1. finance

IFN COUNTRY
CORRESPONDENTS
The UAE — A key participant in the Islamic ϐinance economy
UAE
By Rima Mrad
A number of delegations visited the
UAE in the past period with the aim of
focusing on the terms of cooperation
between the UAE and various European
governments with respect to the
promotion of the Islamic finance sector.
This definitely is helping in shaping
the progressive role the UAE is playing
in the development of this sector and
in fostering Dubai’s identification as
a capital for the global Islamic finance
economy.
Belgian economic mission in
the UAE
Belgium is one of the UAE’s top trading
partners. During the past month, a
Belgian economic mission was hosted in
the UAE. The mission was presided by
Princess Astrid. This economic mission
occurred in the UAE between the
24th-26th March 2015, the aim of which
was to further promote and strengthen
economic ties between the UAE and
Belgium.
During the mission, a seminar, ‘Islamic
Economy in Belgium: Scope and
Concrete Opportunities’, was hosted
on the 26th March 2015, at the Conrad
Hotel in Dubai at which Nadim Bardawil
and Ahmad Waheed of Bin Shabib
& Associates gave a presentation on
sovereign and private Sukuk. The
seminar included a delegation of
businessmen and various officials from
Belgium. The UAE representatives/
delegation at this seminar included
key officials from the Dubai Chamber
of Commerce, Dubai Economic
Development and the Dubai Islamic
Economy Development Center.
Islamic Economy ‘Fiqh’
Conference
Together with the Dubai government, the
Islamic Affairs and Charitable Activities
Department in Dubai hosted an Islamic
Economy Conference between the 22nd24th March 2015, at the Dubai World
Trade Center. The aim was to explore the
principles surrounding Islamic economy
and to promote Dubai as the capital of
Islamic banking. This conference offered
a platform to discuss topical issues such
as whether Islamic finance is preferable
©
to conventional financing in the current
economic climate and whether Islamic
financing will promote more global
economic equality.
Proposed Emirates Airline
deal backed by Britain’s
Export Credit Agency
Emirates Airline has announced that it
will be purchasing four new A380s, via
a US$913 million Sukuk issuance, which
will be guaranteed by Britain’s Export
Credit Agency (BECA). The predicted
average life of the bond will be 5.37
years (Emirates 24/7 Business). This has
captured a lot of international interest, as
this will be the first time that BECA has
guaranteed a Sukuk issuance.
Deϐinition of Sukuk in Islamic
ϐinance
In its simplest terms, Sukuk can be
described as an Islamic bond or Shariah
compliant Islamic investment certificates.
Sukuk is becoming an increasingly
popular financial instrument among
those wishing to raise funds for projects,
developments, etc.
Conventional bonds and
Sukuk
Conventional bonds represent an issuer’s
debt obligation to the bondholder,
whereas Sukuk represents the investor’s
undivided ownership in an underlying
asset.
The investors (Sukukholders) are issued
with Sukuk certificates, in return for
initial funds. The income generated by
the underlying asset is then divided
periodically, among the investors.
Types of Sukuk structures
The various types of Sukuk structures are
as follows:
• Ijarah: This is based on a structure
involving leasing a tangible asset. The
conventional equivalent of this is a
lease.
• Mudarabah: This structure is based
on a partnership, whereby one party
provides the capital (Rab Al Maal),
and the other manages it (Mudarib).
The conventional equivalent to this is
a fund manager.
• Murabahah: This structure entails the
financier buying goods/investment
20
for the cost price and then selling
it on to the customer for a profit
(cost price plus a mark-up). The
conventional equivalent to this is
cost-plus financing.
• Musharakah: This is a type of
partnership, both parties contribute
capital and labor and share the profits
at an agreed ratio. The conventional
equivalent to this is a joint venture.
• Istisnah: In this type of structure,
the asset does not exist at the time of
contracting. This type of structure is
commonly used in manufacturing
projects, to finance such projects. The
conventional equivalent to this is
short-term project finance.
• Hybrid: In this type of structure, the
underlying pool of assets consists of
different Islamic finance contracts,
such as Istisnah, Mudarabah and
Sukuk Ijarah.
Types of bonds
A conventional bond is described as a
debt security/investment, whereby the
issuer (borrower), repays the money to
the bondholder (investor), with interest.
The different types of bonds are as
follows:
• Fixed rate bonds: The interest is fixed
at the date that the bond is issued and
this rate remains the same throughout
the existence of the bond.
• Floating rate notes: The interest varies
in these types of investments. It is
based on benchmark rates, such as
LIBOR or EURIBOR.
• Variable rate notes: The interest in
these types of investments will vary
at different set times or at certain
triggers, during the existence of the
bond/notes.
• Zero coupon bonds: These bonds do
not have interest but are issued to the
investor at a lower price. The investor
will receive the full price back once
the bond matures.
• Partly-paid bonds: The price of the
bonds is paid in installments and
interest only accrues on the part that
is paid.
Rima Mrad is a partner at Bin Shabib &
Associates. She can be contacted at rima.
[email protected].
15th April 2015