CC Islamic Finance

CC Islamic Finance - December 2007 CC Perspectives Autumn...

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December 2007 CC Perspectives Autumn 2007 Islamic Financing in the Real Estate sector Last year Clifford Chance concluded more than $18 billion of Islamic financing deals across the various asset classes, primarily through Dubai, London, New York, Singapore and Hong Kong. Three main Shari'a compliant financing structures are available for real estate financing: Ijara, Musharaka and Mudaraba. The difference, fundamentally, lies in the asset base ratio. The Ijara, or leasing, structure requires a one-to-one asset; the Musharaka requires between one-third and one-half of financing to be asset backed; and the Mudaraba may not, at its outset, have an identifiable asset at all. Ijara The Ijara is the best known and most popular Islamic financing structure. Robin Abraham, a partner in Clifford Chance's Finance and Projects Group in Dubai, explains: "A typical Ijara would involve the acquisition of real estate by a bank, followed by the leasing on of the right to benefit from that real estate. Typically, lease rentals are fixed and floating - analogous to principal and interest under a conventional loan facility. "Under an Ijara the original acquisition of the asset, the subsequent leasing of the asset and the final transfer back at the end of the lease need to be seen as separate, independent transactions," he explains. "In addition, some Shari'a scholars require that the entity that is selling the asset in the first place should not be the ultimate lessee of that asset. That insistence - on the presence of three distinct entities: the seller of the asset, the bank and the lessee - prevents the adoption of a simple sale and lease-back agreement in some transactions." Robin also raises a number of non-Shari'a issues to consider when pulling together an Ijara: ownership issues, such as lender liability; the right of banks to own real estate (some countries have restrictions on foreign ownership); transfer and capital gains taxes (following the initial sale of the property, subsequent leasing and return transfer); and jurisdictional regulatory issues, such as whether the bank is permitted to both hold and lease the asset. Musharaka Musharaka is the Arabic word for partnership. As a transaction structure it offers a number of advantages. Firstly, it is accepted by all four main schools of jurisprudence - and so can be used in Islamic financings in the Middle East, in Islamic financing principles - avoiding the charging and receiving of riba, or interest - are almost as old as Islam itself. Journalist Matt MacAllan talks to Clifford Chance experts about how these principles effect the real estate practice today. “Tangibility requirements under a Musharaka can
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CC Islamic Finance - December 2007 CC Perspectives Autumn...

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