86 Islamic Finance in Practice
Structured Islamic finance
Structured finance has no particular definition. Generally, it will involve the
packaging together of various legal structures to produce a financial product
or solution. The starting point will be to analyse thecommercial objectives
of the customer. Once those are known then it is a question of looking at the
possible Shari’a-compliant financing techniques and undertaking any
necessary due diligence, which can extend to matters such as legal research,
tax analysis and a review of any underlying assets that are to be employed
in the Islamic financing.
With complicated transactions (which is often the case with certain
structured Islamic finance products) the challenge is to find a structure that
will simultaneously line up the Shari’a requirements, the secular legal
parameters and the commercial objectives of the customer. Especially with
capital market structured products, there will usually be many documents
and the structure will often involve a large number of transactional
sequences, all of which will require to be vetted and approved by the Shari’a
Supervisory Board that must issue its fatwa. From a transactional
perspective, therefore, it is important to obtain initial approval from the
Shari’a Supervisory Board as soon as possible in relation to the structure.
Once this has been approved, then it is usually prudent to have the Shari’a
Supervisory Board vet the initial drafts of the documents to ensure that
there are no fundamental errors from a Shari’a perspective; it is not
advisable to only ask the Shari’a Supervisory Board to approve the
documentation once they have been fully negotiated. By that time closing
dates would have been pencilled in but, if the Shari’a Supervisory Board at
that stage reverts with material objections, the documents may have to be
significantly amended and this is likely to have a knock-on impact on the
projected closing date.^1
Two examples of Islamic structured products are considered to show some
of the issues that will be faced from a practical perspective.Clearly,however,
these two examples are not all encompassing, as the scope of Islamic
structured products is unlimited.Derivative style products
Derivative style financial products raise particular difficulties under the
Shari’a. When viewed in a Shari’a context, conventional derivative products(^1) The Accounting and Auditing Association of Islamic Financial Institutions based in Bahrain which has
issued numerous standards relating to Islamic financial products, issued a statement in relation tosukuk
in February 2008. Paragraph six of that statement provides as follows: “Shari’a Supervisory Boards should
not limit their role to the issuance of fatwa on the permissibility of the structure ofsukuk. All relevant
contracts and documents related to the actual transaction must be carefully reviewed {by them}, and then
they should oversee the actual means of implementation, and then make sure that the operation complies,
at every stage, with Shari’a guidelines and requirements as specified in the Shari’a standards. The
investment ofsukukproceeds and the conversion of the proceeds into assets, using one of the Shari’a-
compliant methods of investments, must conform to Article (5/1/8/5) ofthe AAOIFI Shari’a Standard (17).”