Islamic Finance 101 Key Elements of Shariah Compliant Investments

1
Islamic Finance 101Key Elements of Shariah
Compliant Investments
Date
2 April 2008
2
Shariah
General Principles

• Islam
• Monotheistic religion founded in 7th century by
  Prophet Mohammed
• Builds on validity of Old Testament and New
  Testament (Abraham, Jesus, Mary)
• Five Pillars Belief in One God Prayer
  Charity Pilgrimage Fasting
• A strong sense of social responsibility
• Shariah and Islamic Finance Concepts
• Shariah The way or the path.
• A body of Islamic law that defines the day-to-day
  activities of Muslims
• Governs all aspects of the life of Muslims,
  including their business activities

3
Shariah
General Principles

• As applied to business
• calls for fair dealing with business partners and
  customers
• social responsibility in business dealings
• Investment restrictions
• Under Shari'ah, can make a equity investment in
  any business as long as it does not involve
  gambling, alcohol, pornography, dealing in pork
  products, or non-Shariah compliant financial
  services (e.g., banks, insurance companies)
• In addition, the financing should be structured
  in a Shariah compliant manner
• Cannot make money on money instead should
  profit from a productive asset
• Shariah disfavors uncertainty and gambling

4
Shariah
Standards

• Shariah Supervisory Board Committee of
  scholars who review and certify Shariah
  compliance. Many major global institutions have
  Shariah boards (e.g., Dow Jones, HSBC, etc.)
• No set of universally accepted standards
• Middle East vs Malaysia
• Different rules for majority vs minority
  investments

5
Shariah Structures
Ijara
STRUCTURE
OVERVIEW

• Generally used for acquisition financing
• SPV, owned by a 3rd party corporate services
  provider, obtains conventional acquisition
  financing from Lender
• SPV uses the loan amount to acquire the assets of
  Target through an asset purchase agreement
• The funds raised by Target, together with the
  Arcapita equity are used to pay the sellers.
• SPV then leases the assets back to Target via a
  lease agreement in exchange for a predetermined
  rental payment stream which matches SPVs payment
  schedule under the credit agreement
• Lease incorporates all the customary covenants
  included in the credit agreement
• SPV and Target also enter into a call option
  agreement, a put option agreement, a supplemental
  agreement and a tax matters agreement
• All activities of Target must be Shariah
  compliant

100
Lease Agreement
Loan
Debt service payments
Rent
Mortgage andRelated Collateral
6
Shariah Structures
Murabaha/Tuwarruq
STRUCTURE
OVERVIEW

• Used for acquisition financing and for working
  capital facilities
• Bank enters into a conventional revolver or
  short-term loan with the SPV
• The SPV enters into a spot commodity purchase
  transaction with a commodity broker
• The SPV sells the commodities to the Target, with
  immediate delivery but deferred payment
• Target then resells the commodities to a
  commodity broker for immediate delivery and
  payment, which effectively provides Target with
  liquidity
• Target then pays the SPV on the date the deferred
  payment is due, which corresponds to the payment
  date under the working capital line
• All activities of Target must be Shariah
  compliant

(1) Spot Payment
Revolving Credit Agreement
(2) Spot Delivery
(4) Spot Delivery
(5) Spot Payment
(3) Spot Delivery
(6) Deferred Payment
Tuwarruq Agreement
7
Shariah Structures
Istisna
STRUCTURE
OVERVIEW

• Usually used for development transactions
• SPV, owned by a 3rd party corporate services
  provider, enters into a joint venture with JV
  Partner
• JVco will acquire the Property from its current
  owners.
• Holdings will enter into an Istisna agreement
  with SPV, whereby it hires SPV to develop its
  share of the Property, paying SPV an upfront
  payment (which equals Arcapitas equity
  investment)
• Under the Istisna agreement, SPV will agree to
  deliver its share of the completed property or
  completed portions thereof to Holdings or to its
  order. SPV or JVco can be appointed to handle
  the sale of the Property on behalf of Holdings
  and to distribute the proceeds to Holdings.
• JVco will enter into a development agreement with
  Developer, an affiliate of JV Partner, for
  consideration commercially agreed to develop the
  Property

Call option
Istisna Agreement
Development Agreement
8
About Arcapita

• Arcapita Bank B.S.C.(c) (Arcapita) is a global
  investment group with offices in Atlanta, London,
  Bahrain and Singapore
• Founded in 1997 in Bahrain to bridge investors in
  the Gulf Region with international investment
  opportunities
• Provide diversification by asset class and
  geography
• Offer shariah-compliant investments
• Total financial assets in the region estimated at
  1.3 trillion, of which 250-300 billion are
  shariah compliant
• Arcapitas main lines of business include
• Corporate investment (private equity and venture
  capital),
• Real estate investment and
• Infrastructure and Asset-based investment.
• Completed 64 platform transactions valued in
  excess of 21 billion across the U.S., Europe and
  Asia with over 6.2 billion in equity invested

9
Contact Arcapita
Arcapita Bank B.S.C.(c)
Arcapita Inc.
P.O. Box 1406ManamaKingdom of Bahrain Tel 973
1721 8333Fax [phone]
75 Fourteenth Street, 24th FloorAtlanta, GA
30309United States of America Tel [phone]
9000Fax [phone]
Arcapita Limited
Arcapita Pte. Limited
15 Sloane Square, 2nd FloorLondon SW1W
8ERUnited Kingdom Tel [phone] Fax
44 207 824 5601
North Tower, Level 25One Raffles QuaySingapore
048583 Tel [phone]Fax [phone]
www.arcapita.com