Islamic Financing Explained

Those practicing Islamic financing must do that according to a specific set of laws called Sharia. To ensure that project financing in the United States or EU is consistent with Sharia precepts, specific structures & methods have been devised that take into consideration specifics of Islamic banking. 

If you are considering concluding contracts involving Islamic financing in Europe or countries where Sharia is the major law, then you may find this article quite useful.

Islamic Financing: Underlying Principles

Sharia places a certain number of limitations on commercial activities, and that is why UK and EU-registered companies should keep that in mind prior to undertaking financial transactions with Islamic financing.

Starting an Islamic finance business requires knowing some basic concepts, namely:

Ri-bā (Usury)

This implies unfair & exorbitant benefits that result from concluding business deals in the United States or other countries and is, therefore, explicitly forbidden as per Sharia. That concept mainly applies to loans & interest charged on them.

Gha-rar (Hazard or Lack of Certainty)

Under this concept, concluding any agreement involving Islamic financing which conditions are considered too vague automatically makes it null and void. This concept can be applied to insurance agreements involving the lack of certainty with regard to a particular event occurring.

May-sir (Speculative Investment)

This stands for prohibition of business dealings based mainly on speculation. A good example will be derivatives agreements which are deemed to be of highly speculative nature as per Sharia.

Qi-mar (Betting or Wagering)

This concept applies to transactions involving any elements of gambling which are explicitly forbidden as per Sharia.

Financial Establishments

Financial establishments used for transactions involving Islamic financing in Great Britain possess some distinctly similar features. They are all about distributing profits & losses between the parties & attracting assets, both tangible & real. That is precisely why Islamic financing is primarily utilized as an ABL tool.

Ija-rah 

Used mainly for financing projects, this is a lease agreement whereby lenders owning a particular asset lease it to businesses or individuals in exchange for rental fees.

Istis-nah’

Ija-rah is suitable for financing large-scale and long-term projects. This type of agreement is classified as a derivative.

Muraba-hah

According to this concept, financiers buy assets from suppliers before instantly selling it on to customers in exchange for a payment that will be made at a later date. Under the deal, the payment involves a price spread which reflects the sum payable as interest according to an ordinary loan agreement.

Mushara-kah

Considered most appropriate in terms of distributing profits & losses, this deal involves sharing both profits & losses based on how much each of the parties invested. Usually, one of the participants is entrusted with exercising control over the deal, although both of them are entitled to do so.

Mudara-bah

Suitable for registered investment entities in the US & Europe, this agreement involves financiers contributing capital & executors getting the job done for remuneration. Under the deal, the two are to agree beforehand on the manner and the amount in which they will be sharing expected profits.

Su-kuk

Being an analog of bonds, they are more like certificates backed up by other assets. Su-kuk is all about one party holding a specific asset & the other paying to it from proceeds gained from the said asset. This scheme ensures regular dividends, while the certificates are exchangeable for money upon their maturity. Also, these certificates could be bought and sold on stock exchanges.

Resolving Disputes Involving Islamic Financing in Great Britain

Resolving disputes as per agreements involving Sharia law may entail certain problems with applicability of law & relevant jurisdictions.

One of the possible ways of resolving disputes involving Islamic banking institutions is resorting to English law. However, there might be a problem with Sharia-based provisions, as it is unclear what legislation should be prevalent if a financial dispute is settled in Great Britain: Sharai or English law.

Those intending to resolve a dispute involving Islamic finance should bear in mind that English courts usually consider Sharia-based concepts of the agreement as commercial elements. Consequently, only the principles of English law will apply, which means that the parties are to ensure the document’s compliance with Sharia standards through other means.

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