union de banques arabes et françaises
DESCRIPTION
Union de Banques Arabes et Françaises. Islamic Products. The French finance industry and the Paris money market in the era of Islamic finance December 6th 2007. A - INTRODUCTION. - PowerPoint PPT PresentationTRANSCRIPT
Diapositive 1
Union de Banques Arabes et Franaises
Islamic Products
The French finance industry and the Paris money marketin the era of
Islamic financeDecember 6th 2007
Islamic Banking has a different way of financing trades and projects or investing in companies, from the one which is known in the Western world, in as much as the concept of interest or Riba is strictly forbidden by the Sharia.
A - INTRODUCTION
A potential market estimated worth USD 500 billion of assets.
Growing at a rate of between 10% to 15% p.a. These estimates
cover through a more than 330 financial institutions and banks all
the Muslim world from China to Morocco englobing South East Asia,
the Gulf Countries, the Middle East and Africa.
A- INTRODUCTION (continued)
B- MAIN ISLAMIC PRODUCTS & INSTRUMENTS
Challenge for Islamic banking: Find sources of revenue based on
non-interest banking products.
Three main products satisfy such criteria: I-Trade Products (Profit).II-Corporate Investments (Dividends).III-Leasing (Rentals). In addition to these basic products a certain number of financial instruments are available.
I- Trade Products
1- MurabahaAt the origin, before Islamic banking started, Murabaha
contracts were contracts sale between seller and buyer. Islamic
banking has adopted such agreement to be directly between banks and
clients. A Murabaha involves the purchase of goods by a bank from a
supplier (A), and the sale back of same goods simultaneously to the
banks client (B) at an agreed mark up.Sale of the goods by the bank
to its customer (B) could be on a deferred-payment basis i.e.
credit sale (Bai Bithaman Ajil/Bai Muajal).
Murabaha (Commodities)
Islamic Bank
U.B.A.F.
Cash to A
DeferredPayment through Transferor irrevocable L/C
Amountinvested
Invoice & Warrants to IB
Invoice & Warrants to U.B.A.F.
Trader A
Economic equivalent to a term deposit in conventional banking
without an investment mandate
ANNEX I
Murabaha (Commodities)
Islamic Investor
U.B.A.F.[Agent)
Cash to A
Deferred payment throughan irrevocable L/C
Trader A
Trader B
Amountinvested
Repayment of theinvestment plus profitless a commission
Invoice to U.B.A.F.
Invoice to B
Economic equivalent to a term deposit in conventional banking with
an investment mandate
Commodities could also be capital or consumer goodsTraders: A being
Exporter & B Importer
ANNEX I bis
2- Mudarabah
A form of contract, where one (or several) investor(s), called Rab
El Mal, provides funds to an entrepreneur (Mudareb) who invests
such funds in a way acceptable to the Sharia.
A bank could act as Mudareb investing funds on behalf of the investors, or as Rab El Mal if acting as a participant.
The Mudareb acts without recourse vis-a-vis the investors except in case of negligence.
I- Trade Products (continued)
Investment risk is therefore borne by the investors to the extent of their participations.
Profit is shared, according to a mutual pre-agreement between investors and Mudareb.
Two forms of contracts:- limited: refering to a precise
transaction;- unlimited: the Mudareb is not committed to inform the
investors of projects undertaken (equivalent to funds under mandate
in conventional banking).
I- Trade Products (continued)
ANNEX II
Mudarabah / Murabaha Agreements(to Finance Exports or Projects)
Deferred RepaymentGuaranteed or not by a bank LC/LG eventually
insured by ICIEC
Participants (Rab El Mal)
Murabaha &Wakala Agreements
Mudarabah Agreement
U.B.A.F.(Mudareb)
Seller
Contract
Goods
Spot
Payement
End Buyer
Agent*(Wakil)
* Designated by the end buyer
Musharakah (active partnership)
Contract between two or more parties to finance a project, or
equity.
Investment banking arm of banks could participate in such contracts.
Profit is distributed among the partners along predetermined ratios.
Loss is borne by each partner in proportion to its
contribution.
II- Corporate Investments
III- Leasing (Ijarah, Ijarah Wa Iktinaa)
An Ijara (Operating Lease) is a lease contract by which a lessor (a bank through an SPC) purchases and leases out an Asset to a lessee for a set period of time against payment of an pre-agreed rental charge. The underlying object of the lease contract shall be an Asset owned by the lessor, provided that the use of the Asset is lawful under Sharia.
Ijarah contract could be structured as a lease back.
Ijarah wa Iktinaa (Financial Lease) is similar to Ijarah except that the lessee is commited to take possession of the Asset at the end of the lease.
For some scholars Ijarah & Ijarah wa Iktinaa do not apply on intangible Assets (Software) or rights on natural ressources exploration.
A long-term lease contract can include an option with the
agreement of both parties, to negotiate the price for a specified
time period. The new price would be fixed (at the beginning of each
period) at the prevailing market conditions or similar value in the
market. This will virtually translate into Libor plus a fixed
margin.
III- Leasing (Ijarah, Ijarah Wa Iktinaa) (continued)
Differences between Conventional Lease & Ijarah
1- Commencement of lease payments: Rentals can be paid in advance
i.e. prior to free disposal of the leased asset by the lessee in
conventional lease, it is not the case in Ijarah, however the first
rental can be contractually higher than the others if the lessor
wants to be protected against an immediate market depreciation of
the leased asset becoming a second hand item.2- Lease assignments:
Assignment of the sole rentals (excluded of the Asset) to a third
party is not permitted unless that the existing Ijarah is
terminated between the two parties. Then the lessor sells the asset
to the third party that enters with the lessee in a new Ijarah .
The lessee can sub-lease the asset to a third party if:*provision
is made in the agreement or,*express permission of the lessor is
taken.
3- Risk of destruction or total loss:Both schemes agree that the
lessee is responsible for any loss to the leased asset caused by
his negligence and that he can also be made liable for the normal
wear and tear and operational maintenance costs. In case of a total
loss caused by factors beyond the control of the lessee, Ijarah (to
the contrary of conventional lease) does not permit in principle to
make the lessee liable for the damage.4- Insurance:Not usually
permissible in Islam if it is in return for a fee. However,
permission has been given to obtain insurance in an Islamic lease
if no other viable Islamic alternative exists. The insurance cost
is borne by the lessor but can be incorporated in the rental
payments.
Differences between Conventional Lease & Ijarah
(continued)
5- Maintenance:Basic and essential care of the equipment necessary for the good maintenance of the leased asset is the obligation of the lessor (and eventually incorporated in rentals in case of financial lease). 6- Hell or High Water Clause:Conventional lease include usually such a clause with the lessee obligation of paying the full rental payments regardless of any event effecting the equipment or any change in the circumstances of the lessee. Such a condition is not permissible under Sharia, but appropriate solutions are available.
Differences between Conventional Lease & Ijarah
(continued)
7- Late payment penalties:Conventional lease agreements entail penalties for late payment of rent. Since this is considered interest it is prohibited under Islamic law but some kind of compensation can be considered.
8- Method of Rescheduling:A finance lease may be rescheduled with the agreement of lessor and lessee under Sharia. The original agreement cannot be altered to reflect the rescheduling. The procedure is to cancel it and enter into a new agreement with the same parties. This enables penalties from delays on the previous contract to be recovered.
Differences between Conventional Lease & Ijarah
(continued)
9- Financial lease (Ijara Wa Iktinaa): In a lease with purchase
option, the purchase option and sale price should be clearly set
out at the signing of the lease contract. However, at the actual
time of sale, a new sale contract will have to be signed on the
same terms agreed upon at the outset.
Differences between Conventional Lease & Ijarah
(continued)
Structure of Ijarah (Operating Lease)
ANNEX III
Lessee (Fund User)
Lessor (Intermediary)
Security Sharing /Right of Recourse
Asset
Investors(Fund Provider)
CashInvestment
Sukuk Al-Ijarah
E N F O R C E M E N T
L E A S E
Lease Rental
Structure of Ijarah-Wa-Iktinaa (Lease with a Purchase Option on
Asset)
ANNEX IV
Lessee (Fund User)
Lessor (Intermediary)
Security Sharing /Right of Recourse
Asset
Investors(Fund Provider)
CashInvestment
Sukuk Al-Ijarah
E N F O R C E M E N T
L E A S E
Lease Rental
PurchaseOption
C- OTHER ISLAMIC INSTRUMENTS
Bai Al Salam: Contract in which a negotiated pre-payment is made
for goods to be delivered later on. It could be used for pre-export
finance.
Sukuk: Similar characteristics to those of conventional bonds
with the key difference being that such Asset-Backed Securities
(ABS) shall always be linked to a Sharia compliant asset as such
Sukuk can be used for project finance.
Tawaruq: A sale to a customer of Commodity or Assets by a bank on
deferred payment at cost plus profit. The customer then sells the
commodities to a third party on spot basis.Wakala: Agency
Agreement.Takaful: A form of Islamic Insurance based on Quranic
principle of mutual assistance.
C- OTHER ISLAMIC INSTRUMENTS (continued)
ANNEX V
Exporter
S.P.C.(Islamic Banks)
Importer
Contract Negotiation
Purchase ofGoods
U.B.A.F. (Opening Bank)
Sight L/C
Instructions
ImportersBank
Guaranteed deferredpaymentL/C
Mudarabah & Murabaha
Sale ofGoods
Tawaruq
ANNEX VI
Contractor
Contract USD 10MM
XYZ HotelsCompany
FinancialCompany (A)
Sale of Shares
Modareb &Co Modareb
Spot Payment
Sale of Shares
Deffered Payment
Resale of Shares
Spot Payment
U.B.A.F.
XYZ
*ICIEC*Bank Guarantee*Assignment ofreceivables
Securities
FinancialCompany (B)
Sukuk Al-Ijarah Lease Back associated with certificates
(Sukuk)
ANNEX VII
Industrial company
Cayman SPV
Cash
Certificate holders
Certificates
Issue of Certificates and Sale of Trust Assets
Cash
Trust Assets
Leased back Assets
Cash Redemption of Certificates
Lease Rentals Payments
Periodic Cash Distributions
Lease Payments and Periodic Distributions
Repurchase of Trust Assets and Redemption of Certificates
Repurchased of trust
.Head-Lessor(Jersey)
AircraftProducer
CharitableTrust
XYZ (C.I.)Bank
PurchasingAircraft
Lessor(Cyprus)
Own 100%
Managing
Charitable Trust
Own 100%
XYZ (Cyprus) Bank
Managing
IslamicInvestors
Modareb
Airline Company
Lessor Funding
Mudarabah Agreement
LeaseRentals
Operating Lease
Head Lease
LeaseRentals
Ijarah Begharad Al Iktinaa(Financial Lease Ending by Purchasing)
Rentals could be guaranteedBy ICIEC
ANNEX VIII
LBO
ANNEX IX
Investors
Holding 1
Holding 2
100%
100%
Target Co.
Islamic banks
Trader A
Trader B
Acquisition100%
Goods
Goods
Goods
Spot
Spot
Deferred
Repayment
Patrick LEGAIT
Patrick LEGAIT, is Chairman of the Management Board of U.B.A.F.
since mid 2001, seconded from Crdit Lyonnais.Previously and after 9
years with Socit Gnrale, from 1973 to 1982, successively as Credit
Manager and Buyers Credit specialist in both France and Germany, he
joined First Chicago from 1982 to 1988, and became Vice President
and Managing Director to lead the Frankfurt based Trade Finance
Group. He was then transferred to Geneva with world wide
responsibilities, and was particularly in charge of major customers
in Saudi Arabia.Then Patrick Legait joined Crdit Lyonnais in 1988
where he assumed different responsibilities, mainly: Head of the
Commercial Department and Managing Director of Crdit Lyonnais in
Frankfurt, Director of BfG Bank AG in charge of multinational
customers. Back to Crdit Lyonnais' Head Office, he became
responsible for Crdit Lyonnais' Central Department for the paper
industry worldwide. Afterwards he was appointed to Crdit Lyonnais'
European Division to handle all customer and commercial aspects
linked to European commission constraints on Crdit Lyonnais. He was
then transferred to the Inspection Gnrale in 1999 and headed
various missions in French, Asian and North African banking
units.Born in 1948, Patrick Legait who started his career with a
Master Degree of Economics, is today a man of broad international
experience and speaks fluently English and German.
Mahmoud ABDEL WAHAB
N en Egypte en 1951, Mahmoud Abdel Wahab termine ses tudes
secondaires au Caire au Collge de la Sainte Famille (Jsuites). En
1973, il obtient sa matrise dconomie de la facult dEconomie et
Sciences Politiques de lUniversit du Caire, qui lui confie une
fonction de Matre Assistant et le dtache en 1974 sa branche de
Khartoum. En 1980, Il obtient un Doctorat dconomie de lUniversit
Paris I Sorbonne.Aprs un court passage dans une socit
dinformatique, il entre lU.B.A.F. en 1984, et occupe en 1989 les
fonctions de Secrtaire Gnral du Groupe UBAF. Il contribue en 1994
la mise en place dune activit Islamic Banking dont il est
actuellement et depuis 4 ans le responsable.
Participants are welcomed to address any questions related to this presentation to:
Mahmoud Abdel WahabTel. 01 46 40 64 42Fax.01 46 40 65 17E-mail:
[email protected]
Union de Banques Arabes et Franaises