Since 2006 through today, there remains fierce competition for capital. As a result, non-traditional alternatives are being sought, and Islamic Finance falls within this vein.

Islamic finance offers substantial benefits to its participants. With the Australian government sanctioning this type of finance the timing is right for prospective borrowers to proceed with finance applications for Australian based proposals. It is important to highlight that this form of finance has been available for quite some time in England, Germany, France, Japan, Singapore, Hong Kong and Malaysia, just to name a few.

Sukuk (Islamic Bonds)

PFA via its funding partners can co-ordinate the provision of funds via an instrument called a Sukuk or Shariah compliant bond. Shariah compliant lending is a form of finance that complies with Shariah law, this means the funding does not permit:

• The paying or charging of interest;
• Alcohol and gambling ventures; and
• Transactions of a speculative or uncertain nature – the underlying assets must be clearly identifiable.

Sukuk’s are typically issued by a special purpose vehicle (SPV) which could be a trust or a company.

The market for Sukuk is now maturing and there is an increasing momentum in the wake of interest from issuers and investors. Sukuk have confirmed their viability as an alternative means to mobilise medium to long-term savings and investments from a huge investor base.

Different Sukuk structures have been emerging over the years but most of the Sukuk issuance to date have been Ijara Sukuk, since they are based on the undivided pro-rata ownership of the underlying leased asset, it is freely tradable at par, premium or discount. Tradability of the Sukuk in the secondary market makes them more attractive.

Although less common than Ijara Sukuk, other types of Sukuk are also playing significant roles in emerging markets to help issuers and investors to participate in major projects, including airports, bridges, power plants etc. The Sovereign Sukuk issues, following Malaysia’s lead, are enjoying widespread and positive acclaim among Islamic investors and global institutional investors alike.

Glossary

ISLAMIC TERM DEFINITION

Fatwa - A legal opinion issued by an Islamic law specialist on a specific issue

Gharar - Ambiguity, uncertainty

Halal - Permissible, lawful

Haram - Prohibited, forbidden

Ijara - A lease agreement where the bank as the lessor earns profit by charging rental on the asset leased to the customer

Mudaraba - An investment agreement between an investor (providing capital) and entrepreneur (providing management expertise) with profits being shared on a pre-determined ratio and losses being borne by the investor only

Murabaha - Sale of goods for deferred payment by an Islamic financial institution to a customer for cost plus an agreed profit mark-up

Musharaka - Partnership agreement between two parties where profits are shared on a pre-agreed ratio and losses are shared in proportion to the capital contributed

Riba - Usury, interest. It covers any return of money on money – whether the interest is fixed or floating, simple or compounded

Shariah - The set of rules derived from the holy Quran and the sayings and acts (the Sunnah) of the Prophet Mohammed as well as the opinions of qualified Muslim scholars

Shariah advisor - An independent professional trained Islamic scholar who advises an Islamic financial institution on the compliance of its products and activities with the Shariah

Sukuk - The Islamic equivalent of bonds that represent ownership in an underlying asset or project or venture