90 Islamic Finance in Practice
Currency exchange mechanism
The investors purchased assets that constituted real estate interests which
were subject toijara(leasing) contracts for residential buildings. The rental
payments were in UAE dirhams. However, the investors wished to be paid
in US dollars. While the UAE dirham is pegged to the US dollar, there was
a concern about what would happen if the peg were broken. Therefore, there
had to be arrangements whereby, if the exchange peg was broken, a financial
institution would agree to exchange UAE dirhams in the future for US
dollars at the pegged rate.
In order to structure and draft the documentation, it was first necessary
to obtain guidance from the Shari’a advisers. The exchange of money does
cause some Shari’a-related issues. However, the principle of there being an
undertaking from a bank to purchase UAE dirhams in return for US dollars
was found to be acceptable provided that:- There was merely an undertaking from the exchange bank to exchange if
called upon by the issuer (rather than a binding twoparty agreement); - If the issuer wished to exchange it would need to send a notice to the
exchange bank providing full details as to the amount and the date of the
exchange; - There would then be an agreement entered into by both parties to reflect
that particular sale; and - The sale/exchange should take place on the same day as the agreement
to sell/purchase.
However, there were some practical concerns that had to be addressed.
Having a separate sale and purchase agreement signed by both parties each
time that there was an exchange was going tocause operationaldifficulties.
After discussions with the Shari’a advisors, it was accepted that when the
notice of exercise was sent by the issuer, the exchange bank would only have
to sign and return the notice, which would contain language that, as a
matter of English law, would constitute a concluded sale and purchase
agreement.
The other commercial issue was that it would not always be possible to
exchange the currencies on the same day as the signed and returned notice
but, in this instance, the Shari’a advisers were willing to approve the
exchange if it occurred no later than two business days from the date of the
notice. This approval was given on the Shari’a ground of necessity because,
within the international banking system, the movement of funds might
require two business days for the exchange to be completed. In this way,
through an exchange of views between the financial institutions and the
Shari’a advisers, it was possible to structure an exchange mechanism that
met all parties’ concerns.