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Monthly Archives: February 2014
February 19, 2014
DR. ZULKIFLI HASAN
Islamic Finance in the Land of Pope
Gulf ties could aid Islamic finance in Italy, supporters hope
BY BERNARDO VIZCAINO Available at:
http://www.reuters.com/article/2014/02/18/islamic-finance-italy-idUSL6N0JX0QS20140218
Feb 18 (Reuters) – Bankers and academics in Italy are stepping up efforts to develop Islamic finance in the country, a campaign which could benefit from growing economic links between Gulf countries and the euro zone’s third largest economy.
Islamic finance has so far made only marginal progress in continental Europe, mainly in France and Germany. But Italy is seeking trade and investment with wealthy Gulf Arab states as a way to grow out of its debt problems.
Kuwait’s sovereign wealth fund announced this month that it would invest 500 million euros ($685 million) in Italian companies in coordination with the Italian government’s own strategic investment fund. Italy made a similar deal with Qatar last year.
Italy’s trade ties with the Gulf are booming; its exports to the United Arab Emirates hit 5.5 billion euros in 2012, a 16.7 percent rise from 2011, government data shows.
Only about 2 percent of Italy’s population of 61 million are Muslim. But the hope is that as Gulf companies and investors increase their activities in Italy, Islamic finance – which follows religious principles such as bans on interest payments and pure monetary speculation – will follow.
Italian firms raising loans could use Islamic structures to attract sharia-compliant banks from the Gulf, for example. Italian bonds and equities could become attractive to Islamic funds if they were certified as sharia-compliant.
“I think the development of sharia-compliant products is an important opportunity for Italy – it might become one of the drivers to get finally out of the economic crisis,” said Enrico Giustiniani, analyst at Banca Finnat Euramerica in Rome.
“There is quite a big interest from Islamic funds and Islamic institutional investors to invest in Italy, especially in this period with many companies on sale.”
INDEX
Banca Finnat has gone as far as designing a hypothetical index of sharia-compliant stocks, which features some of the country’s best-known luxury brands, Giustiniani said.
“A specific index still does not exist, but the interest is very high. The luxury sector is a brand required by foreign institutional investors and it is a very important growth driver for our country.”
Gulf investors have already shown considerable interest in Italy’s luxury good firms; in 2012, for example, Italian fashion brand Valentino was bought by Qatar’s royal family.
Fondazione Istud, a Milan-based business school, plans to establish an Islamic finance position this year, intended as a venue for industry research and to develop proposals aimed at Italian decision makers.
This would be the first structured attempt to provide industry information and influence legislation, Marella Caramazza, director-general of Fondazione Istud, told Reuters.
“Certainly regulators and practitioners seem to demonstrate a general interest on this subject in our nation, but at the same time tend to have a very conservative approach.
“At this stage, we are trying to involve stakeholders and gather funds at different levels, in order to begin with the activities,” Caramazza added.
REGULATIONS
These activities should include a review of existing regulations, mainly those covering real estate registration taxes, said Hatem Abou Said, representative in Italy of Bahrain’s Al Baraka Banking Group (ABG).
Tax rules are particularly important for Islamic finance because many of its asset-based transactions are vulnerable to double taxation under conventional accounting methods; addressing such barriers could lure Islamic banks to the market.
Currently, however, only broad discussions are taking place with Italian policy makers and no specific agenda is in place, said Francesca Brigandi, president of COMEDIT, the Italian-Mediterranean and Gulf Countries Chamber of Commerce.
While political and legislative hurdles remain, Italy’s central bank is no stranger to Islamic finance as it monitors the sector on a regular basis, though it does not have a specific group studying Islamic finance, said a central bank spokesman.
Its research department has conducted formal studies, held seminars on Islamic finance as far back as 2009, and last year co-hosted a forum with the Malaysian-based Islamic Financial Services Board, one of the industry’s standard setting bodies.
Rony Hamaui, chief executive of Milan-based Mediofactoring, a fully owned subsidiary of Intesa Sanpaolo, Italy’s biggest retail bank, said his and other Italian companies had explored Islamic financing options in the past but did not do deals, partly because of a lack of regulatory support in Italy.
However, deals could start to materialise – perhaps involving Italian firms overseas – even without government support, as companies increasingly seek to broaden their funding sources, Hamaui said. “Liquidity is becoming a more and more important problem in Europe.” (Editing by Andrew Torchia)
Regards
Duomo, Milan, Italy
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February 11, 2014
DR. ZULKIFLI HASAN
MEMAHAMI KONSEP “SUMPAH” DALAM ISLAM
MEMAHAMI KONSEP “SUMPAH” DALAM ISLAM
Oleh Zulkifli Hasan
1.0	Pendahuluan
Mutakhir ini, masyarakat dihidangkan dengan pelbagai isu agama yang sememangnya perlu difahami secara ilmiah, jujur, ikhlas dan tepat menurut kehendak syarak. Di antara isu yang menjadi topik hangat perbincangan umum pada hari ini ialah tentang konsep sumpah atau al-Yamin di dalam Islam. Apabila berlakunya sesuatu kes yang melibatkan pertuduhan dan perselisihan, maka kerap kali sumpah menjadi sebutan dan mainan. Di dalam kes pertuduhan liwat misalnya, ramai yang membuat andaian bahawa Yang Menuduh dan Orang Kena Tuduh perlu mengangkat sumpah bagi menyelesaikan kes. Dengan itu berlakulah upacara angkat sumpah di dalam masjid dihadapan al-Quran dan mendapat liputan secara langsung di media. Begitu juga dalam kes video seks yang menggemparkan Malaysia, di mana ramai pihak menuntut Orang Kena Tuduh untuk bersumpah dan beranggapan ianya perlu dan wajib dilakukan. Kes terkini merujuk kepada pasukan bolasepak T-Team yang melaksanakan upacara sumpah di depan al Quran berkenaan dengan insiden pergaduhan di stadium Larkin Johor. Begitu juga dengan kes-kes lain yang melibatkan pihak sesuka hati bersumpah malahan dilaksanakan dengan menjunjung al Quran.
Melihat kepada perihal ketidak atau kurang fahaman umum mengenai konsep sumpah dalam Islam, penulis ingin berkongsi sedikit pengetahuan berkenaan dengan ruanglingkup undang-undang Islam terhadap perlaksanaan sumpah dan aplikasinya. Dengan informasi dan penjelasan yang diberikan, diharapkan selepas ini tiada lagi desakan dari pihak tertentu untuk sesuka hati meminta sesiapa bersumpah. Sesungguhnya hanya ilmu pengetahuan dan kejujuran serta keihklasan dalam memahami konsep sumpah ini akan memelihara masyarakat dari pelbagai mehnah dan tohmahan.
2.0	Konsep Sumpah (Al-Yamin) dan Pembahagian
Menurut bahasa al-yamīn bermaksud kanan atau bahagian kanan, dan di dalam bahasa melayu al-yamīn bererti sumpah. Istilah lain yang digunapakai juga merujuk kepada al-yamīn ialah al-halaf, al-istihlaf, al-Ila’ dan al-qasam. Dari sudut istilah pula, al-yamīn ditakrifkan sebagai: “Suatu lafaz yang digunakan untuk menyatakan (mensabitkan) haknya terhadap sesuatu perkara atau menafikan sesuatu perkara dengan menyebut nama Allah S.W.T atau sifat-sifatNya”. Melalui pentakrifan ini, sumpah yang dibuat dengan memegang atau menjunjung al-Quran di mana sering kali menjadi anggapan ramai sebagai syariat Islam bukanlah amalan yang dituntut oleh syarak.
Bagi memahami konsep sumpah dengan lebih mendalam, kefahaman terhadap pembahagiannya adalah amat penting. Secara umumnya sumpah dibahagikan dua bahagian iaitu di luar mahkamah (al-Yamīn ghair al-Qadha’iyyah) dan dalam mahkamah (al-Yamīn al-Qadha’iyyah). Walaupun kedua-dua al-yamīn bertujuan untuk menguat dan mengukuh sesuatu tetapi terdapat beberapa perbezaan dari segi hukum dan kaedah pemakaiannya. Al Yamin di luar mahkamah adalah tidak tergolong dalam kategori pembuktian yang diterima untuk sabitan apa-apa kes. Manakala al-Yamin di dalam mahkamah menjadi keterangan (al-Bayyinah) dan boleh diterima pakai untuk sabitan di dalam kes mal (sivil) sahaja. Apa-apa bentuk al-Yamin atau sumpah di dalam kes-kes yang melibatkan jenayah seperti hudud, qisas dan taa’zir tidak boleh diterima pakai sebagai pembuktian untuk sabitan.
2.1	Al-Yamīn Di luar Mahkamah (al-Yamīn Ghair al-Qadha’iyyah)
Al-Yamīn di luar mahkamah juga bertujuan untuk menguat dan mengukuhkan sesuatu perkara. Tetapi al-yamīn ini tidaklah menjadi salah satu cara pembuktian berbeza dengan al-yamīn di dalam mahkamah. al-Yamīn ghair al-Qadha’iyyah bergantung sepenuhnya kepada niat yang orang melafazkannya, sekiranya lafaznya berbeza dari apa yang diniatkannya ia disebut sebagai ‘Tauriyyah’. Tauriah semasa bersumpah adalah tidak dibenarkan samasekali sekira bertujuan untuk menganiayai orang lain bahkan ia merupakan perbuatan yang diharamkan. Pembahagian al-yamīn di luar mahkamah boleh dibahagikan kepada empat iaitu al-yamīn al-munaqidah, al-yamīn al-lagha, al-yamīn al-ghumus dan al-Yamin Mubahalah.
Al-Yamīn al-Mun’aqidah.
Al-yamīn al-Munaqidah iaitu sumpah yang bersungguh-sungguh dan sah. Ia merupakan suatu sumpah terhadap sesuatu perkara pada masa yang akan datang sama ada untuk dilaksanakan atau meninggalkan sesuatu perkara. Sekiranya seseorang itu melanggar apa yang disumpahkannya maka wajib dikenakan kafarah.
Al-Yamīn al-Lagha
Al-Yamīn al-Lagha adalah jenis sumpah sia-sia yang mana orang yang melafazkan sumpah tersebut tidak berniat untuk bersumpah. Ianya juga boleh ditakrifkan sebagai sumpah terhadap sesuatu yang tidak disangkakan menepati ianya bersumpah sebagaimana ia bersumpah akan tetapi ternyata tidak tepat atau dalam erti kata lain sumpah yang dimaksudkan dengan sesuatu tetapi lidah menyebut perkataan lain. Para fuqaha berpendapat bahawa sumpah jenis ini tidak dikenakan kafarat kepada sesiapa yang melanggarnya.
Al-Yamīn al-Ghumus
Al-Yamīn al-Ghumus ialah sumpah bohong yang merendahkan hak-hak atau bertujuan membuat dosa dan khianat serta ia tergolong di antara dosa-dosa besar. Ghumus itu bermaksud menjerumuskan pelakunya ke dalam neraka. Mengikut pendapat mazhab Shafie diwajibkan juga kafarat kepada sumpah bohong ini.
Al-Yamin al-Mubahalah
Al-Yamin al-mubahalah ialah sumpah saling melaknat sesiapa yang berbohong antara kedua-dua belah pihak, termasuk orang yang bersumpah. Di antara perkara yang perlu diberi perhatian pada sumpah mubahalah ialah ianya adalah bentuk sumpah di luar mahkamah yang berlaku untuk mempertahankan diri dan bukan untuk melakukan tuduhan kepada orang lain. Sekiranya apa yang disumpah tidak betul, sesuatu yang batil atau berbohong orang yang bersumpah juga termasuk dalam mereka yang dilaknat dalam sumpahan itu. Perlu diingat keperluan kepada al-Yamin mubahalah tidak menjadi tuntutan sekiranya kes sedang dibicarakan di Mahkamah. Ini kerana ianya boleh mengganggu proses keadilan di Mahkamah yang melibatkan banyak kaedah pembuktian yang lain seperti al-Iqrar, al-Syahadah dan al-Qarinah. Malahan sumpah mubahalah dianjurkan hanya selepas pelbagai cara diusahakan untuk menyelesaikan perbalahan dan sekiranya terus buntu barulah ianya boleh dilaksanakan. Sheikh Yusuf al-Qaradhawi mengingatkan bahawa mubahalah bukanlah perkara yang baik dan mudah dilakukan begitu sahaja, sebaliknya ia berlaku dalam perkara-perkara yang sangat penting dalam agama sahaja.
2.2	Al-Yamīn Di Dalam Mahkamah (al-Yamīn al-Qadhaiyyah)
Al-yamīn al-Qadhaiyyah berfungsi untuk mensabitkan atau menafikan sesuatu dakwaan ke atas seseorang dan ia bergantung kepada niat orang yang mengarahnya iaitu Hakim. Ianya hanya terpakai untuk sabitan dalam kes mal. Menurut kitab-kitab fiqh, al-yamīn yang dilaksanakan dalam sesuatu penghakiman terbahagi kepada tiga bahagian iaitu Yamīn al-Mudda’a ‘alaih, Yamīn al-Mudda’i dan Yamīn al-Syahid.
Yamīn al-Mudda’a alaih
Yamīn al-Mudda’a alaih ialah sumpah yang dilafazkan oleh yang kena dakwa atas arahan hakim merujuk kepada permohonan yang mendakwa bagi menguatkan jawapan terhadap dakwaan. Ia juga dikenali sebagai Yamīn al-Asliyyah, Yamīn al-Dafī’ah dan Yamīn Al-Rafī’ah. Ulamak Hanafiyyah juga menamakan sebagai sumpah wajib (Yamīn al-Wajibah).
Yamīn al-Shahid
Yamīn al-Shahid akan dilaksanakan oleh saksi sebelum sesuatu kesaksian dibuat. Sumpah ini bertujuan memberi kebenaran atas kepercayaan. Pada Masa ini al-yamīn jenis ini menjadi ganti kepada tazkiah kepada saksi.
Yamīn al-Mudda’i
Imam Abu Hanifah dan sahabat-sahabatnya hanya menerima Yamīn al-Mudda’a alaih (sumpah yang didakwa) dan menolak selain daripada itu. Namun jumhur yang terdiri daripada Maliki, Shafie, Hanbali dan lain-lain menerima pakai yamīn al-Mudda’i. Menurut para ulamak yang menerima Yamīn al-Mudda’i, ia terbahagi kepada tiga bahagian iaitu Yamīn al-Jalibah, Yamīn al-Tuhmah dan Yamīn al-Istizhar.
i. Yamīn al-Jalibah: Sumpah yang dilaksanakan oleh al-mudda’i untuk mensabitkan hak-haknya. Sebab-sebab yang memerlukan sumpah ini adakala ianya keterangan seorang saksi sahaja iaitu sumpah bersama seorang saksi (al-yamīn ma’a al-Syahid) adakalanya kerana nukul al-mudda’a alaih daripada al-Yamīn al-asliyyah dan dikembalikan kepada al-mudda’i supaya bersumpah atau dinamakan al-yamīn al-Mardudah atau al-Munqalibah. Adakalanya al-yamīn al-Jalibah digunakan kerana lauth iaitu yamīn al-Qasamah dalam kes pembunuhan atau kecederaan. Kadangkala ia juga dilaksanakan kerana Qazaf suami terhadap isterinya iaitu dikenali sebagai al-Yamīn al-Li’an dan adakalanya amanah kerana setiap orang yang diberi amanah dan mendakwa telah memulangkan barang tersebut kepada tuannya. Maka dibenarkan dakwaannya dengan bersumpah kecuali pemegang barang gadai, penyewa dan peminjam tidak dibenarkan dakwaan mereka melainkan jika ada bayyinah.
ii. al-Yamīn al-Tuhmah: Sumpah yang diarah oleh Hakim kepada orang yang mendakwa bertujuan untuk menolak dakwaan yang tidak dapat dipastikan kebenarannya. Sumpah ini diterima pakai oleh mazhab Maliki dan Zaidiyyah.
iii. Yamīn al-Istizhar: Bentuk sumpah ini yang paling kerap digunakan dalam menyelesaikan sesuatu pertikaian di mahkamah Syariah. Yamīn al-Istizhar juga disebut sebagai Yamīn al-Istithaq atau Yamīn al-Istibra’ iaitu sumpah yang dilakukan oleh orang yang mendakwa atas permintaan hakim untuk menolak tohmah terhadapnya selepas ia mengemukakan dalil dan keterangan yang diperlukan dalam dakwaan. Lazimnya Yamīn al-Istizhar ini dilaksanakan bagi tuntutan yang berhubung dengan hak ke atas orang yang ghaib atau mati.
4.0	Kesimpulan
Konsep sumpah di dalam Islam merupakan salah satu cabang ilmu yang perlu difahami secara mendalam oleh pengamal undang-undang manakala kesedaran dan kefahaman asas pada konsep ini perlu diserap dan diperjelaskan kepada masyarakat. Akibat dari ketidak atau kurang fahaman atau buat-buat tak faham pada konsep sumpah ini membuatkan ketidakselesaan dan persengketaan di dalam masyarakat. Desakan pihak tertentu untuk bersumpah dalam pelbagai aspek menunjukkan krisis intelektual dan kedangkalan tahap kefahaman Islam. Kini sumpah juga diheret dalam kancah bolasepak negara. Begitu jelas ketidakfahaman dan tahap kesedaran masyarakat mengenai konsep sumpah ini.
Sumpah yang boleh diterima pakai untuk sabitan kes adalah sumpah yang dibuat di mahkamah dan menurut syarat-syarat yang ditetapkan. Sumpah sebagai kaedah pembuktian hanya terpakai di dalam kes mal dan ianya tidak boleh diterima di dalam kes jenayah seperti kes liwat, zina, qazaf dan sebagainya. Sumpah di luar mahkamah bukanlah sesuatu perkara yang digalakkan di dalam Islam. Sumpah mubahalah misalnya, bukanlah boleh dilaksanakan sesuka hati sesedap rasa. Ianya hanya boleh dilakukan sekiranya pelbagai cara lain telah dilaksanakan dan tiada kaedah lain lagi yang boleh menyelesaikan perselisihan. Dalam aspek kaedah bersumpah pula, amalan bersumpah menjunjung atau mencium atau mengusap atau mengangkat al-Quran bukanlah tuntutan ajaran Islam. Sumpah cukup dengan menyebut nama Allah S.W.T atau sifat-sifatNya.
Penjelasan ringkas mengenai konsep sumpah di atas diharapkan dapat merungkai dan memberi kefahaman yang sewajarnya terhadap ruanglingkup dan aplikasi sumpah menurut hukum syarak. Masyarakat umum atau pihak tertentu janganlah terlalu teruja dan terkinja untuk mendesak individu untuk bersumpah sebagai kaedah menyelesaikan pertikaian dan perselisihan. Sumpah yang menyandarkan kepada nama Allah Subhanahuwataala atau sifat-sifatNya tidak boleh dipermain-mainkan dalam bentuk apa sekalipun. Amalan mendesak atau memaksa individu bersumpah di dalam masyarakat perlu dihentikan atau kita akan hanya terus mengamalkan perkara yang tidak dituntut oleh syarak malahan boleh mencetuskan kemurkaan Allah Subnahuwataala.
Best Regards

ZULKIFLI HASAN
Muscat, Oman
My Thought
1 Comment
February 9, 2014
DR. ZULKIFLI HASAN
Islamic Finance Isn’t Just About Religion – Sometimes It’s Just Good Business
Islamic Finance Isn’t Just About Religion — Sometimes It’s Just Good Business

By International Business Times
By Kathleen Caulderwood Available at:
http://www.investing.com/news/economy-news/islamic-finance-isn’t-just-about-religion—-sometimes-it’s-just-good-business-265197
Eric Meyer, a hedge fund manager, finds himself flying from Connecticut to the Persian Gulf at least once every four to six weeks.

Islamic Finance Isn’t Just About Religion — Sometimes It’s Just Good Business
His favorite city there is Dubai, where he’s had an office in the Jumeirah Lakes district for the past five years. It’s a long way from his native Missouri, where he grew up with no idea that his future career in finance would depend upon the Gulf States, a few sheiks and Shariah law.

“When I started out in finance, the Middle East to me was just a very interesting place to read about,” Meyer said.

Today, he’s the president, CEO and chairman of Shariah Capital, a U.S.-based company that creates and customizes Islamic finance products.
A bank staffer speaks on the phone inside the Bank Islam branch office in Shah Alam, outside Kuala Lumpur, Nov. 6, 2013. Reuters

Meyer got into the business after visiting a portfolio-manager friend in Kuwait more than a decade ago who happened to be related to the president of one of the country’s largest banks.

“So his uncle said, ‘I wish one of you guys would take Islamic finance seriously, because the guy who takes it seriously can really add tremendous benefits,’” Meyer recalled.
That’s how it started.
This year will be Meyer’s 15th in Islamic finance, and it’s going to be a good one.

On Thursday he and two partners (one American, one Saudi) announced their new wealth management firm, Mahal Thqa Financial Advisors. They’ll offer independent advice to Islamic investors on ventures that follow Shariah rules.
Meyer is one among many in the industry who expect big things for Islamic finance in the next few years. “There’s not that many people trying to build out Islamic finance, but there should be,” he said. “It’s just hard work and common sense.”

Though the concepts are hundreds of years old, a modern version of Islamic finance has evolved in recent generations to satisfy the needs of people looking to invest without going against their religious beliefs. Besides the moral incentives, there’s real money to be made. The Shariah-compliant sector has grown to $1.6 trillion in assets over the past three decades, according to the Global Islamic Financial Review. It’s becoming hard to ignore – even for the West.
As the markets of the Gulf countries and Malaysia – two of the largest for Islamic finance – begin to recover, Muslim and non-Muslim financiers from around the globe have noticed the growing investor pool with enough cash to make a serious impact.

“We’ve just come through a very difficult period for the financial sectors,” said Toby O’Connor, CEO of the Islamic Bank of Asia, at the Bloomberg Link Doha Conference in April. “We’ve seen enormous change within the big banks – in some cases they’ve pulled out their lending limits to emerging markets.”
In Africa, a handful of countries have already laid the groundwork to enable Islamic banking, and some of London’s newest landmarks were built thanks to Shariah-compliant bonds. Even America’s Goldman Sachs has made forays into the sector, albeit with mixed results. This year also marks the very first Islamic finance program for beef exports in Brazil.
“What you are seeing is an opportunity for Islamic finance to fill some of the voids created by pullback in the conventional markets,” O’Connor said, and he cited the sukuk market as an example. “Sukuk” is an Arabic word that translates literally to “certificates” (it’s always plural) but is understood to represent a bond-like product, though the comparison is not precise.

“As interest-bearing transactions are prohibited under Islamic commercial law, sukuk are used to raise funds using various permissible contracts,” said Habib Ahmed, a professor of Islamic finance at the Durham University Business School, and Sharjah chair in Islamic Law and Finance at the School of Government and International Affairs.
Basically, Islamic investors can’t make money from money. There must be real assets involved that can be easily identified. A sukuk holder can receive rental payments from the leasing of a specific property but cannot lend money to a leasing company.

There are also many places where the money should not be spent. Funds cannot be spent in ordinary banking activities, or fund projects like tobacco or alcohol production. To ensure compliance, Shariah scholars regularly audit financial activities.

It’s generally understood that money will be used to finance projects that are socially responsible. That way, even if someone purchased a sovereign sukuk, they know the money will be spent on activities that promote social good.
Ahmed listed 14 types of sukuk that can be debt-based, asset-based, equity-based and agency-based. The most popular kind are leasing-based (also called ijarah), which is raising sukuk for real estate. Sorting through the products can be complicated, but that hasn’t stopped sukuk issuances from increasing globally as non-Muslim investors have become more interested.

“On the demand side, most purchases are pious Muslims who believe that, for all their imperfections, the sukuk are morally superior to regular bonds,” said Timur Kuran, professor of social science and economics at Duke University.
But religion isn’t the only reason.
“A second source is people looking for diversification,” Kuran said, adding that the social-responsibility aspect is appealing in the same way that an environmentally conscious investor will put money into “green” funds.

Standard & Poor’s released a report on Feb. 5 predicting that sukuk issuances worldwide will top $100 billion in 2014 thanks to higher demand from the Middle East and growth in Malaysia – the world’s largest market.

It’s this combination that makes Africa a burgeoning destination for Islamic finance.
“We believe that for investors looking to buy Islamic bonds outside of traditional markets like Asia and the GCC region, Africa may soon offer a fresh alternative,” the S&P report predicts.

In October, a Nigerian state issued a Shariah-compliant bond, a seven-year instrument that raised about $62 million from domestic pension funds and international investors. Senegal has also announced plans to issue a $200 million sukuk in the first quarter of the year.
Governments that issue sukuk benefit from a new and broad investor base, and the possibility to build up their reserves.

“Sukuk offer an opportunity to tap the large pool of funds from the Middle East and East Asia,” said Anadou Sy, an Africa economist at the Brookings Institute.
Beyond the fact that Africa has a sizeable Muslim population, non-Muslims are also looking for ways to diversify their holdings, Sy said. Also making sukuk more attractive is that they lend themselves to infrastructure projects, which are desperately needed in sub-Saharan Africa. “Domestic revenues will not be enough to finance the large infrastructure projects that governments plan to undertake,” Sy pointed out.
The top 20 Islamic banks in the world have been growing by about 16 percent annually for the past three years, according to Ernst & Young, which has attracted the attention of investors in the developed world as well. The 2013 World Islamic Economic Forum in November was held in London, where Prime Minister David Cameron announced an ambitious plan. “I want London to stand alongside Dubai and Kuala Lumpur as one of the great capitals of Islamic finance anywhere in the world,” he said in a speech.

The U.K., where Musims are 5 percent of the population, already has more Shariah-compliant banks that any other Western country. Shariah-compliant finance is responsible for building the London Gateway and the Shard – the tallest building in Europe – as well as significant investments in a soccer stadium in Manchester and even parts of the Olympic Village.
“There are some countries whose instincts sometimes incline toward pulling up the drawbridge. But if they do so, they fail to recognize that the way the world is changing affects their future success,” Cameron said. “Britain will not make that mistake.”

Islamic finance is becoming more common in the United States as well, though there are more challenges than in Britain.

“When you look at the U.S., there are a few key challenges to growth in the sukuk market – the first is political will,” observed Kavilash Chawla, managing director of Nur Global Strategies, a Chicago-based Islamic finance advisory firm.
Chawla cited Cameron’s speech in London, and noted, “It’s very unlikely we would ever see any sort of similar language out of the U.S.”

He also referred to problems Goldman Sachs had when it attempted to issue sukuk. In 2011, the bank announced that it would issue $2 billion worth, but just over a year later, scholars from Abu Dhabi Islamic Bank determined that their program was not compliant with Islamic law, since the funds would go to the bank’s non-Shariah business.
Despite that setback, many Americans are still looking to get involved.
“Retail consumers are looking for financial products that are aligned to their value base,” Chawla said, adding that corporate non-Muslim consumers are also interested. “From a pricing perspective, it’s attractive,” he said.
Part of what Chawla’s firm does is facilitate connections between American companies and Islamic investors. He gave an example of one Midwestern company he’s advising on Shariah-compliant financing to help appeal to investors from the Middle East. The management didn’t know much about Islamic finance, but it is interested in making the process work. The main problem with his American customers is that they think the process is more complicated than it is. But this will improve with time and familiarity, he said.

Shariah, after all, is a particularly freighted term in the U.S., where it carries negative political connotations. That’s partly due to a general lack of understanding of what Shariah entails, particularly relative to the financial world. In August, for example, North Carolina became the country’s seventh state to sign into law a bill that officially prohibits its judges from “considering” Islamic law.
But on the corporate side, politics aren’t the problem.

“The clients don’t understand how you access some of the Shariah-compliant capital that’s out there,” Chawla said. “They don’t have a deep understanding of how to structure sukuk or how it affects costs.” Explaining those things is part of his firm’s role.

Many of the companies Chawla works with are non-Muslim and are simply trying to tap into a market with major potential. He said he’s working with a large U.S.-based project in the Midwest that’s making forays into the halal food industry and wants their finances to align with Islamic law.
Though many of these ideas are new to American companies, they’re more familiar farther south. According to the CIA World Fact Book, Muslims represent less than 1 percent of Brazil’s population, but more than 40 percent of the country’s farmers are well-versed in the nuances of halal – the process of slaughtering animals according to Islamic law, which only takes an extra two or three seconds, according to Juan Fernando Valdivieso and Muneef Tarmoom, co-founders of Abu Dhabi Equity Partners, an investment firm that recently initiated Brazil’s first Shariah-compliant livestock finance program. They’ve been working in Brazil for years, and said that many Islamic practices are well-known to farmers there. “They’re extremely accustomed to it because it’s an emerging market for them,” Valdivieso said, adding that almost all exports of halal beef will go to countries in the Gulf.
The pair has also organized Shariah-compliant financing for ethanol, sugar and soy exports. To them, Brazil represents an ideal place to work. “Given the significant trade between the Middle East and Brazil, it was certainly an area we were looking at from a macro perspective,” Tarmoom said, citing Brazil’s high favorable interest rates, among other factors.

“It allows us to extract a larger profit rate, while keeping the risks contained,” he said, adding that now is the time to move in these markets as European and global banks begin to scale back their exposure.
To Tarmoom and Valdivieso, it’s a bet on South-South trade – trade between emerging markets – that they feel is only going to keep growing. And given the fact that a large proportion of the populations in developing countries in the Middle East, South Asia and Africa will be looking for Shariah-friendly ways to finance their projects, they and others promoting these products should be well-placed for the future.
Regards

Zulkifli Hasan
With late Ashgar Ali Engineer in Bangkok
Islamic finance news
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February 7, 2014
DR. ZULKIFLI HASAN
Islamic finance ‘relevant to all faiths’
Islamic finance ‘relevant to all faiths’
Available at:
http://www.tradearabia.com/news/BANK_251542.html
A majority of non-Muslim UK consumers believe that Islamic finance is relevant to all faiths, said a recent survey.
The first national survey by UK-based sharia-compliant retail bank Islamic Bank of Britain pointed out that about 66 per cent of those surveyed felt that sharia finance is appropriate in a modern western society.
The survey, which was conducted by 2Europe, an independent research company, questioned 300 British Muslim and non-Muslim consumers across the UK.
It was aimed at finding the British consumers’ understanding of and attitudes towards Islamic finance.
The survey said that about 60 per cent of the consumers agreed that Islamic banking works different to the way conventional banking works, and it pays profits rather than interest on savings products and charges rent not interest on their home finance products.
About 58 per cent of those surveyed considered Islamic finance to be an ethical system of finance and one which considers the impact of its activities on society
A specific focus on the 200 Muslim customers and prospective customers surveyed showed that about 36 per cent of Muslims currently use sharia-compliant finance, of which nine per cent use it exclusively.
A further 45 per cent of Muslims, who don’t currently use sharia-compliant finance, are very likely to consider doing so in the future, it said.
Sultan Choudhury, managing director of IBB, said: “IBB has long been considered the pioneer of sharia-compliant retail banking.  It’s therefore fitting for the bank to mark its 10-year anniversary by revealing findings from the UK’s first survey into British consumers’ attitudes of Islamic finance.
“The insights also come at a time when the UK Islamic finance sector as a whole is set to embark on several important developments, including the launch of a Sovereign Sukuk, due later this year.” – TradeArabia News Service
Regards
Tokyo
Islamic finance news
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February 1, 2014
DR. ZULKIFLI HASAN
Quest for Meaning: My Thought
Dear Readers,
My “Interview’ on the issue of Quest for Meaning that aired on MOBTV channel.
Watch my other ‘interviews’ and lectures at
https://zulkiflihasan.wordpress.com/my-e-lecture-series/
MOBTV
http://www.mobtv.my/talkshow-4684.html
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www.isdb.org 1435H / 2014G

ISLAMIC DEVELOPMENT BANK
Modes of Finance

© Islamic Development Bank, 2016

 King Fahd National Library Cataloging-in-Publication Data

Islamic Development Bank

          Islamic development bank modes of finance / Islamic

   Development Bank – Jeddah, 2016

     ISBN: 9960-32-323-4

     1-Islamic Finance   2-Financial Products l-Title

     332.121 dc  1437/7793

     L.D. no. 1437/7793

     ISBN: 9960-32-323-4

PUBLISHER’S COPYRIGHT

All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in

a database or retrieval system, without the prior written permission of the Islamic Development Bank.

IMAGES COPYRIGHT

The images used on Pages (2, 6, 8, 12, 14, 18, 20, 28, 30, 36, 44, 52, 54, 56, 58, 60, 62 and 66) are Copyright ©

Shutterstock.com and reproduced with permission subject to the Terms of Service (ToS) for a Single User Standard License

(effective March 25, 2014). The Islamic Development Bank (IDB) will not be liable for any third party use of these images

in any form or means.

Contents
Introduction ......................................................... 1

A. The Modes of Finance - AT A GLANCE ............. 3

B. The Modes of Finance - EXPLAINED ................ 7

B1. Grant .......................................................... 9

B2. Loans .......................................................... 13

B3. Leasing (Ijarah) ........................................... 21

B4. Istisna’a ....................................................... 29

B5. Instalment Sale .......................................... 37

B6. Restricted Mudarabah ............................... 45

B7. Equity Participation .................................... 53

C. Methods of Disbursement ............................... 57

D. Sources of Funds ............................................. 61

D1. Ordinary Capital Resources (OCR) ............. 63

D2. Islamic Solidarity Fund for Development ... 64

D3. IDB Waqf Fund ........................................... 65

E. Glossary ........................................................... 67

FOREWORD

A Key Strategic Thrust of the Vision 1440H requires IDB to transform itself into a knowledge-based
bank. This entails regularly developing and efficiently maintaining a knowledge repository of the
institution for the benefit of the staff as well as our clients in our Member Countries.

Through its mandate, the Financial Product Development Center (FPDC) has constantly pursued
streamlining product development knowledge across the IDB Group. This enables it to assess the
existing financial products and identify gaps that can be filled with new and innovative products to
better serve our Member Countries. This publication is a laudable step towards such a knowledge
product. It encapsulates the essential knowledge of IDB’s Modes of Finance (the ‘products’) in
accordance with the rulings of the IDB Shariah Committee, thereby bringing IDB’s clients even more
closer to the institution with regards to its financial offerings.

The invaluable support provided by IDB experts in Shariah, Legal, Finance and Operations towards
this effort is highly acknowledged. We eagerly hope that all stakeholders wholly benefit from this
knowledge product and we invite them to work with us to keep improving our offerings.

Dr. Abdul Aziz Al-Hinai

Vice President, Finance
Islamic Development Bank

IV

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Acknowledgements

This publication is the result of a collaborative effort led by the Financial Product Development
Center (FPDC).

The Center would like to accord its deep appreciation to experts from the Legal Department for their
highly constructive efforts towards the preparation of this publication. Thanks to the Finance Control
Department, which was generous with information on best-practices. Thanks also to the Operations
Complex of IDB, which provided critical information and valuable feedback.

The legal documentation from the Legal Department was used by the Center for the consolidation
of the basic information and structures of the products. These were refined in successive meetings
with inputs from Shariah, Legal, Finance and Operations experts following which the Legal Dept.
reviewed the final version for publication.

Special Thanks to the Project Team Members (in alphabetical order)

Aboubacar Kante - Senior Shariah Expert, Legal Department

Demba Diallo - Senior Legal Counsel, Legal Department

Mohsin Sharif - Project Coordinator, Financial Product Development Center

V

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Introduction
This Manual provides the basic knowledge about the Islamic Development Bank’s Modes of Finance
(the ‘products’).

The products are presented according to the following methodology.

Definition1.

How it works at IDB2.

Scope3.

Eligibility4.

Application Process5.

Legal Documentation6.

Effectiveness7.

Step by Step8.

Structure Diagram9.

Basic Terms and Conditions10.

Disclaimer: This Manual is for informational purposes only. The information contained herein is
subject to change at the discretion of the Islamic Development Bank.

1

The Modes of Finance
AT A GLANCE

LoanGrant

Concessional

Leasing
(Ijarah)

Instalment
Sale

Restricted
Mudarabah

Ordinary

Istisna’a
Islamic

Solidarity
Fund for

Development
(ISFD)

Special
Assistance
(SA) Grant

Technical
Assistance
(TA) Grant

Ordinary
Capital

Resources
(OCR)

Ordinary
Loan

Technical
Assistance
(TA) Loan

A. The Modes of Finance

4

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A. The Modes of Finance
Mode Source of Funds Tenor Scope

Concessional

Special Assistance
(SA) Grant

A pool consisting of:
Income of IDB Waqf

Fund
+

An allocation from IDB
OCR’s income

N/A
For support to Muslim communities in non-Member
countries. Also for disaster relief in Member
countries.

Technical Assistance
(TA) Grant

N/A For capacity building for Member Countries.

Loan

Ordinary Capital
Resources (OCR)

Ranging from
15-30 yrs including

a
Grace Period of

3-10 yrs
(see Page 12 also)

Ordinary loans are for long-term financing for
projects in Member Countries.

Technical Assistance (TA) loans are for feasibility
studies for major projects in Member Countries.

Islamic Solidarity Fund
for Development (ISFD)

For long-term financing to target Millennium
Development Goals.

Ordinary

Leasing

Ordinary Capital
Resources (OCR) and
funds from Resource

Mobilization

Ranging from
10-20 yrs including

a
Gestation Period of

3-5 yrs

Financing to provide for capital equipment and fixed
assets.

Istisna’a
Financing to provide for constructing/manufacturing
an Asset.

Instalment Sale
Asset Financing for the client with spot delivery, with
repayment in instalments.

Restricted
Mudarabah

Profit-sharing loss-bearing arrangement for business
financing with restricted terms and conditions.

5

The Modes of Finance
EXPLAINED

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B1. Grant
Technical Assistance (TA) Grant
These grants are provided for technical assistance and capacity building activities in IDB’s Member
Countries, with priority given to Least Developed Member Countries (LDMCs).

Special Assistance (SA) Grant
These grants are provided for social projects (schools, hospitals etc.) for the exclusive benefit of
Muslim communities in Non-Member countries. They are also provided for disaster relief in Member
countries.

Step by Step
Approval:1.  Following a formal request from the Recipient, IDB processes the request and approves
to provide a grant amount to the Recipient.

Signature:2.  IDB and the Recipient sign the Grant Agreement.

Procurement:3.  The Recipient signs a contract with a supplier/contractor/consultant to procure
the goods/services.

Disbursement:4.  The Recipient requests for IDB for disbursement. IDB disburses to the supplier/
contractor/consultant directly.

Delivery:5.  The supplier/contractor/supplier delivers the goods/service to the Recipient.

9

Contractor / Supplier

Disburses
Grant Amount

Recipient

Sign Grant Agreement

Delivers goods
and services

Signs contract for
procurement

1

3
2

4

B1. Grant

10

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Basic Terms and Conditions

The request for the first disbursement is required to be submitted within six months from the •
date of effectiveness (which is the date of the signature of the Agreement), failing which the
project is liable for cancellation.

By the last date of disbursement, if any part of the Approved Amount is not utilized, IDB can •
cancel that part.

Procurement of goods and services under the TA Grant Agreement has to be carried out in •
accordance with the Procurement Guidelines and policies of the IDB.

Anti-corruption and anti-fraud provisions are included in all legal documents. To ensure •
compliance, IDB has the right to audit and examine the records and accounts of all parties related
to the project.

Depending on the type of the project, the Agreement may provide for opening a Special Account •
in the country of the Recipient in accordance with the Guidelines for Opening a Special Account
provided by IDB.

B1. Grant

11

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B2. Loans
Definition
Long-term concessional facility that IDB provides for financing development in its Member Countries.
IDB charges a service fee to cover its administrative expenses.

The different types of Loans are as follows.

Ordinary Capital Resources (OCR) Loans•  - These loans are classified into 2 types depending
on their scope of activities. The source of funds for these loans is the IDB’s Ordinary Capital
Resources (as defined in Article 9 of IDB’s Articles of Agreement)

Ordinary Loans•  – Long-term concessional loans provided for financing development and
infrastructure projects.

Technical Assistance (TA) Loans•  – Loans with soft terms to assist Member Countries in
obtaining consultancy services to conduct feasibility and other such studies for major
projects.

Islamic Solidarity Fund for Development (ISFD) Loans•  – Loans with soft terms mainly directed
at projects and programmes that aim for poverty alleviation, achievement of Millennium
Development Goals (MDGs) and micro-finance programmes in various sectors (education, health
etc.) in the Member Countries, especially Least Developed Member Countries (LDMCs).

13

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B2. Loans
Step by Step

Approval:1.  Following a formal request from the Borrower, IDB processes the request and approves
to provide a loan to the Borrower.

Signature:2.  IDB and the Borrower sign a Loan Agreement.

Effectiveness:3.  The Borrower provides effectiveness documents to IDB which reviews the
documents and declares effectiveness. Project implementation begins.

Procurement:4.  The Borrower signs a contract with a supplier for procurement of goods/
services.

Disbursement:5.  The Borrower requests IDB for disbursement. IDB disburses to the supplier
directly.

Repayment Schedule:6.  At the end of the Grace period, the ‘Final repayment schedule’ is confirmed
between IDB and the Borrower.

Repayment:7.  The Borrower initiates repayment of the loan to IDB – “Principal Loan Amount +
Service Fee”

The Borrower completes repayment of the loan.8.

15

B2. Loans

Contractor / Supplier

Disburses
Loan Amount3

Borrower

Sign Loan Agreement

Repays Principal Loan
amount plus service fee

Delivers goods
and services

Signs
contract for
procurement

4

5

1

2

16

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Repayment Tenures and Service Fee

Loan Type Tenor
Service Fee

(if calculated on Annual basis)

Ordinary Capital Resources (OCR)

High Income Countries
15 yrs including a Grace Period of 3 yrs

Up to 1.5% p.a.

Middle Income Countries
20 yrs including a Grace Period of 5 yrs

Least Developed Member Countries
25 yrs Including a Grace Period of 7 yrs

Technical Assistance (TA) Loans
16 yrs including a Grace Period of 4 yrs

Islamic Solidarity Fund for
Development (ISFD)

High poverty content
30 yrs including a Grace Period of 10 yrs

Up to 0.75% p.a.

Low-income countries
25 yrs including a Grace Period of 7 yrs

Up to 2.00% p.a.
Middle Income countries

20 yrs including a Grace Period of 5 yrs

High income countries
15 yrs including a Grace Period of 3 yrs

B2. Loans

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Basic Terms and Conditions

IDB charges a service fee to cover its administrative costs. It ranges from a minimum of 0.75% •
upto a maximum of 2.00% per annum (OCR: 1.75% - ISFD: 2.00%) of the principal amount.

All loan amounts are to be repaid in semi-annual, equal and consecutive instalments throughout •
the tenure of repayment.

The service fee accrues for payment immediately upon signature of the Loan Agreement, upto a •
maximum of 4% of the total service fee until the first disbursement.

The request for the first disbursement is required to be submitted within six months from the •
date of effectiveness, failing which the project is liable for cancellation.

By the last date of disbursement, if any part of the Loan Amount is not utilized, IDB can cancel •
that part.

The Borrower bears all taxes, charges, fees, dues and cost-overruns related to the loan.•

Depending on the type of the project, the Agreement may provide for opening a Special Account •
in the country of the Borrower in accordance with the Guidelines for Opening a Special Account
provided by IDB.

Anti-corruption and anti-fraud provisions are included in all legal documents. To ensure •
compliance, IDB has the right to audit and examine the records and accounts of all parties related
to the project.

B2. Loans

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B3. Leasing (Ijarah)
Definition
A contract of letting on lease, under which the owner of an Asset sells a definite usufruct of the Asset
in exchange for a periodic definite reward (the rent).

How it works at IDB
IDB operates the ‘Lease-to-Own’ structure on a medium to long-term basis. IDB (as Lessor), purchases
an Asset and subsequently transfers the ‘right to use it’ (usufruct) to the Client (Lessee) for a rental
payment for a specific period (the lease period). Throughout this lease period, IDB retains the
ownership of the Asset. At the end of the lease period, IDB transfers the title of the Asset to the
Client as a gift.

Scope
To provide for fixed assets and capital equipment (movable assets in certain cases) such as machinery
and equipment for projects.

21

Eligibility
IDB approves lease financing for projects that are technically sound and economically viable, and
are of high priority to the member country. Such financing may be extended to governments,
government-backed entities as well as private sector companies.

Application Process
Applicants have to request for IDB financing either through the office of the IDB governor in their
particular country (usually the Ministry of Finance, Economy or Planning) or directly to IDB for private
sector and quasi-sovereign applicants. The request has to be supplemented with a feasibility study
of the project. For private sector and quasi-sovereign companies, additional documentation may be
required.

B3. Leasing (Ijarah)

22

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Legal Documentation
Lease Agreement:A.  This Agreement provides for the terms and conditions of the Lease operation,
including the mark-up rate, tenor of financing. A Grant Agreement, which provides for the
transfer of the title of the Asset at the end of the Lease period, is also attached as an annex.

Agency Agreement:B.  Through this Agreement, the Lessee is appointed to act as an agent on
behalf of IDB, to procure the Asset.

Service Agency Agreement:C.  Through this Agreement, the Lessee is appointed to act as an agent
on behalf of IDB, for the maintenance of the Asset. It includes the provisions for repairs and
insurance of the Asset.

The Agreements are required to be signed between IDB and the Lessee within six months from the
date of IDB’s approval.

Effectiveness
For the Agreements to be effective, the Lessee will have to provide ‘effectiveness documents’ which
are listed in the Agreements.

The Agreements are required to become effective within six months from the date of signature,
failing which they are liable for cancellation

B3. Leasing (Ijarah)

23

Step by Step
Approval:1.  Following a formal request from the Client, IDB processes the request and approves
the Leasing arrangement whereby it will procure fixed Assets and lease them to the Client, who
promises to take Assets on Lease.

Signature:2.  IDB and the Client sign the Lease, Lease Agency and Service Agency Agreements.

Effectiveness:3.  The Client provides effectiveness documents to IDB which reviews the documents
and declares effectiveness. Project implementation begins.

Procurement:4.  IDB appoints the Client as its Agent, to sign a contract with a Supplier to procure
the Assets and supervise, monitor and take delivery of the Assets. The Client also insures the
Assets in the name of IDB during the lease period.

Disbursement5. : IDB pays the price of the Assets directly to the Supplier.

Delivery:6.  The Client (now the Lessee), as IDB Agent, takes delivery of the Assets from the
Supplier.

Rental payment:7.  Lessee pays fixed periodical rentals to IDB over the agreed lease period.

Transfer of Title:8.  At the end of the lease period, IDB transfers ownership of the Assets to the
Lessee, as a gift.

B3. Leasing (Ijarah)

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B3. Leasing (Ijarah)

Contractor / Supplier

Pays Purchase
Price of Asset

Beneficiary/Lessee

Sign Lease, Lease Agency &
Service Agency Agreements

Pays lease rentals

Transfers t itle of Asset at
the end of lease period

Delivers Asset

Leases Asset

Signs contract on
behalf of IDB for
procurement

1

5

6

7

3

4

2

25

Basic Terms & Conditions

Project, Rental & Mark-up
The land for the Project has to be free from all kinds of liens and encumbrances and the Lessee •
should have a lawful and valid title of the land.

The calculation of the rental is based on the Capital Cost of IDB, plus a fixed or floating mark-up. •
In case of a floating mark-up, there is a floor and a cap and the rental of the first 6 months is
known to the parties.

Procurement
The Lessee, as IDB’s agent, will:•

abide by the IDB’s Procurement Guidelines and Procedure in procuring/constructing the Asset. ¾
negotiate and agree with the supplier/contractor on the price, specifications and delivery of  ¾
the Asset.
take delivery of the Asset on behalf of IDB. ¾
use the Asset in a proper manner, repairing any defections (under the Service Agency  ¾
Agreement)
will not sub-lease, charge, pledge, mortgage or dispose of the Asset without IDB’s prior written  ¾
consent.

B3. Leasing (Ijarah)

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Insurance, Repairs and Major Maintenance
The Lessee, as IDB’s agent, will ensure that the leased Asset is comprehensively insured during •
the Leasing period with an acceptable Islamic insurance company in IDB’s name, at IDB’s cost and
in accordance with prevalent practices.

The Lessee will also act as a service agent, carrying out major maintenance and repairs at the •
cost of IDB.

Rental payment
The rental is to be paid semi-annually throughout the lease period. The first rental will be paid •
six months from the end of the Gestation period.

Payment of the rental on the leased Asset will be made on due dates in a freely convertible •
currency acceptable to IDB in accordance with the actual rental payment schedule.

Disbursements
The request for the first disbursement is required to be submitted within six months from the •
date of effectiveness, failing which IDB has the right to cancel the project.

By the last date of disbursement, if any part of the Approved Amount is not utilized, IDB can •
cancel that part.

Anti-corruption and anti-fraud provisions are included in all legal documents. To ensure compliance,
IDB has the right to audit and examine the records and accounts of all parties related to the project.

B3. Leasing (Ijarah)

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B4. Istisna’a
Definition
A sale where an Asset is transacted before it comes into existence. A purchaser orders a manufacturer
to manufacture a specific Asset according to the purchaser’s specifications and deliver it at a pre-
agreed delivery date for a pre-agreed price, which is payable either in lump sum or instalments at
any time as agreed.

How it works at IDB
IDB operates Istisna’a on a medium to long-term basis, wherein IDB appoints the Purchaser (client)
as its Agent who gets the Asset constructed/manufactured. When the Asset is constructed/
manufactured and accepted by the Purchaser, IDB transfers the title of the Asset to the Purchaser.
The Purchaser then pays the Sale price of the Asset in deferred payments.

Scope
Infrastructure projects and trade in capital goods within and among member countries.

29

Eligibility
IDB approves Istisna’a financing for projects that
are technically sound and economically viable,
and are of high priority to the member country.
Such financing may be extended to governments,
government-backed entities as well as private
sector companies.

Application Process
Applicants have to request for IDB financing
through the office of the IDB governor in their
particular country (usually the Ministry of
Finance, Economy or Planning) or directly to IDB
for private sector and quasi-sovereign applicants.
The request has to be supplemented with a
feasibility study of the project. For private sector
and quasi-sovereign companies, additional
documentation may be required.

B4. Istisna’a

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Legal Documentation
Istisna’a Agreement:•  This Agreement provides for the terms and conditions of the Istisna’a
operation including the Sale price, tenor of financing, description of the Asset, delivery terms
and date and its payment schedule.

Istisna’a Agency Agreement:•  This Agreement lists the guidelines to be abided by the Purchaser
for procurement of the Asset. The Client acts as an agent on behalf of IDB.

The Agreements are required to be signed between IDB and the Purchaser within six months from
the date of IDB’s approval.

Effectiveness
For the Agreements to be effective, the Purchaser will have to provide ‘effectiveness documents’
which are listed in the Agreements.

The Agreements are required to become effective within six months from the date of signature,
failing which they are liable for cancellation.

B4. Istisna’a

31

Step by Step
Approval:1.  Following a formal request from the Purchaser, IDB approves the Istisna’a arrangement
whereby it agrees to construct/manufacture an Asset and sell it to the Purchaser. The Purchaser
promises to buy the Asset when constructed/manufactured.

Signature:2.  IDB and the Purchaser sign the Istisna’a and Agency Agreements.

Effectiveness:3.  The Purchaser provides effectiveness documents to IDB which reviews the
documents and declares effectiveness. Project implementation begins.

Procurement:4.  The Purchaser, as IDB’s Agent, signs contracts with,

A Consultant (for detailed design, control and supervision, wherever required); anda.

A Constructor/Manufacturer (to construct/manufacture the Asset).b.

The Purchaser insures the Assets in the name of IDB during the construction period. Construction/
manufacturing begins.

Disbursement:5.  IDB initiates stage payments directly to the Consultant as well as the Contractor.

Delivery:6.  Following inspection and acceptance at the end of the construction/manufacturing,
the title of the Asset is transferred to the Purchaser, who is now liable to pay the Sale Price in
accordance with the Istisna’a Agreement.

Payment of Sale Price:7.  The Purchaser pays the Sale price to IDB in instalments.

B4. Istisna’a

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B4. Istisna’a

(a) Consultant
(b) Constructor/Manufacturer

Pays Purchase
Price of Asset
in stages

Beneficiary/Purchaser

Sign Ist isna’a & Ist isna’a
Agency Agreements

Pays Sale Price

Delivers Asset

Transfers t itle of
Asset for Sale Price

Signs contract on
behalf of IDB for
construct ion

1

5

6

2

4

3

33

Basic Terms & Conditions

Terms of the Project
IDB will construct/manufacture the Asset for the Purchaser, in its capacity as the financier/•
vendor, according to the pre-determined specifications.

The land for the Project has to be free from all kinds of encumbrances and the Purchaser should •
have a lawful and valid title of the land.

The legal documentation will clearly indicate that the Purchaser is acting as an Agent for and on •
behalf of IDB during the construction/manufacturing period of the Asset.

The Purchaser will provide IDB with all progress reports and any other reports and information •
requested by IDB.

Following inspection and acceptance at the end of the construction/manufacturing, the title of •
the Asset will be transferred to the Purchaser, who will now be liable to pay the Sale Price in
accordance with the Istisna’a Agreement.

B4. Istisna’a

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Disbursements
The request for the first disbursement is required to be submitted within six months from the •
date of effectiveness, failing which the project is liable for cancellation.

By the last date of disbursement, if any part of the Approved Amount is not utilized, IDB can •
cancel that part.

The approved amount is disbursed in accordance with the IDB Disbursement Procedures and •
relevant provisions in the legal documentation.

Insurance
The Purchaser, as IDB’s agent, will ensure that until the final acceptance of the Asset, it is •
comprehensively insured with an acceptable Islamic insurance company and that IDB is named
as a loss payee under the insurance policies.

Anti-corruption and anti-fraud provisions are included in all legal documents. To ensure compliance,
IDB has the right to audit and examine the records and accounts of all parties related to the
project.

B4. Istisna’a

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B5. Instalment Sale
Definition
A credit sale of an Asset, delivered on spot, in which the purchaser can pay the price of the Asset at
a future date, either in lump sum or instalments.

How it works at IDB
IDB operates Instalment Sale on a medium to long-term basis, wherein IDB purchases an Asset and
sells it to the Purchaser (client) at an agreed Sale Price (cost plus a mark-up). The Purchaser pays the
Sale Price in instalments. The ownership/title of the Asset is transferred to the Purchaser on the date
of delivery of the Asset.

Scope
To provide for assets such as equipment and machinery for developmental projects.

37

Eligibility
IDB approves Instalment Sale financing for projects that are technically sound and economically viable,
and are of high priority to the member country. Such financing may be extended to governments,
government-backed entities as well as private sector companies.

Application Process
Applicants have to request for IDB financing through the office of the IDB governor in their particular
country (usually the Ministry of Finance, Economy or Planning) or directly to IDB for private sector
and quasi-sovereign applicants. The request has to be supplemented with a feasibility study of
the project. For private sector and quasi-sovereign companies, additional documentation may be
required.

B5. Instalment Sale

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Legal Documentation
Instalment Sale Agreement: The Agreement provides for the procurement function of the Purchaser
(as an Agent of IDB), the terms and conditions (as an annex) as well as the Sale Price, tenor of
financing, etc.

The Agreement is required to be signed between IDB and the Purchaser within six months from the
date of IDB’s approval.

Effectiveness
For the Agreement to be effective, the Purchaser will have to provide ‘effectiveness documents’
which are listed in the Agreement.

The Agreement is required to become effective within six months from the date of signature, failing
which it is liable for cancellation.

B5. Instalment Sale

39

Step by Step
Approval:1.  Following a formal request from the Purchaser, IDB approves the Instalment Sale
arrangement whereby it agrees to purchase an Asset and sell it to the Purchaser. The Purchaser
promises to purchase the Asset once it is delivered.

Signature:2.  IDB and the Purchaser sign the Instalment Sale Agreement.

Effectiveness:3.  The Purchaser provides effectiveness documents to IDB which reviews the
documents and declares effectiveness. Project implementation begins.

Procurement:4.  The Purchaser, as IDB’s agent, signs a contract with a supplier to procure the
goods. The Purchaser insures the Assets in the name of IDB during the transit period.

Disbursement:5.  IDB pays the purchase price of the Assets directly to the supplier.

Delivery:6.  The Purchaser, as IDB Agent, takes delivery of the Assets from the Supplier.

Sale:7.  Upon delivery, IDB sells the Assets to the Purchaser at Sale Price on deferred basis.

Payment of Sale Price:8.  The Purchaser pays the Sale Price to IDB in instalments.

B5. Instalment Sale

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B5. Instalment Sale

Supplier

Pays Purchase
Price of Asset

Beneficiary/Purchaser

Sign Instalment Sale Agreement

Pays Sale Price
in instalments

Delivers Asset

Sells the Asset
at Sale Price

Signs contract on
behalf of IDB for
procurement

1

5

6

3
2

4

41

Basic Terms & Conditions

Procurement
As per the legal documentation, the Agreement defines the Agency role of the Purchaser, wherein •
IDB authorizes the Purchaser to act as its Agent to purchase the Asset and receive delivery on
its behalf.

The Purchaser, as IDB’s agent, will:•

abide by the IDB’s Procurement Guidelines and Procedure in procuring the Asset;a.

negotiate and agree with the supplier on the price, specifications and delivery of the Asset; b.
and

take delivery of the Asset on behalf of IDB.c.

Sale
Immediately upon the delivery of the Asset, the sale will be concluded by an exchange of an offer •
from the Purchaser and acceptance by IDB.

B5. Instalment Sale

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Disbursements
The request for the first disbursement is required to be submitted within six months from the •
date of effectiveness. If not, then IDB has the right to cancel the project.

By the last date of disbursement, if any part of the Approved Amount is not utilized, IDB can •
cancel that part.

Insurance
The Purchaser, as IDB’s agent, will ensure that the Asset is adequately insured (until delivery) at •
the cost of IDB with an acceptable Islamic insurance company and that IDB is named as a loss
payee under the insurance policies.

Anti-corruption and anti-fraud provisions are included in all legal documents. To ensure compliance,
IDB has the right to audit and examine the records and accounts of all parties related to the
project.

B5. Instalment Sale

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B6. Restricted Mudarabah
Definitions

Mudarabah
A profit-sharing loss-bearing contract in which one party (Rab al-maal) provides capital and the other
party (Mudarib) provides expertise to manage a business enterprise. Any profit earned is shared in a
pre-agreed ratio and any loss is borne solely by the capital provider (Rab al-Maal), except in case of
negligence and misconduct from the Mudarib.

Restricted Mudarabah
Restricted Mudarabah is a variant of Mudarabah that is used by IDB, wherein the Mudarib (the entity)
is bound by certain restrictions on the sectors/areas/projects into which it can invest the Mudarabah
capital. These restrictions are agreed upon upfront in the Restricted Mudarabah Agreement (RMA).

Scope
Investment in specific sector projects such as sustainable agriculture, renewable energy, youth
employment programs etc.

45

Eligibility
IDB approves Restricted Mudarabah for investments that are focused on strategic thrust areas
(sustainable energy, agriculture etc.) and are of high priority to the member country. Funds for
investment may be extended to governments, government-backed entities as well as private sector
companies.

Application Process
Applicants have to request for IDB financing through the office of the IDB governor in their particular
country (usually the Ministry of Finance, Economy or Planning) or directly to IDB for private sector
and quasi-sovereign applicants. The request has to be supplemented with a feasibility study of
the project. For private sector and quasi-sovereign companies, additional documentation may be
required.

B6. Restricted Mudarabah

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Legal Documentation
Restricted Mudarabah Agreement: The Agreement lists the terms and conditions of the operation,
including the investment plan, profit-sharing ratio, duration etc.

The Agreement is required to be signed between IDB and the Mudarib within six months from the
date of IDB’s approval.

Effectiveness
For the Agreement to be effective, the Mudarib will have to provide ‘effectiveness documents’ which
are listed in the Agreement.

The Agreement is required to become effective within six months from the date of signature, failing
which it is liable for cancellation.

B6. Restricted Mudarabah

47

Step by Step
Approval:1.  Following a formal request from any potential entity, IDB processes the request and
approves the Restricted Mudarabah in order to provide capital to the entity (the Mudarib) for
investment in a specific sector. Both parties agree to share the profits of the investment on a
pre-agreed ratio. Any loss is solely borne by IDB, except in case of negligence and misconduct
from the Mudarib.

Signature:2.  IDB and the Mudarib sign the Restricted Mudarabah Agreement.

Investment:3.  The Mudarib invests the capital into projects (in the pre-agreed specific sector)
which generate profits.

Profit-sharing:4.  The profits are shared by the Mudarib and IDB according to the pre-agreed
ratio.

B6. Restricted Mudarabah

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B6. Restricted Mudarabah

Business

Mudarib

Sign Restricted
Mudarabah Agreement

Share the prof its

Generates prof its

Provides capital

Any genuine loss
borne solely by IDB

Invests in
specif ic projects

1

2

5

3
6

4

49

Basic Terms & Conditions

Disbursement
The request for disbursement is required to be submitted within a period before the proposed •
disbursement date as specified in the Agreement.

The request for disbursement has to be accompanied by a tentative list of projects that will •
benefit from the investment.

The request for disbursement may require to be supplemented with any other document, as •
specified in the Agreement.

Liquidation of the Mudarabah Operation
Upon the maturity of the Mudarabah arrangement, the Mudarib will liquidate the assets of the •
Mudarabah operation.

Following the liquidation by the Mudarib, IDB will receive “Mudarabah Capital + IDB’s share of •
Profits”

If the profit is greater than what was agreed upon, the excess will be retained by the Mudarib, •
as an incentive.

B6. Restricted Mudarabah

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Authority and Responsibilities of Mudarib
The Mudarib will have conducted the relevant feasibility studies to determine the financial •
viability of the projects that will be invested in.

The Mudarib will ensure that the financing will be used only for Shariah-compliant ventures.•

The Mudarib will invest only in those projects which will return not be less than the anticipated •
profit as mentioned in the Agreement.

The Mudarib will submit progress reports to IDB, as and when requested.•

B6. Restricted Mudarabah

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B7. Equity Participation
Definition
A mode of financing whereby IDB makes strategic long-term investments with the objective to
maximize its developmental objectives. These investments are usually in the equity of Shariah-
compliant industrial, agro-industrial projects, Islamic banks and financial institutions of its Member
Countries.

ExitMonitoringApproval and
Disbursement

Due Diligence
and Clearance

In-depth
Analysis

Deal Sourcing
and Screening

Step 1 Step 2 Step 3 Step 4 Step 5 Step 6

The Investment Process
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Features
IDB does not acquire majority or controlling interest in the share capital of a company. �

Investments do not exceed one-third of the company’s capital. �

Investments do not provide IDB with control or the ability to exercise any significant influence  �
over the financial and operating policies of such companies.

Investments are sold at a time when IDB considers it appropriate. �

B7. Equity Participation

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Methods of Disbursement

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Methods of Disbursement
Upon submission of the relevant documents (contracts, authorizations etc.), IDB can disburse the
amounts for any approved project through any of the following methods.

Direct Payment:1.  IDB disburses directly to the supplier/contractor/consultant.

Payment against Letter of Credit:2.  On the basis of a Letter of Credit (LC) issued by a local bank
of the Beneficiary, IDB issues an Irrevocable Commitment to Reimburse (ICR) for the requested
amount.

Special Account:3.  Wherever applicable, a Special Account can be opened for easy and timely
disbursement (small contracts, minor expenses etc.) of the Project. It can be opened at the
Central Bank or any local commercial bank acceptable to IDB, with a single deposit amount not
exceeding USD 500,000.

Depending on the type of project, IDB may use other methods of disbursement, in accordance with
IDB Guidelines for Disbursement.

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Sources of Funds

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EQUITY

The capital subscribed in accordance i.
with Article 5;

Deposits placed with the Bank pursuant ii.
to Article 8;

Amounts received in repayment of loans, iii.
from the sale of equity holdings;

Amounts received in repayment of iv.
loans, from the sale of equity holdings
and as income from investments related
to ordinary operations and;

Any other funds received by the Bank v.
or placed at its disposal, or income
received which does not form part of IDB
Waqf Fund Resources and Trust Fund
Resources.

RESOURCE MOBILIZATION

Funds mobilized from the Islamic capital i.
market for medium and long term
funding requirement;

Funds mobilized from the Islamic capital ii.
market by issuing Sukuk (Islamic Bonds)
on a Public and Private Placement basis;

Funds mobilized from the Islamic iii.
money market for short-term funding
requirement;

Funds mobilized from the Islamic money iv.
market on a short and medium term
basis through commodity Murabaha
placements.

IDB Sources of Funds
D1. Ordinary Capital Resources (OCR)

63

D2. Islamic Solidarity Fund for Development (ISFD)
ISFD is a Waqf/trust fund under the IDB. Its capital consists of voluntary contributions from the
Member Countries (MCs) of the Organization of Islamic Cooperation (OIC) as well as IDB.

For its activities, the Fund utilizes:

income from the Waqf;i.

funds derived from its operations; andii.

other resources received by the Fund.iii.

IDB Sources of Funds

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D3. IDB Waqf Fund
In 1417H, the “Special Accounts of the Islamic Development Bank - Ordinary Capital” consisted of

Special Reserve;•

Special Assistance; and•

Special Account for Least Developed Member Countries.•

In 1418H, the balances of the these accounts, together with the related assets and liabilities, were
transferred to the Special Account Resources Waqf Fund (the “Waqf Fund”).

The balance of  ‘Special Reserve Account’ formed the balance of the Waqf Fund principal amount.

The Waqf Fund derives its income from the following sources:

Return from cash and cash equivalents and fixed deposits with banks;I.

Profit on managed investment;II.

Net income from deposits of the Unit Investment Fund (UIF); andIII.

Investment in Murabaha and other funds.IV.

IDB Sources of Funds

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E. Glossary
Term Definition

Concessional Modes of Finance Financing facilities that are provided with soft terms and conditions.

Ordinary Modes of Finance Financing facilities that are provided at market rates

Effectiveness
The adequate state of a signed Agreement following the submission
of documents to satisfy all conditions, as required by a Financing
Agreement. (Opinion of a Legal counsel, provision of guarantee etc.)

Gestation Period
The period from the first date of disbursement upto the last date of
disbursement

Grace Period
A period allowed to the Beneficiary before commencing repayment to
IDB.

Implementation Period
The period starting from the date of effectiveness upto the completion
date of the works/procurement of a project.

Mark-up
A profit margin (additional amount) above the actual cost of IDB for
acquiring assets/goods/commodities.

Resource Mobilization
A process of generating resources from the Islamic financial/capital
markets.

Service Fee
A fee payable by a Borrower to IDB for the processing and monitoring
of a loan.

Supplier/Manufacturer/Contractor/Constructor
An individual or a firm selected to supply, manufacture or construct
Assets, commodities or equipment against a specific contract.

Waqf
An endowment or a charitable trust devoted exclusively for Islamic
purposes.

67

The Financial Product Development Center (FPDC) was established in Muharram 1432H (December
2010). Its main purpose is to enhance the leadership of the Islamic Development Bank Group in the
development and promotion of innovative Islamic financial products within the framework of the
Maqasid al-Shariah. This is accomplished while further strengthening the financial soundness and
relevance of the IDB Group.

The Center is the focal point for the development of new and innovative financial instruments at
IDB Group, and for this purpose it also collaborates with various institutions in the Islamic financial
industry.

Strategic Objectives

The Center has three major strategic objectives:

Developing Business Process for new product  �
development.

Building capacity of product developers. �

Designing new financial products. �

These three objectives are summarized by the “3Ps” that
the Center works along: Process, People, and Products.

For any queries, please contact:

Financial Product Development Center
Islamic Development Bank

19th Floor, HQ Building
P.O. Box 5925, Jeddah 21432

Kingdom of Saudi Arabia

Email: fpdc@isdb.org
Tel: +966 12 646 7469
Fax: +966 12 636 7554

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ISLAMIC DEVELOPMENT BANK
Modes of Finance

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