Islamic Finance - an update in the context of Europe

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Sukuk (Islamic Bond):

Bond Issuer Companies issue Sukuk in order to raise capital in a form of Islamic investment on a definite project or venture says Prof. Dr. Mohd. Ma'sum Billah, a global renowned Islamic finance expert from the Middle Eastern Business World Group. In doing that, the company sells an asset to investors who lease it back to the company for a rental called Sukuk al-Ijarah. This rental is an alternative to the coupon of a traditional corporate bond. Leasing (Ijarah) leads to facilitate several categories of Islamic investment products in the contemporary reality says Prof. Dr. Mohd Ma'sum Billah, a global renowned Islamic finance expert from the Middle Eastern Business World Group. Sukuk in to day’s economic reality is adapted as security as in debt capital market of Islamic investment, and has reached the West. In March 2007, two of Kuwaiti investors have bought the British car company Aston Martin. They wanted to finance the deal according to Islamic principles, and hired the German West LB to finance the deal using the Sukuk (structure).

Islamic Debt Financing:

If a person plans to buy a house or Vehicle or any property or Asset and needs financing facilities under Shari’ah principles, and approach the bank. The bank will buy the subject matter first and resell it to the client at a markup. The client pays back the price in fixed installments. This type of structure is facilitated by Bai’ Bithaman al-Ajeel (differed Payment on long term basis by installments), al-Murabahah (differed Payment on short term basis by installments), Bai’ al- ‘Inaa’ (Buy back sale) and Tawarruk (Buy back Sale by Special Purpose vehicle @ SPV) says Ma'sum.

Corporate Banking with Diminishing Partnership (Musharakah Mutanaqisah):

If somebody wants to start a company and needs money, he doesn't receive a loan, but the Islamic bank offers capital and in return obtains ownership of shares under the structure of Musharakah Mutanaqisah (Diminishing Partnership) says Ma'sum. In this way, the bank acts a bit like a benevolent venture capitalist. But it doesn't have to search for an exit strategy as its share diminishes over time as the entrepreneur pays back the capital. As long as the bank is holding shares, it shares risk and revenue of the company. The details of this arrangements have to be worked out in great detail in the contract as Islamic banking does not allow uncertainty called Gharar.

Takaful:

Islamic insurance, called Takaful, which pools the premium (contributions) paid by the Participants. There are two types of Takaful schemes namely, Family @ Life Takaful (long term policy) and General Takaful (short term policy). In a Family Takaful scheme the money is distributed in to two different accounts, one account is for risk management (treated on the basis of Tabarru’ @ donation or Waqf @ charity or Hibah @ gift) while the other is Shari’ah-compliant investment account (treated on the basis of al-Mudharabah @ co partnership). The claims against the risks are settled out of both accounts. "If one does not make any claim within the policy period, shall receive money from the investment account only". In General Takaful the premium (contributions) paid shall initially be credited in to risk management account(treated on the basis of Tabarru’ @ donation or Waqf @ charity or Hibah @ gift). The claim shall be settled out of this account but if one does not make any claim with the policy period he or she may be satisfied out of surplus sharing. This general Takaful provides coverage against the risks of the sectors like, health, motor, accident ,property etc, explains Prof. Ma'sum. Moreover, Takaful is further backed up by Re-Takaful arrangement.

(view expressed in German Finance Time)