at an Islamic finance conference in Paris.

Part of the problem is linguistic. Many Middle Eastern scholars work only in Arabic, the language of Islam, but the global market needs scholars fluent both in Arabic and in languages such as English or French.

A study for Paris Europlace, an industry group trying to develop Islamic banking in France, said there were fewer than 100 scholars in the world qualified to sit on sharia boards.

Demand for Islamic banking has grown in recent years and expanded from the Middle East as more of the world’s 1.3 million Muslims seek investments that comply with their faith.

The current financial crisis has also hit the Islamic sector, but Islamic banks say they are better placed to weather it because of their more conservative stance.

“We’re not immune, but we’re not failing catastrophically,” said Sheikh Nizam Yaquby from Bahrain, who advises the Islamic units of HSBC and BNP Paribas , among others. “The scholars stopped us from buying subprime loans.”

Islamic law bans fixed interest rates and trade in companies dealing in alcohol, pork or pornography. But like sharia in any other field, there are no fixed rules that all scholars accept.

“About 90 percent of all sharia board rulings are consistent so there’s only about 10 percent difference,” Yaquby said.

Some differences are theological. Malaysia, home to over half the global Islamic bond market, follows the Shafi school of Sunni Islam and is the most flexible with debt.

Saudi Arabia, with its Wahhabi form of the Hanbali school, is the strictest, while the Gulf states chart a middle course. Islamic finance in western countries generally follows the Gulf.

Shi’ites used to have some striking differences, such as the view that the interest ban did not apply to interbank lending, “but now they are joining the mainstream,” Barkatulla said.

Mufti Ahmed Said Louqman Ingar from the French Indian Ocean island of Reunion said an investment fund there almost failed despite approval by an international sharia board. “Clients wanted approval by local French-speaking scholars,” he said.

One sharia board might reject an airplane leasing deal because the airline served passengers alcohol while another might ignore that and approve the contract, he said.

There are also no set fees for sharia advisers, who Gulf media say can earn up to $100,000 per fatwa, or religious edict, on a contract. But Barkatulla said money was not the issue.

“There is enough economic rationale for people to get trained,” he insisted. “This will not be a problem.”


Islamic Home Finance Methods

IJARA / IJARAH – Lease To Own
The term Ijara literally means rent, the Sharia process is known as Ijara-wa-Iqtina, rent with an acquisition or rent to own. The process of Ijara can be used for equipment as well as property. The process is very simple, a single asset Trust is created, the Trust purchases the property, and then leases the property to the customer. With each monthly payment, a portion of that payment goes towards ownership, until the customer owns 100%.

The basic difference between a Sharia Ijarah-wa-iqtinah process and a conventional lease is that, the Ijara process obligates the Trust (seller) to sell the property to you under a Promise to Purchase, and while the same contract entitles the customer to purchase the property, the customer is not enforceably obligated to do so.


The purchase price that is agreed to in the Promise to Purchase is equal to the original purchase price less the down payment made by the customer plus $1.00. For example, if the value of the property is $200,000 and the customer makes a $40,000 down payment, then the initial amount the customer has to pay the investor for 100% ownership is $160,001. As the customers ownership increases, this amount reduces, until the final ownership payment of $1.00

The initial Ijara amount that is financed by the customer, earns profit for the investor through monthly rental payments. Traditional amortization calculations are utilized to determine the exact monthly payment. The mathematical formulas are acceptable as there are no Sharia issues with mathematical calculations. The major difference between a traditional mortgage amortization and an Ijara transaction is that the Ijarah transaction is based upon a reverse amortization calculation.

While it may appear contrary to the Sharia, it is in fact acceptable to describe the profit on an Islamic transaction as a percentage. The following example should clear up any confusion regarding the acceptability of quoting the profit as a percentage in an Ijara transaction:

Suppose you have a $100,000 in cash.
You purchase a home and pay cash for the home.
You rent the home to a tenant for $500 per month
At the end of the year you have collected $500 x 12 or $6,000 in rent
That $6,000 in rent is a 6% return on your $100,000 investment
Is that 6% Rent or Riba? well it is clearly it is Rent, as it is based upon a business transaction. Now let’s look at a traditional mortgage interest transaction:

Starting with the same $100,000 cash.
You give someone the money.
They proceed to purchase the same home with those funds.
They pay you the same $500 per month, or 6% a year for use of the money.
This is basically rent on money
In this case is the 6% Riba? yes, it is rent on money. The first example was rent on property. So it should be clear that from a Sharia perspective it is acceptable to describe the profit on an Islamic Ijara transaction as a percentage. Furthermore, it is also a requirement under the Truth in Lending Act/Consumer Protection Act, that any profit earned on a residential real estate finance transaction should be described as a percentage so that a customer can clearly understand what the overall cost of the finance transaction is.

In an Ijara transaction, you are technically a tenant. You sign a lease that obligates you to a rent payment over a period of time. However, unlike a typical rental property lease, you are responsible for all the maintenance of the property, and you have all the rights and duties of a Homeowner. You can sell the property anytime you wish, you can remodel, decorate, landscape, sublet, or basically utilize the property for any legal purpose that it is zoned for. The only exception may be if you engage in an activity that may adversely affect the value of the property, like demolishing a garage without rebuilding it. For all practical purposes your role is the same as a homeowner, because once your have fulfilled your obligations under the lease or promise to purchase, you become the owner of the property.

One of the basic Sharia compliance principles is that there should be a sharing of either a gain or loss in a finance transaction. The Ijara transaction is structured in such a way that 100% of the gain is rightfully the customers. Under the Shariah, the gain or loss is shared by the parties in a transaction according to their percentages of ownership. The Ijara transaction abides by this principle, in that at the time of realization of the gain or loss, there is only one owner of the property, and that is the customer. From a procedural perspective, at the time of sale:

the Trust will transfer the title of the property to the customer,
the customer will then transfer the title to the new buyer,
the new buyer will then settle the transaction according to the agreement with the customer,
and then the customer will settle with the trust according to the agreement between the customer and the trust (the Ijara documents)
the procedural steps above creates a situation where the customer holds 100% title, albeit for a short period of time, but by doing so entitles the customer to be the beneficiary of the difference between the two agreements; that is the sale to the new buyer, and the original promise to purchase agreement with the trust.

MUSHARAKA – Declining Balance Co-ownership
The term Musharaka, Musharakah, means sharing. In the context of Islamic Finance, Musharak is a declining balance co-partnership, and is also a Shariah-compliant method of Islamic Home Finance.

You enter a partnership arrangement with a co-owner and sign a contract that specifies the terms of your agreement. After you find the home you want, you get approval to move ahead, and make an offer. Your partner or co-owner, usually a professional investment company rather than an individual, provides the lion’s share of the purchase price.

As part of the partnership agreement, you agree to make monthly payments to the partnership for your use of the home as either explicit or implicit rent.. At the same time, you make regularly scheduled investments in the partnership to increase your equity, or ownership share, of the home. With each payment, the balance you owe the partnership declines and your equity increases.

The amount of your monthly payment is determined at the time of purchase, based on several factors including the price of the home, your credit rating, the amount of your initial payment, the term of the contract, and the current and projected fair market value of similar homes in the community where you buy.

Shariah scholars are working with Islamic financial institutions to make the monthly payment schedules more like conventional mortgage amortization, indicating how each payment is divided. The goal is to make the contracts easier to understand and ultimately more available at competitive prices.


The IFSB is organising its first Seminar in Korea

images12Entitled Seminar on Islamic Finance, which will be held on 13 – 14 January 2009.

 This Seminar is co-organised with the the Financial Services Commission / Financial Supervisory Service of Korea. The main objective of the Seminar is to create awareness of Islamic finance, which has not yet acquired sufficient recognition among the Korean financial community, and to highlight its potential opportunities in Korea.


The Seminar will discuss:

  • Overview of the Islamic financial services industry (IFSI) from the perspectives of Regulators
  • Operational and business structural issues in starting an Islamic financial services unit
  • Current Shari’ah, legal and ratings issues facing the IFSI
  • Case studies on Sukuk issuance Challenges and opportunities for Islamic finance in Korea


The Seminar, targeted at regulators, supervisory bodies, financial practitioners, key executives and academics, will facilitate further understanding of the global Islamic financial services industry, benefiting especially those market players involved with multi-national corporations and cross-border activities.