Commercial Real Estate and Project Financing 81
that it intended to invest in. The funds would be used to construct the
properties and the proceeds from their sale or leasing, would be shared
between the Islamic financier and the developer (as themudarib).
Often there will be an undertaking or promise from themudaribto
purchase the interest of therabb al-maalat an exercise price but the same
issues as have already been discussed with this type of undertaking or
promise in relation toijaras, also applies tomudarabaarrangements.
It is important to note that some Shari’a schools are of the opinion that
themudarabacontract cannot stipulate that therabb al-maalwill have a
role with themudaribin the management of themudarabaproperty. If
there were such a condition, then themudarabawould be void. It would
appear that if arabb al-maalvolunteers to perform such functions (and
there is no obligation for it to perform such functions contained in the
mudarabacontract) then thiswould be acceptable.
Musharaka
In the context of real estate and project financing, amusharakawould likely
take the form of a partnership or joint venture (sharikat al aqt). Under this
arrangement, the Islamic financier would contribute funds and the customer
would contribute another asset, such as real estate or some other valuable
Shari’a compliant assetrelated to the project.
The agreement would need to describe the capital contributions and the
split of profits and losses, as well as themanagement responsibilities (which
would normally be undertaken by the customer who has the required
knowledge and expertise).
The customer, as the managing partner, would then undertake the project
using the funds and the other contributed assets in the construction and
operation of the project. During the construction phase there would be no
income being generated and so no profits. As such this type of structure
would not usually, in and of itself, be attractive to an Islamic financial
institution. In some instances, the Islamic financial institution’s share in
the partnership or joint venture has been leased to the customer and, in this
way, the Islamic financial institution has been able to achieve the required
returns, both during and after the construction phase.
Often there can be difficulties with this type of structure when tested
against the applicable governing law(s). Some of these issues include the
following:
- Does the partnership or joint venture need to be licensed and, if so, are
there any fees to be paid, accounts to be filed, etc. (all of which an Islamic
financial institution would normally not want);
- In whose name would the assets be held? If it is an unincorporated joint
venture, the assets might have to be held in the name of the customer –
this raises credit risks on the customer;
