As many people are aware, Islamic finance does not accept
the lending of money against a pre-determined risk
free/guaranteed growth (interest). To avoid the pure lending of
money against interests (known as riba), Islamic
contracting and finance are structured on asset-based finance,
partnership, and shared risk and reward principles.
Islamic finance has a basic ethical understanding that is
quite universal (for example, no investment in gambling,
prostitution, or arms manufacturing). Generally, doing business
and making profits is allowed and even encouraged. The surplus
created should be used to support the family and be distributed
equally to charities.
The combination of those rules gives rise to special types
of contracts, special clauses and restrictions that differ
somewhat from conventional contracting, but do not necessarily
conflict with it. Contracts should also be clear and
transparent, free of any uncertainties and the rights and
obligations of the parties should be clearly stipulated.
Contracts for partnerships and specific sales contracts are
the basic tools with which a lawyer working in this field
should be knowledgeable. They can often be easily inserted into
one's own legal framework, respecting the specific restrictions
of the Islamic way of thinking
Contrary to general western belief and understanding,
Islamic thinking is not static, but is always evolving.
Interpretations of rules regarding finance and other areas can
be different and based on place and time.
The murabahah contract is a simple sales contract
where the transaction is concluded with immediate delivery of
the goods, but the payment can be deferred to a later time
(bai'mu'ajjal variation). The murabahah
contract then is not a loan (and certainly not in violation of
the prohibition on interest), but a pure sale (business
transaction). The sale is concluded at a fixed price that may
give rise to an agreed mark up.
If an Islamic finance institution is involved in the sales
transaction, the financial institution will acquire the
commodity first and then sell it through to the client with (or
without) deferred payment at original price plus the mark
The ijarah is the Islamic counterpart of the
conventional lease contract. It involves transfer of the
usufruct only. The risk and liabilities associated with the use
of the asset will be borne by the client. At the same time, all
the risks and liabilities connected with the ownership of the
assets (such as loss or destruction) rest with the owner
The ijarah can become an ijarah wa iqtina
(financial lease) when the user/client has the option to
acquire the commodity at the end of the lease period (normally
at down payment of a certain price).
One of the basic rules for Islamic contracting is that
nothing can be sold that does not already exist and is not in
the (constructive) possession of the seller. Sometimes,
however, pre-financing is necessary to allow production. For
these situations the bai al salam (in short,
salam) may be used.
The salam was intended to finance agricultural
exploitations and was used in this manner to allow farmers to
receive financing that allowed them to buy the materials needed
for their future crops. For this, contracting over future goods
is allowed, but quantity, quality and time of delivery have to
The commodity must exist in units with homogenous
characteristics that are traded by counting, measuring or
weighing according to usage and customs of trade (excluding
precious stones of which quality can differ). Payment must be
Istisna in many regards appears the same as a
salam, but relates to goods for manufacture. The
difference between salam and istisna is
- the payment of the price is not necessarily immediate
(deferred payment is possible); and
- it envisions individualized goods for manufacture.
If the manufacturer is acquiring the goods that it will use
to make the commodity from the buyer/financial institution
so its only contribution is labour an
istisna in general is not permissible (for instance a
rent of labour contract can then be used).
This contract refers to a joint business enterprise in which
the partners (two or more persons) undertake to share all the
profit/losses of a specific venture. The way profit will be
shared must be agreed at the outset and any periodical advance
for one or more partners will be off-set at the settlement of
the accounts/closing of the partnership.
The profit sharing must to be in relationship to the input
of capital, but it can be agreed that one partner gets a bigger
share (for example, if it provides more labour) provided that a
non-working partner (silent partner) to the musharakah
can only be granted ratio of the profit that is maximum equal
to its input in the capital.
It is not permissible to establish a fixed and guaranteed
return to be allocated to a partner, because this would suggest
the loan of money and/or would mean that a partner does not
take its share risk in the enterprise.
Buyout clauses (unit by unit) can be built into a contract.
Consequently, one partner will slowly buy out the other partner
and in the end own the entirety. This technique is usually used
for investment purposes, where the financial institution
partners up with a client, leases the goods to the client
(through ijarah) and slowly exits from the
In this type of partnership, the silent partner, rabb
al-mal, only invests money and the working partner,
mudarib, only invests labour/expertise. This
arrangement is generally used when a party only needs a certain
amount of capital input.
The mudarib will manage the partnership for all
matters that concern the regular course of business. Besides
its labour, the working partner cannot suffer loss (excluding
responsibility for fraud, negligence, misconduct or wilful
wrongdoing or contravention of its mandate). It can be rewarded
an agreed-upon share of the profit, wherein advances are
allowed, which can be subject to ultimate payback. The
rabb-al-mal risk is limited to capital itinvests.
It can take some time to get used to the different contracts
(and their combinations) within Islamic finance, but the
attentive reader will feel that nothing really new has been
introduced. After all... a sale is a sale. When the lawyer is
aware of the dos and don'ts and the rational behind those
rules, Islamic contracting usually is easily adapted to most
finance, corporate and construction needs. The ethical
conditions also make for cleaner contracting than conventional
structures. The need for basic rules of this kind is felt
Turkey's Islamic finance market
The participation banks (local terminology for Islamic
finance banks) have grown considerably, especially since the
crisis in 2001. Growth is at an average annual rate of 46% in
terms of asset size, 61% in terms of funds placed, 47% in terms
of funds raised (between 2001 and 2005).
The Islamic finance sector as a whole operated at the end of
2006 about 340 branch offices (up on 290 branches at the end of
2005) and expects to grow at a rate of 50 new units a year.
Combined staffing grew from 5,740 (in 2005) to 6,565 (September
2006). Compared to 2005, deposit/investment accounts have grown
by about 25%.
There are four fully fledged participation banks in
- Albaraka Türk Participation Bank (Albaraka Turk
Katilim Bankasi), part of the Gulf-based Albaraka Banking
Group, is said to be preparing for an IPO in 2007.
- Kuveyt Türk Participation Bank (Kuveyt Turk Katilim
Bankasi), part of the Kuwait Finance House. Depending on
market conditions, it might be a candidate for an IPO in the
- Türkiye Finans Participation Bank (Turkiye Finans
Katilim Bankasi), of Turkish origin (Boydak and Ulker).
- Bank Asya (Asya Katilim Bankasi), also of Turkish origin.
In May 2006 it conducted probably the most successful IPO in
Turkish history, raising $150 million for 20% of its shares,
valuing the bank at $800 million (but with $7.5 billion worth
of offers for an oversubscription of 50 times).
In addition, outside players have entered the Turkish
Dubai Islamic Bank has representative office in
The International Investor TII (Kuwait-based) is investing
in the Turkish market.
ABC Islamic Bank (EC) intends to increase its financial
activities in Turkey over the next years. Among others, it is
gearing up for the new Turkish mortgage law (extensive
knowledge available through its alburaq diminishing
musharakah product line) and intends to offer
overnight murabahah to Turkish financial institutions
(through its ABC Clearing Company).
An increasing number of Islamic finance houses are showing a
presence in Turkey. Institutions such as Amlak Finance, Dubai
Bank and National Bank of Kuwait Capital have established
representative offices, formed partnerships or are about to
form partnerships to take a more active role in the development
of the sector in the country.
Recently, in December 2006, the Qatar-based Doha Bank opened
its representative office in Istanbul. This followed the
strategic alliance (March 2006) between Dubai Bank PJSC and
Daruma Corporate Finance (Turkey) to cooperate in originating
and structuring, execution and distribution of
shariah-compliant corporate finance and merchant
Several international banks such as BNP, Calyon, and
Deutsche Bank have joined ABN Amro, Citigroup and HSBC in
promoting Islamic finance as part of their mainstream product
offerings and can be assumed to enter the local market in
Over the last decade, a substantial cross-border Islamic
finance market has developed (initiated and still more or less
dominated by HSBC). Originally a funding vehicle for the
cash-strapped local banks by way of bank guaranteed financing
to local corporations, the market has expanded to an annual
estimated volume of roughly $500 million to $600 million, with
corporate risk-based structures, often with security packages
involving cheques, export receivables and credit card
Leasing operations are an inherent part of the licence of
Turkish participation banks. So the traditional mark-up sales
(murabahah) together with leasing (ijarah)
are the main products available to local consumers, aside from
the products offered by the conventional financial institutions
that are considered to be compliant.
The cross-border syndications are handicapped on this issue
and for the moment only use the murabahah, because
leasing finance is subject to approvals that complicate the
Government sukuks are not available in Turkey, due
to the lack of regulatory infrastructure. Government interests
to regulate the sukuk have been postponed, mostly
because of the present offer of inexpensive funding from the
international conventional market.
Several private issuers have begun considering
sukuk and are evaluating market conditions and the
regulatory framework for their purposes.
It is estimated that the assets of the participation banks
in Turkey will exceed $25 billion in the next decade and will
make up 10% of the total banking system. Growth in the
cross-border syndication market will follow at least at a
Source of statistical data: Association of Turkish
Paul Wouters is a member of the advisory board for
Islamic Finance News (Malaysia) and holds the Islamic Finance
Qualification SII, London
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