Islamic Finance

Syndicated and Structured Islamic Finance 87

often involve speculation and uncertainty and these two principles are

Shari’a repugnant. Structuring techniques have been used recently to create

financial products that increase their projected returns by reference to

indices that are not based on Shari’a products. These have employedsalam

ormurabahainvestments (often backed up with capital guarantee mecha-

nisms) coupled withwa’ad (undertakings or promises) from a financial

institution to pay the investors additional amounts over and above the

returns on their investments if an index (which may be based on non-Shari’a

compliant products) produces a higher rate of return. This is an example of

a structured Islamic finance product that uses various interlocking agree-

ments, investments and indices to create a level of return which the

customer wishes to achieve. It is fair to say, however, that this particular

type of product has not been accepted as being in compliance with the

Shari’a by all Shari’a scholars.

Sukuk

An example of asuk^1 as a structured product was the $210 million secured

floated rate notes issued by Tamweel Residential ABS CI (1) Ltd in July

2007.^2 A diagram of this highly structured product is attached as an exhibit
to this chapter.
The customer, Tamweel PJSC (based in Dubai, United Arab Emirates
[UAE]) wanted to free up its balance sheet by selling part of its residential
financing portfolio (which, as an Islamic financial institution, had been
structured to be Islamically compliant through the use of anijarastructure).
Under theijaras, its customers would lease a villa or apartment from
Tamweel and pay rent. At the end of the lease term, if all of the rental
payments had been made, the customer lessee would obtain title to the
property.
From a Shari’a-compliant perspective, some of the main structuring issues
were as follows:

• The investors should only haverecourse to the assets;


• The issue had to have multi-tranches;


• There had to be a liquidity facility; and


• As the revenue stream from theijaraswas in UAE dirhams and the issue
  was to be in US dollars, there had tobe a currency exchange mechanism.

Recourse to assets

The issue was structured along the lines of a securitization.Sukukshould

involve the investors being the owners of the pool of assets that they acquire

(^1) Suk is singular; sukukis plural although market practice is to use the termsukukeven when it refers to a
single transaction.
(^2) This transaction won the Euromoney Islamic Finance Deal of 2007 award and the Islamic Finance News
2007 Structured Deal award.