Islamic finance

Our team has been structuring and advising on Shariah-compliant financings for Islamic institutions and investors for almost two decades.

With unrivalled experience in supporting participants in the sector with innovative solutions, we have the pre-eminent Scottish practice in Islamic finance and are trusted advisors in England and Wales with international reach.

We structured the first Shariah-compliant retail mortgage and savings products operating under Scots law and carried out the first purely Islamic commercial property financing in Scotland.

Our Islamic finance group works in collaboration with Shariah scholars and supervisory boards to provide pragmatic commercial advice which observes the principles of justice, equity and fairness inherent in the Shariah.

We support banks, financial institutions, funds, corporate clients and sponsors on a variety of structures, including the following types of transaction:

Commodity murabaha

Commodity murabaha involves trading assets between two parties as a method of providing finance. The assets purchased and sold under a commodity murabaha transaction are typically metals that are publicly tradable on a commodities exchange.

Under a commodity murabaha transaction, a financier (usually a financial institution) acquires commodities and then immediately sells those commodities to its client at an agreed mark-up on their original cost price. The profit mark-up on the original cost price is often linked to a publicly available benchmark or index.

The price due to the financier is generally payable by the client in instalments or on other deferred payment terms. The deferral of the price involves the provision of credit, which may be used as working capital or to fund the acquisition of real estate or other assets.

Diminishing musharakah

Diminishing musharakah is an arrangement under which a financier (usually a financial institution) and its client co-own an asset in a decreasing partnership.

At the outset of a diminishing musharakah transaction, the financier and its client co-own the underlying asset in proportion to their respective financial contributions. Typically, the client either provides a deposit toward the cost of the asset (with the balance of the cost being contributed by the financier) or contributes an asset in kind.

Over the term of the transaction, the client makes payments to acquire the financier’s share of the co-owned asset in increments. As each acquisition payment is made, the client’s share increases and the financier’s decreases.

The financier grants the full use or occupation of the co-owned asset to the client for the term of the transaction by leasing its share to the client, in return for the client making rental or occupancy payments.

A diminishing musharakah structure is commonly used to finance the acquisition of real estate, but may also be used to fund developments.

Hybrid structures

In circumstances where the required level of finance exceeds the amount available from Shariah-compliant sources, hybrid structures may be used.

Such structures typically involve the establishment of two special purpose vehicles (SPVs), one of which obtains conventional debt under a traditional interest-bearing loan facility, while the other is funded by way of Islamic equity or Shariah-compliant debt.

The asset being financed is often owned by the conventionally indebted SPV and leased to the other SPV.

Islamic mortgages

Islamic mortgages (also known as Shariah mortgages) for retail banking customers may be structured in a number of different forms, using techniques such as the following:

• murabaha - where the residential property is purchased by the financier and sold on deferred payment terms to the mortgage customer;
• diminishing musharakah - where the residential property is co-owned by the financier and the mortgage customer in a decreasing partnership; and
• ijara - where the residential property is purchased by the financier and leased to the mortgage customer, who may require title to be transferred to them on payment of a principal sum.

Where the mortgage customer or a family member intends to live in the residential property, the transaction generally constitutes a regulated home purchase plan and the financial institution providing the mortgage needs to be authorised under the Financial Services and Markets Act 2000. However, Islamic mortgages for buy-to-let properties are typically unregulated.

Shariah-compliant current and savings accounts

Shariah-compliant current accounts can be set up in the form of a contract of qard (or “loan”), under which a customer or client lends a sum of money to a bank and, in return, the bank undertakes to repay the principal amount of the loan without any interest or profit mark-up.
Savings accounts generating an investment return for the customer or client on the sum deposited can adopt one of the following structures:

• mudaraba - a limited partnership where the customer or client provides the capital and the bank manages that capital with a view to producing an investment return; or
• wakala - an agency arrangement where the customer or client appoints the bank as its agent to invest a sum of money with a view to providing a Shariah-compliant return.

The regulation of deposit-taking in the UK generally requires a bank to guarantee the repayment of the capital amount of any deposits that it accepts. Careful structuring of savings accounts is therefore required to ensure the appropriate regulatory treatment.