Sharia Compliant Financing
Shari'a compliant financing, distinct from other industry sectors, requires specific legal expertise and established professional relationships with key actors. Although already a multi-billion dollar industry with an impressive annual growth margin, Shari'a compliant financial experts are few and far between - particularly in the United States. CM Capital Alliance was among the first American firms to identify its potential and comprehensively offer Shari'a compliant financial services stateside. CMCA is a pioneer with regard to brokering Shari'a compliant investment financing for not only Shari'a observant clientele, but also secular clients. CMCA has a demonstrated record of facilitating relationships between our clients and domestic and foreign-based Shari'a compliant real-estate financiers. Therefore, our unique status within the Shari'a finance world allows us to procure our clients the best possible Shari'a compliant rates.
Our Host of Shari'a Compliant Financial Services Includes:
- Facilitating financing package procurement ranging from $500,000 to $50 Million and above, per transaction
- Knowledgeably coordinate Shari'a compliant refinancing and cash-out transactions for existing commercial properties
- Professional service emphasized by integrity and customer-service, which are among Shari'a compliant finance's principal hallmarks
At CMCA, we pride ourselves on our distinguished record of achievement in the area of Shari'a compliant finance. As one of the sector's pioneers, it is our commitment to spearhead Shari'a compliant finance's continual growth in the United States for the benefit of our clients. In addition to providing conventional debt & equity placement, it is our objective to provide the optimal investment strategies both in the conventional and Shari'a compliant financial markets.
Understanding Shari'a Compliant Financing
Murabaha - Initial Price Plus Profit
Ijara - Operating Lease
Diminishing Markets - Shared Ownership
Wakala - Agency
What is Shari'a Compliant Financing?
Shari'a compliant financing is a rapidly growing service in the United States and global markets. The hallmark of Shari'a finance is its categorical prohibition against interest bearing loans and transactions. The prohibition against interest is derived from Islam's Holy Book, the Koran, which ordains it as sacrilege for the value of a commodity to increase merely by being lent to another individual. However, Shari'a compliant financing does not prohibit the earning of profit, such as long as the lender is willing to share in the risk of a loss on the investment.
The prohibition against interest is founded upon the broader prohibition against speculative financial transactions. This bar also prohibits gambling, unethical investment, loan piracy, and ambiguous and adhesive contracts. Combined with its commitment to morally driven generation of profit, Shari'a finance is also premised on philanthropy and community empowerment through its financial solutions.
Murabaha - Initial Price Plus Profit
In a Murabaha arrangement, a financial institution will purchase the asset for the customer and then immediately resell it to that customer on a deferred basis, attaching an agreed-upon transaction cost to the real value of the asset. Subsequently, the customer will make installment payments on the asset until the balance (including the transaction cost) is entirely satisfied. There are three types of Murabaha products: the Basic Murabaha, the Commodity Murabaha, and the Reverse Murabaha.
The Basic Murabaha is a routine product used to purchase basic personal and household items. These items generally include cars, refrigerators, televisions, household appliances, and sometimes real property. Title of the asset will always pass from the capital provider to the customer at the beginning of a basic Murabaha arrangement.
The Commodity Murabaha is often used in two situations. First, a customer will require a loan to purchase an asset. The provider will then purchase the commodity from a supplier, which it will subsequently sell to the customer for a revised price that includes a transaction fee. This transaction fee is the source of profit for the Shari'a compliant provider. The provider and customer will then negotiate an installment payment schedule, and immediately take title but not possession of the commodity. Next, using the provider as its agent, the customer will then sell the commodities to a third party-purchaser at the revised price (plus the provider's transaction fee).
In the second situation, a customer will require a loan. The provider, using a third-party agent, will purchase the commodity from a supplier by taking the title but not possession of the asset. The provider will then sell it to a customer for the price plus a transaction fee, which comprises the profit earned. The customer, therefore, is able to procure and take immediate possession of needed assets by making installments over a negotiated payment schedule. This transaction is finalized rather quickly, to avoid risk in the commodity's rise or fall in price. Ultimately, the provider is able to earn profit by appending a transaction fee to the commodity's real value, while the customer is able to procure much-needed commodities and conveniently make installment payments over an agreed-upon schedule.
Ijara - Operating Lease
The basic translation for ijara is "rent" or "lease." The Basic Ijara is employed to rent a variety of items, including cars, household appliances, televisions and real property. In addition, some providers currently lease expensive construction machinery and medical devices to clients. The Ijara, an established Shari'a compliant product, provides a much-needed resource to the customer without shifting title away from the provider. However, an ijara may be qualified with an option-to-buy clause, which the customer may exercise at any point of the arrangement, but typically at the expiration of the rental schedule.
Ijara wa Iqtina, or finance leasing, is virtually equivalent to a basic ijara, with the exception of title passing to the customer at some point of the rental agreement. Title typically passes at the end of the arrangement. This product is generally used to purchase both goods and real property.
Diminishing Markets - Shared Ownership
The Diminishing Markets, or shared ownership, product is arguably the most complex yet innovative Shari'a compliant solution. By combining two written contracts, the ijara agreement and a diminishing ownership agreement (Musharaka), two parties (or more) will share ownership of the asset. For example, a customer who wishes to purchase a property and pays a specific percentage as a deposit to the vendor will then enter into a diminishing ownership agreement with the provider. The Shari'a compliant provider will then pay the outstanding balance, and then take title of the property by way of a sub-lease agreement with the vendor. Therefore, the provider's customer will have a beneficial interest share in the property (10%), with the remainder going to the provider (90%). The provider will allow the customer to defer the payment of the 90% over a fixed period, to be paid in installments without the accumulation and collection of interest.
Simultaneous with the customer's entry into a diminishing ownership agreement, the customer also enters into a lease agreement with the provider, whereby the provider collects a variable amount of rent installments paid by the customer. Rent is typically paid on a monthly basis. The lease agreement, again, is concurrent with the diminishing ownership agreement. The customer may also be expected to pay any outgoing fees related to the property as well as all administrative and legal costs, arrangement fees and stamp duty.
Furthermore, both the amounts repaid under the diminishing ownership agreement and the amount paid under the lease agreement are combined and used to calculate how much of the provider's share of the property has been purchased by the consumer. As the Shari'a compliant provider's share in the property gradually declines with each successive rental payment, so does the amount paid under the lease agreement.
As the close of the lease agreement and if all of the conditions contained within the ijara and musharaka contracts are met, the provider will finally pass title of the property to the consumer under the diminishing ownership agreement, normally for an additional payment. In addition, many Shari'a compliant providers also require the customer to sign a third agreement under which the customer provides some form of security against payments of the amount due under the other two contracts. Some Shari'a compliant providers may also require more than three assignments to be signed.
Wakala - Agency
The Wakala is an investment product that functions like a Mudaraba product. However, the profits derived from the latter are divided between the investing parties, while a wakala renders to the investor only an agreed upon ratio against his/her investment. Any profit made above that ration is rendered to the Shari'a compliant provider as part of its profit.
For example, if an investor agrees to invest a particular amount with a provider for an agreed upon term, 10% for instance, the provider will then pool the investors funds with the funds of other independent investors. At the close of a given investment period, the investor's investment potential stops at the 10% ceiling. Any additional profits, again, are taken by the Shari'a compliant provider - but if the provider's investment does not generate profit to meet the investor's 10% return, then the investor will still take his 10% return to the detriment of the provider, who will suffer a loss.
