Discussion of Book - IFIP: Leasing and Investment Funds
Background
In the fields of Islamic finance, investment and banking, the most frequently used nominate contract structure for sophisticated investment and financing transactions, and one of the two most frequently used contractual structures for home purchase financing, is the lease (ijara). That is true globally, and it is true in almost every region in the world. In the world of interest-based finance, the lease is also one of the most frequently used, and best understood, contractual structures. In both Shari`ah-compliant finance and interest-based finance, the lease is constituted in a range of different forms, and leases can be adapted for use in many different contexts and industries. The lease is one of the most flexible and dynamic contractual structures in the financing toolbox. And the lease, particularly in its “birfurcated structure” formulation, has played the leading role in allowing Islamic finance, investment and banking to integrate into the larger interest-based financial and economic system. The lease (ijara) is the method by which the “leverage”, “gearing” or “finance” component of the acquisition price is structured, implemented and repaid.
Before a lease structure can be implemented, however, the Shari`ah-compliant investors must acquire the property that is going to be leased. The property is acquired with money from the Shari`ah-compliant investors, at least in part. In most instances, the Shari`ah-compliant investors desire to make use of leverage or gearing, in addition to their own money. The leverage or gearing generally comes from a bank or other financial institution or from the capital markets. And it is this leverage or gearting that is repaid using the ijara structure.
But what about the portion of the acquisition price that is provided by the Shari`ah-compliant investors? How is that infused into the transaction?
Overwhelmingly, the money from the Shari`ah-compliant investors comes through an investment fund of some sort. That is true even in circumstances where there is only a single Shari`ah-compliant investor (the structure is essentially the same as a fund structure; of course, greater efficiencies are obtained if there is more than one investor utilizing the structure).
As a result of the foregoing, Islamic Finance in Practice: Leasing and Investment Funds is one of the first books completed in the series. The foci of this book are (a) the manner in which money is obtained from Shari`ah-compliant investors and made available for investment purposes (i.e., investment funds), and (b) the use of different types of leases to effect investments and financings of many different types. The concepts developed in this book also find application in numerous other books in the series. For example, leasing structures are one of the primary structures for private equity investment transactions, and leases are a fundamental structure in project and infrastructure finance transactions.
As noted in the general description of the Islamic Finance in Practice series, the presentation and analysis of case studies is the core methodology employed by the books in this series. Nowhere is that statement truer than in Islamic Finance in Practice: Leasing and Investment Funds. Virtually every example of an investment fund and every example of a lease finance transaction in this book is an actual fund or transaction that has been implemented in the Islamic investment industry.
Before a lease structure can be implemented, however, the Shari`ah-compliant investors must acquire the property that is going to be leased. The property is acquired with money from the Shari`ah-compliant investors, at least in part. In most instances, the Shari`ah-compliant investors desire to make use of leverage or gearing, in addition to their own money. The leverage or gearing generally comes from a bank or other financial institution or from the capital markets. And it is this leverage or gearting that is repaid using the ijara structure.
But what about the portion of the acquisition price that is provided by the Shari`ah-compliant investors? How is that infused into the transaction?
Overwhelmingly, the money from the Shari`ah-compliant investors comes through an investment fund of some sort. That is true even in circumstances where there is only a single Shari`ah-compliant investor (the structure is essentially the same as a fund structure; of course, greater efficiencies are obtained if there is more than one investor utilizing the structure).
As a result of the foregoing, Islamic Finance in Practice: Leasing and Investment Funds is one of the first books completed in the series. The foci of this book are (a) the manner in which money is obtained from Shari`ah-compliant investors and made available for investment purposes (i.e., investment funds), and (b) the use of different types of leases to effect investments and financings of many different types. The concepts developed in this book also find application in numerous other books in the series. For example, leasing structures are one of the primary structures for private equity investment transactions, and leases are a fundamental structure in project and infrastructure finance transactions.
As noted in the general description of the Islamic Finance in Practice series, the presentation and analysis of case studies is the core methodology employed by the books in this series. Nowhere is that statement truer than in Islamic Finance in Practice: Leasing and Investment Funds. Virtually every example of an investment fund and every example of a lease finance transaction in this book is an actual fund or transaction that has been implemented in the Islamic investment industry.
Investment Funds: Money from Shari`ah-Compliant Investors
Virtually every Sharīʿah-compliant investment in a Western jurisdiction, and most of the Sharīʿah-compliant investments made in jurisdictions within The Organisation for Islamic Cooperation (the “OIC”, which was named the Organization of the Islamic Conference until June 29, 2011), are made through investment fund vehicles of some type. The fund vehicle is the framework for getting money from the Shari`ah-compliant investors into the actual investment (which may be a property, another asset or an operating business). It is also the method by which the Shari`ah-compliant investors minimize their “tax leakage”, achieve efficiencies and economies of scale, and protect their investments.
Islamic Finance in Practice: Leasing and Investment Funds opens with a consideration of investment funds as a primary vehicle for Shari`ah-compliant investments; it starts with the first money. Using an actual fund as a case study, the analysis works through the process of getting money into and through the investment fund, through a range of (usually tax-efficient) intermediary entities, into the investment, and then back out through the maze and into the pockets of the Shari`ah-compliant investors.
The jurisdiction chosen for the case study is one of the most difficult in the world in terms of getting money in and out with minimal or, for some types of income, no, taxation. One very important purpose of this jurisdictional choice, and the case study methodology, is to sensitize readers to the necessity for carefully addressing fund-related structures of this type before commencing any other investment-related activity. Another important purposes is to develop knowledge and awareness of the intricacies of the investment fund mechanism and its operational parameters: they will impact every moment and aspect of the fund’s existence, and thus every moment and aspect of the investment.
Exploration is made of the nature of the fund structure, which is driven by legal, regulatory and Shari`ah considerations. The important legal, regulatory are tax and Shari`ah considerations, pertain to, among other things, (a) the different parties that are, or will be, involved in the transaction, (b) the location or locations of the assets in which investment is made, and (c) the nature of the structure being used to implement investment transactions for or on behalf of the fund (such as the ijara), and by various market considerations.
The fund is considered from pre-inception and initial structuring, with particular emphasis on tax and Shari`ah considerations. It then moves through the offering process which involves the offering of the fund interests (usually through a private placement mechanism), subscription for the purchase of the interests (pursuant to a subscription agreement) and the ultimate sale and purchase of interests (hissas) in the fund. The offering documentation is specifically considered. There is also a focus on some of the sensitivities and parameters that exist in the offering process and related documentation. Special attention is paid to the infusion of funds and the distribution and extraction of funds, as well as complex ownership formulations. The interaction of tax and other regulatory constraints, on the one hand, and Sharīʿah principles, on the other hand, is another significant focus. The analysis also encompasses some of the fundamental fund documents, including offering documents (particularly private placement memoranda), subscription agreements, placement agreements, fund management agreements, indemnification agreements, and some of the agreements that are unique to Shari`ah-compliant transactions.
Islamic Finance in Practice: Leasing and Investment Funds opens with a consideration of investment funds as a primary vehicle for Shari`ah-compliant investments; it starts with the first money. Using an actual fund as a case study, the analysis works through the process of getting money into and through the investment fund, through a range of (usually tax-efficient) intermediary entities, into the investment, and then back out through the maze and into the pockets of the Shari`ah-compliant investors.
The jurisdiction chosen for the case study is one of the most difficult in the world in terms of getting money in and out with minimal or, for some types of income, no, taxation. One very important purpose of this jurisdictional choice, and the case study methodology, is to sensitize readers to the necessity for carefully addressing fund-related structures of this type before commencing any other investment-related activity. Another important purposes is to develop knowledge and awareness of the intricacies of the investment fund mechanism and its operational parameters: they will impact every moment and aspect of the fund’s existence, and thus every moment and aspect of the investment.
Exploration is made of the nature of the fund structure, which is driven by legal, regulatory and Shari`ah considerations. The important legal, regulatory are tax and Shari`ah considerations, pertain to, among other things, (a) the different parties that are, or will be, involved in the transaction, (b) the location or locations of the assets in which investment is made, and (c) the nature of the structure being used to implement investment transactions for or on behalf of the fund (such as the ijara), and by various market considerations.
The fund is considered from pre-inception and initial structuring, with particular emphasis on tax and Shari`ah considerations. It then moves through the offering process which involves the offering of the fund interests (usually through a private placement mechanism), subscription for the purchase of the interests (pursuant to a subscription agreement) and the ultimate sale and purchase of interests (hissas) in the fund. The offering documentation is specifically considered. There is also a focus on some of the sensitivities and parameters that exist in the offering process and related documentation. Special attention is paid to the infusion of funds and the distribution and extraction of funds, as well as complex ownership formulations. The interaction of tax and other regulatory constraints, on the one hand, and Sharīʿah principles, on the other hand, is another significant focus. The analysis also encompasses some of the fundamental fund documents, including offering documents (particularly private placement memoranda), subscription agreements, placement agreements, fund management agreements, indemnification agreements, and some of the agreements that are unique to Shari`ah-compliant transactions.
Shari`ah Supervisory Boards and Fatawa
One of the elements of a Shari`ah-compliant fund that is not present in other investment funds is the Shari`ah Supervisory Board. And this is a fundamental, integral, ubiquitous and critical element. Every aspect of an Islamic fund must be Shari`ah-compliant (or have an authorized variance in respect of the non-compliant aspect). All determinations as to compliance or variance are made by the relevant Shari`ah Supervisory Board.
From the vantages of every transactional party (sponsors, fund managers, asset managers, investors, even counterparties) it is imperative to have a sound understanding of the function, role and authority of the Shari`ah Supervisory Board, and an understanding of how Shari`ah Supervisory Boards are comprised and function, of what they do from day to day and from time to time. One must understand the various fatawa that the Shari`ah Supervisory Board will issue, including in respect of the offering of the fund, the structure of the transactions by which investments are implemented, the documentation for all of the foregoing matters, and the annual certifications that the fund is operating in compliance with the Shari`ah. It is important to know when and how to interact with the Shari`ah Supervisory Board. It is important to be able to anticipate how they will determine any given matter. All of these matters, from composition and selection of the Shari`ah Supervisory Board, through fund structuring, sale and operation, are addressed.
In addition, detailed consideration is given to the terms and provisions of the consulting agreements that are entered into with Shari`ah scholars. These are the agreements that govern the rendering of services by the Shari`ah scholars. The Shari`ah Supervisory Board (or Shari`ah scholars) will render various fatawa (opinions) of relevance to the investment fund. These will address the fund structure, fund documentation, operation of the fund (including its investments), investment parameters, transactional structures and transactional documentation, among other matters. Each of these matters is discussed.
From the vantages of every transactional party (sponsors, fund managers, asset managers, investors, even counterparties) it is imperative to have a sound understanding of the function, role and authority of the Shari`ah Supervisory Board, and an understanding of how Shari`ah Supervisory Boards are comprised and function, of what they do from day to day and from time to time. One must understand the various fatawa that the Shari`ah Supervisory Board will issue, including in respect of the offering of the fund, the structure of the transactions by which investments are implemented, the documentation for all of the foregoing matters, and the annual certifications that the fund is operating in compliance with the Shari`ah. It is important to know when and how to interact with the Shari`ah Supervisory Board. It is important to be able to anticipate how they will determine any given matter. All of these matters, from composition and selection of the Shari`ah Supervisory Board, through fund structuring, sale and operation, are addressed.
In addition, detailed consideration is given to the terms and provisions of the consulting agreements that are entered into with Shari`ah scholars. These are the agreements that govern the rendering of services by the Shari`ah scholars. The Shari`ah Supervisory Board (or Shari`ah scholars) will render various fatawa (opinions) of relevance to the investment fund. These will address the fund structure, fund documentation, operation of the fund (including its investments), investment parameters, transactional structures and transactional documentation, among other matters. Each of these matters is discussed.
The Generic Ijara Structure
The first leasing topic to be considered relates to some of the fundamental Shari`ah principles that are applicable to the ijara (lease). The inquiry then turns to transactional uses of the ijara in different iterations. Discussion in this section focuses on some of the factors that had the greatest influence on the development of the most frequently used ijara structures, the process by which the structures were developed, and the nature of the bifurcated structure that is so prevalent in modern Islamic finance and investment. A fundamental purpose of this section is to convey a sense of (a) how these structures were presented to Western banks and financial institutions and their lawyers and other advisors in the first transactions in the United States and Europe, and (b) how the structures are built from fundamental principles pertaining to financing and financial transactions.
The discussion then turns to the structure and documentation for a generic ijara transaction. The undertaking commences with consideration of funds infusion. When, how and why does money move from the investors, the sponsors and the bank providing the leverage or gearing into the acquisition of the assets that will be leased pursuant to the ijara? Those are the questions that are first addressed. Thereafter, the analysis considers the functions of the primary transactional parties, particularly the lessee entity that is owned (indirectly) by the Shari`ah-compliant investors. Next, consideration is given to the nature of the Shari`ah analysis of the documentation that embodies an ijara financing structure. It is at this point that each of the primary Shari`ah financing documents (collectively referred to as the “Project Documents”) is introduced and discussed in detail. This discussion also introduces some of the Shari`ah issues that arise regarding the permissibility of different occupational
tenants at the property in which the investment is made.
Next, discussion focuses on the cash flows through the structure. One set of cash flows relates to the flow of rent payments and purchase price payments, including in relation to the documents that give rise to their payment requirements. Another set of cash flows relates to payments in respect of the leverage factors (the loans) and to investors and sponsors. An important difference in cash flow structuring as between the United States (and jurisdictions having a similar ‘substance over form’ orientation) and the United Kingdom (and jurisdictions having a similar ‘form over substance’ predilection) is identified and discussed.
Thereafter, the discussion turns to a consideration of the collateral security structure for ijara transactions of this type. The nature and rationale of the multi-level collateral security structure is examined in detail. The consequences of defaults, and the exercise of remedies, is the subject of the next section.
Finally, the book addresses a criticism that is frequently raised to the effect that Shari`ah-compliant transactions are (significantly) more complex and complicated than their conventional counterparts. A simple transaction is considered with respect to structure, documentation and cash flows using a leveraged lease structure and using an ijara structure.
The discussion then turns to the structure and documentation for a generic ijara transaction. The undertaking commences with consideration of funds infusion. When, how and why does money move from the investors, the sponsors and the bank providing the leverage or gearing into the acquisition of the assets that will be leased pursuant to the ijara? Those are the questions that are first addressed. Thereafter, the analysis considers the functions of the primary transactional parties, particularly the lessee entity that is owned (indirectly) by the Shari`ah-compliant investors. Next, consideration is given to the nature of the Shari`ah analysis of the documentation that embodies an ijara financing structure. It is at this point that each of the primary Shari`ah financing documents (collectively referred to as the “Project Documents”) is introduced and discussed in detail. This discussion also introduces some of the Shari`ah issues that arise regarding the permissibility of different occupational
tenants at the property in which the investment is made.
Next, discussion focuses on the cash flows through the structure. One set of cash flows relates to the flow of rent payments and purchase price payments, including in relation to the documents that give rise to their payment requirements. Another set of cash flows relates to payments in respect of the leverage factors (the loans) and to investors and sponsors. An important difference in cash flow structuring as between the United States (and jurisdictions having a similar ‘substance over form’ orientation) and the United Kingdom (and jurisdictions having a similar ‘form over substance’ predilection) is identified and discussed.
Thereafter, the discussion turns to a consideration of the collateral security structure for ijara transactions of this type. The nature and rationale of the multi-level collateral security structure is examined in detail. The consequences of defaults, and the exercise of remedies, is the subject of the next section.
Finally, the book addresses a criticism that is frequently raised to the effect that Shari`ah-compliant transactions are (significantly) more complex and complicated than their conventional counterparts. A simple transaction is considered with respect to structure, documentation and cash flows using a leveraged lease structure and using an ijara structure.
Variations with Market Conditions and by Country and Legal System
After completion an analysis of the basic generic ijara structure, the book turns to an examination of how that generic ijara structure has been (and is) adapted to different types of market conditions, different legal systems and different jurisdictions. Two examples from different jurisdictions illustrate how the generic structure is adapted to competitive market conditions in which the commitment to obtain a property must be made in quickly, and in any event prior to the time that the leverage providers (the banks) commit to provide the acquisition financing. In circumstances such as those, the acquisition will often be made with funds provided by the Shari`ah-compliant investors exclusively (i.e., without any leverage or gearing at the property level). How that is done will depend upon a number of factors, most importantly (from a financial vantage) the tax regime of the jurisdiction in which the acquired property is located. Islamic Finance in Practice: Leasing and Investment Funds provides two examples, each with detailed analysis, of how that type of transaction is effected in different tax environments. One example is a transaction in the United States and the other is a transaction in the United Kingdom.
Tax considerations are not the only relevant variables as one considers different countries and different legal regimes, of course. Real estate laws are another frequently encountered variable. The next section of this book focuses on transactions in jurisdictions in which options of different types on real property are taxed as having been exercised at the time of the granting of the options (even though they are not actually exercised at that time). The case study that has been chosen for this section is a Shari`ah-compliant transaction from Sweden (which was likely the first Shari`ah-compliant real estate acquisition financing in Sweden).
The book then considers two case studies that illustrate some of the more unusual adaptations that must be made to local legal requirements. One case study examines the documentation and implementation of a commercial real estate acquisition and related financing in Germany. This case study sharpens the focus on a circumstance in which both tax and real estate constraints impinge, with the result being a complicated structure that focuses on usufruct elements rather than fee title interest transfers.
The second case study in this section is a unique South Korean real estate acquisition financing transaction necessitated by South Korean securitization laws that required issuance of tranches of interest-bearing senior and junior bonds. The transaction was a “residual interest sale” structure involving disassociation of real property interests and the sale of hissas in an entity holding some of those interests. Each element of the “residual interest sale” structure is analyzed in detail. Thus, for example, this chapter examines the mandatory senior/junior bond securitization structure, the application of proceeds, the sale of a residual or remainder property interest to an investor entity that is indirectly owned by the Shari’ah-compliant investors, the sale of hissas in the investor entity to a “residual interest purchaser” (also the holder of the junior bonds), and elements allowing the Shari`ah-compliant investor to own the residual interest after the term of the non-compliant end user lease.
Tax considerations are not the only relevant variables as one considers different countries and different legal regimes, of course. Real estate laws are another frequently encountered variable. The next section of this book focuses on transactions in jurisdictions in which options of different types on real property are taxed as having been exercised at the time of the granting of the options (even though they are not actually exercised at that time). The case study that has been chosen for this section is a Shari`ah-compliant transaction from Sweden (which was likely the first Shari`ah-compliant real estate acquisition financing in Sweden).
The book then considers two case studies that illustrate some of the more unusual adaptations that must be made to local legal requirements. One case study examines the documentation and implementation of a commercial real estate acquisition and related financing in Germany. This case study sharpens the focus on a circumstance in which both tax and real estate constraints impinge, with the result being a complicated structure that focuses on usufruct elements rather than fee title interest transfers.
The second case study in this section is a unique South Korean real estate acquisition financing transaction necessitated by South Korean securitization laws that required issuance of tranches of interest-bearing senior and junior bonds. The transaction was a “residual interest sale” structure involving disassociation of real property interests and the sale of hissas in an entity holding some of those interests. Each element of the “residual interest sale” structure is analyzed in detail. Thus, for example, this chapter examines the mandatory senior/junior bond securitization structure, the application of proceeds, the sale of a residual or remainder property interest to an investor entity that is indirectly owned by the Shari’ah-compliant investors, the sale of hissas in the investor entity to a “residual interest purchaser” (also the holder of the junior bonds), and elements allowing the Shari`ah-compliant investor to own the residual interest after the term of the non-compliant end user lease.
Collective Financing Concepts
Islamic Finance in Practice: Leasing and Investment Funds then turns from consideration of transactions involving the financing of individual property acquisitions to collective financing concepts. The generic ijara financings, and the generic ijara structures used in the financing transactions, discussed to this point in the book all involved financings of individual properties. However, the generic ijara structure was originally developed to allow for financings of multiple properties through a single leverage provider. In some cases, that single leverage provider would be a bank or bank consortium. In others, that leverage provider would be a securitization vehicle (e.g., a sukuk offering by a securitization vehicle).
In the real estate investment realm, the first multiple property acquisition financings made use of cross collateralized pool financings (first in the United States and later in Europe). These are the subject of the next chapters of Islamic Finance in Practice: Investment Funds and Leases. Sukuk financings came much later, and were pioneered in the Middle East. Discussion of the sukuk financings is left to a separate book: Islamic
Finance in Practice: Sukuk and Securitizations.
Among the topics that are covered with respect to these cross-collateralized pool financings are the financial benefits and burdens of these types of structures, the elements of the transactional structures, and the operational mechanics of transactions implementing these structures. The chapters addressing cross collateralized pools focus on two case studies. One case study is from a “substance over form” jurisdiction in which the economic substance of the transaction is the critical legal and regulatory factor, rather than the form taken by the transaction. The other case study is from a jurisdiction in which the form of the transaction plays a much larger role in how the transaction is treated for legal (including regulatory) purposes. Most jurisdictions in the world are of the latter type.
The first cross collateralized real estate pool financings occurred in the United States in 2004. These financings made use of the generic ijara structure at the individual property level for each individual property. However, the financing – the leverage or gearing – was provided pursuant to a senior loan and a subordinated loan. That arrangement was later expanded to include a junior subordinated loan as well. Among the topics that are covered with respect to these cross-collateralized pool financings are the financial benefits and burdens of these types of structures, the elements of the transactional structures, and the operational mechanics of transactions implementing these structures.
This is a complex structure, but one that affords considerable benefits to both the financiers and the Shari`ah-compliant fund that acquired the properties. Among numerous other benefits, the financiers obtained considerable risk diversification across different geographic locations, industries, credit profiles. And, among other benefits, the Shari`ah-compliant investors obtained a significantly lower financing rate and considerable operating flexibility and default protection. The various benefits afforded each of the transactional participants are discussed with respect to each of the case studies.
Benefits are not obtained without concomitant burdens, and the chapter discusses both from the vantage of each of the transactional participants. Thus, consideration is given to Shari`ah complexities, tax complexities and operational complexities that arise in these types of transactional formulations in each of the two different types of jurisdictions.
Finally, the operational mechanics of each of the structural variations are considered. Again, comparisons as between the two types of jurisdictions are provided so as to enable the reader to develop a framework for creative structuring and critical analysis of comparative structural models.
In the real estate investment realm, the first multiple property acquisition financings made use of cross collateralized pool financings (first in the United States and later in Europe). These are the subject of the next chapters of Islamic Finance in Practice: Investment Funds and Leases. Sukuk financings came much later, and were pioneered in the Middle East. Discussion of the sukuk financings is left to a separate book: Islamic
Finance in Practice: Sukuk and Securitizations.
Among the topics that are covered with respect to these cross-collateralized pool financings are the financial benefits and burdens of these types of structures, the elements of the transactional structures, and the operational mechanics of transactions implementing these structures. The chapters addressing cross collateralized pools focus on two case studies. One case study is from a “substance over form” jurisdiction in which the economic substance of the transaction is the critical legal and regulatory factor, rather than the form taken by the transaction. The other case study is from a jurisdiction in which the form of the transaction plays a much larger role in how the transaction is treated for legal (including regulatory) purposes. Most jurisdictions in the world are of the latter type.
The first cross collateralized real estate pool financings occurred in the United States in 2004. These financings made use of the generic ijara structure at the individual property level for each individual property. However, the financing – the leverage or gearing – was provided pursuant to a senior loan and a subordinated loan. That arrangement was later expanded to include a junior subordinated loan as well. Among the topics that are covered with respect to these cross-collateralized pool financings are the financial benefits and burdens of these types of structures, the elements of the transactional structures, and the operational mechanics of transactions implementing these structures.
This is a complex structure, but one that affords considerable benefits to both the financiers and the Shari`ah-compliant fund that acquired the properties. Among numerous other benefits, the financiers obtained considerable risk diversification across different geographic locations, industries, credit profiles. And, among other benefits, the Shari`ah-compliant investors obtained a significantly lower financing rate and considerable operating flexibility and default protection. The various benefits afforded each of the transactional participants are discussed with respect to each of the case studies.
Benefits are not obtained without concomitant burdens, and the chapter discusses both from the vantage of each of the transactional participants. Thus, consideration is given to Shari`ah complexities, tax complexities and operational complexities that arise in these types of transactional formulations in each of the two different types of jurisdictions.
Finally, the operational mechanics of each of the structural variations are considered. Again, comparisons as between the two types of jurisdictions are provided so as to enable the reader to develop a framework for creative structuring and critical analysis of comparative structural models.
Single Islamic Tranche Project and Infrastructure Financings
Project and infrastructure development in many jurisdictions within the OIC, particularly in Middle Eastern jurisdictions and Malaysia, has continued unabated through the recent economic downturn. In many jurisdictions, in fact, project and infrastructure spending has increased. Numerous jurisdictions and industry organizations have made notable efforts to increase the amount of Shari`ah-compliant financing used for project and infrastructure development projects. These efforts and related developments, including transactional structures, are discussed in Islamic Finance in Practice: Project and Infrastructure Finance.
However, it is appropriate in Islamic Finance in Practice: Leasing and Investment Funds to make mention of how the ijara was used as the
critical structural element in the first Shari`ah-compliant structure used in project and infrastructure financing in 2002 (and thereafter). The ijara-based structure is generally known in the industry as a “single Islamic tranche” structure, and, in various evolving iterations, it has become something of a fixture in project and infrastructure financing. This structure is discussed in this book.
Topics that are considered in respect of single Islamic tranche leasing transactions include the elements of the structure and the roles of the transactional parties, the documentation for the transaction, mechanics and operational considerations, cash flows in operating scenarios (including both on-going operational sales of production and sales of assets and businesses), and collateral security considerations, among other topics. Importantly, the structure and implementation of single Islamic tranche transactions are subjected to analytical scrutiny, both in absolute terms relating to classical Shari`ah concepts and principles and in the context of “permissible variance” principles deriving from historically important fatawa (such as the 1998 fatwā issued to Dow Jones Islamic Indexes).
However, it is appropriate in Islamic Finance in Practice: Leasing and Investment Funds to make mention of how the ijara was used as the
critical structural element in the first Shari`ah-compliant structure used in project and infrastructure financing in 2002 (and thereafter). The ijara-based structure is generally known in the industry as a “single Islamic tranche” structure, and, in various evolving iterations, it has become something of a fixture in project and infrastructure financing. This structure is discussed in this book.
Topics that are considered in respect of single Islamic tranche leasing transactions include the elements of the structure and the roles of the transactional parties, the documentation for the transaction, mechanics and operational considerations, cash flows in operating scenarios (including both on-going operational sales of production and sales of assets and businesses), and collateral security considerations, among other topics. Importantly, the structure and implementation of single Islamic tranche transactions are subjected to analytical scrutiny, both in absolute terms relating to classical Shari`ah concepts and principles and in the context of “permissible variance” principles deriving from historically important fatawa (such as the 1998 fatwā issued to Dow Jones Islamic Indexes).
Istisna`a - Ijara Construction, Mini-Perm and Long-Term Financings
The final lease-related topic that is considered in Islamic Finance in Practice: Leasing and Investment Funds relates to financing of the construction and operation of residential and commercial real estate projects and certain types of equipment. In many ways, this is a further variation of the generic ijara transaction that is the first lease-related topic addressed in this book. In other ways, this topic leads directly into two other books in the series: (a) Islamic Finance in Practice: Project and Infrastructure Finance, where the istisna`a – ijara transactions are
discussed in the context of the construction and operation of power, energy, oil, gas, petrochemical, mining, industrial, infrastructure and other projects; and (b) Islamic Finance in Practice: Sukuk and Securitizations, where each, and both, of the istisna`a and ijara contracts form the nuclei of different types of sukuk.
After reviewing some of the essential elements of the istisna`a contract as one type of sale contract and a type of financing structure, as case studies, some of the more prominent istisna`a – ijara transactions are examined. As with other contracts, structures and transactions, the foci are the structural elements, the transactional parties and their risk profiles and their roles and limitations, the documentary structure, and mechanics and operational considerations. And, as with other contracts, structures and transactions, the istisna`a – ijara structures are subjected to critical analysis.
discussed in the context of the construction and operation of power, energy, oil, gas, petrochemical, mining, industrial, infrastructure and other projects; and (b) Islamic Finance in Practice: Sukuk and Securitizations, where each, and both, of the istisna`a and ijara contracts form the nuclei of different types of sukuk.
After reviewing some of the essential elements of the istisna`a contract as one type of sale contract and a type of financing structure, as case studies, some of the more prominent istisna`a – ijara transactions are examined. As with other contracts, structures and transactions, the foci are the structural elements, the transactional parties and their risk profiles and their roles and limitations, the documentary structure, and mechanics and operational considerations. And, as with other contracts, structures and transactions, the istisna`a – ijara structures are subjected to critical analysis.
