Investment Banking 99
transactions, it is possible to structure Islamic finance solutions, although
these can be sometimes very difficult to achieve, especially in moredeveloped
jurisdictions where there are complex tax laws. If the Islamic investment
bank wanted to extend finance it could do so using various techniques such
asmusharaka,mudaraba,ijaraand others.
If a direct equity interest is to be taken by an Islamic investment bank or
a Shari’a-compliant customer, then the same concerns about the activities
of the target and the screening techniques described above would also be
applicable.
Derivatives style transactions
In structuring Shari’a-compliant derivatives, an Islamic investment banker
will need to consider certain issues such as:
- the prohibition onriba.This term is commonly held to mean interest and,
while it is true that interest is covered,ribacovers any return that arises
merely through the passage of time by reference to the use of money
itself;
- there should be nogharar(roughly translated as “uncertainty”). This
restriction covers the general prohibition on the sale of an asset which
does not exist at the time when an agreement is entered into. There are
exceptions to this rule, such assalamoristisna’a.Salamhas been used
as the basis of certainShari’a-compliant derivative transactions; and
- there should be nomaisir(speculation).
Behind these issues is the exhortation under the Shari’a that money
should be properly utilized through its use and investment in real goods and
real transactions when a person shares in the return (such as rent, profit or
other economic benefit) by virtue of sharing in risk.
Derivative style contracts by their nature raise serious issues in relation
to some of these key Shari’a issues. Islamic investment bankers are trying
to create new Shari’a-compliant products to match those being offered to
conventional customers and some of the Shari’a-compliant derivative
products have used the following structures.
Currency exchange agreements
Currencies can be exchanged or sold but provided strict conditions are
complied with. A recent transaction was structured around the following
parameters prescribed by the Shari’a advisers:
- There was merely an undertaking from the exchange bank to exchange if
called upon by the issuer (rather than a binding two-party agreement);
