Islamic Finance

Commercial Real Estate and Project Financing 79

obligation owed to the customer, as the service agent, which has not been

clawed back through rent).

There has been a debate recently within the Accounting and Auditing

Organization for Islamic Financial Institutions (AAOIFI) about these types

of undertakings in the context ofsukukand certain principles were included

in a statement issued by AAOIFI onsukuk. The principles mentioned in the

statement may well also be applicable to financings based uponmusharaka,

mudarabaandijarasthat are not part of asukukissue. Where the assets of

musharaka sukuk,mudaraba sukukorwakala sukukare “lease to own”

contracts (ijara muntahia bittamleek) then the AAOIFI statement (fourth

paragraph)^1 permits the sukuk manager to purchase the assets when the

sukukends, for the remaining rental value of the remaining assets. This is

allowed on the basis that the remaining rental value is treated as being

equal to net value at the time of the purchase.

The AAOIFI statement (fifth paragraph) also permits a lessee inijara

sukukto undertake to purchase the leased assets when thesukukends for a

nominal amount. However, this is predicated on the lessee not being a

partner,mudaribor an investment agent.

The debate is still on-going, however, as to the exact meaning of this

statement and its actual implementation.

Murabaha

It is possible to use murabaha in relation to the financing of assets that are

required as part of a construction project. This would, however, normally be

a short-term facility.

Tawarruq

This structure has been used to create working capital facilities for certain

projects. It is not a favoured product and many Islamic scholars do not

accept it.

It involves the use of commodity contracts, such as metals. The Islamic

financier will purchase, at spot, various metals contracts for, say, $100,000.

It will then sell those contracts to the customer on amurabahabasis (with

title passing immediately and with payment being deferred for the agreed

(^1) The AAOIFI Statement on Sukuk was issued in February, 2008. The fourth paragraph states, in part: “it is
not permissible for themudarib(investment manager),sharik(partner), orwakil(agent) to undertake to
re-purchase the assets fromsukukholders, or from one who holds them, for its nominal value, when the
sukukis extinguished at the end of its maturity. It is, however, permissible to undertake the purchase on
the basis of the net value of assets, its market value, fair value or a price to be agreed, at the time of their
actual purchase, in accordance with Article (3/1/6/2) of AAOIFI Shari’a Standard (12) on Sharikah
(Musharaka) and Modern Corporations, and Articles (2/2/1) and (2/2/2) of the AAOIFI Shari’a Standard (5)
on Guarantees. It is known that asukukmanager is a guarantor of the capital, at its nominal value, in case
of his negligent acts or omissions or his non-compliance with the investor’s conditions, whetherthemanager
is amudarib(investment manager),sharik(partner) orwakil(agent) for investments...”