involves special purpose vehicles (SPVs) to ring-fence assets, with true sale opinions confirming transfer. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards mandate transparency to avoid gharar. "Whether conventional or Islamic, lenders' or Financiers' financial requirements boil down to risk mitigation, legal sollidity and profitability."
Financiers in Islamic Finance - often Islamic banks or sukuk issuers (companies that issue Islamic financial certificates) - require structures that promote ethical, Shariah-compliant transactions. Key principle: Money isn’t a commodity; it must be tied to real economic activity. So, forget simple loans; enter Murabaha (cost- plus financing), where the lender buys an asset and resells it to the borrower at a markup. Requirements? Detailed asset descriptions, immediate transfer of ownership risk, and no hidden fees. Lawyers draft these to ensure compliance, often including fatwa certifications from Shariah boards. Even if something is legal under English law, a financier will not enforce if it does not meet Shariah requirements. Another favourite: Musharakah (joint venture). Financiers and clients partner, sharing profits and losses. From the financiers’ view, they require clear profit-sharing ratios, management roles, and exit mechanisms. Legal docs must address partnership laws - think limited liability under companies acts - while avoiding riba (interest). If it smells like interest, it’s genuinely a no-go area. Jokingly, it’s like a business marriage: Prenups (agreements) are essential to avoid messy divorces. Then there’s Ijara (leasing), akin to conventional leases but without interest. Financiers buy assets and lease them, with options to purchase (Ijara wa Iqtina). Requirements include fair market valuations, maintenance obligations, and insurance (Takaful, the Islamic version). At Harold Benjamin, we ensure clauses prevent speculation and comply with English law. Sukuk (Islamic bonds) are big for larger financings. These are asset-backed securities, not debt instruments. Lenders require underlying assets to generate returns—rental income from properties, for instance. Legal structuring
Bridging Islamic Finance and Conventional Banking: Comparisons and Legal Nuances
Comparing the two: Conventional finance is interest-driven and risk-averse via collateral; Islamic is participatory and asset-focused. Financiers in both require robust legal frame- works, but Islamic adds Shariah layers - think double compliance. Please do not agree to undertake any work involving Islamic Finance without speaking to the HB Banking team first. In conclusion, whether conventional or Islamic, lenders’ or Financiers’ requirements boil down to risk mitigation, legal solidity, and profitability. As solicitors, we often don’t get the recognition for the work we have done on a deal but are the first ones to be blamed if something goes wrong. I still ask for a second opinion or a check from the other team members in Banking. A second pair of eyes is always useful when drafting documents and never be afraid to ask someone to check.
chris.vonstrandmann@haroldbenjamin.com
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