Global عربي
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Global عربي
The partnership between Muslims and Non-Muslims is not prohibited and cannot be considered invalid, except when it involves activities banned by Shariah.
What truly matters is whether the transaction follows Shariah principles, not whether the deal is between Muslims and Non-Muslims.
According to AAOIFI Shariah standards, and as adopted by Al Barakah Seminar and the Fourth Fiqhi Seminar of Kuwait House, there is no restriction on conventional banks participating with Islamic banks in syndicated financing, as long as Shariah rulings are observed.
However, conventional banks cannot take full responsibility for managing operations, nor can they make decisions on Shariah-related issues.
The main prohibition concerns Riba (interest) and invalid Shariah contracts. Therefore, if preventive measures are taken against such prohibited practices, there is no justification for prohibition.
Read more about: Is Islamic Banking Truly Halal?
It is defined as the participation of the group of institutions in a joint financing operation through one of the Shariah-compliant mode of financing.
The accounts of syndicated financing operations are kept separate from the accounts of participating institutions.
From a Shariah perspective, syndicated financing is permissible if the entire process is carried out in a Shariah-compliant manner.
When different institutions, including conventional ones, participate in syndicated financing, it will still be considered Shariah-compliant as long as the method of financing follows Shariah rules.
However, if Riba (interest) is involved, or if the transaction is structured in a way that violates Shariah principles, then according to the Scholar opinion, such financing will be regarded as impermissible.
Read more about: Why Riba is Forbidden and How It Differs from Trade?
Following are the differences between Islamic and Conventional syndicated financing:
-Islamic syndicated financing is based on Shariah principles while the conventional syndicated financing is based on Riba and some other Shariah impermissible factors.
- Islamic syndicated financing uses profit and lose sharing mechanism while the conventional syndicated financing uses a fixed return mechanism.
- Islamic syndicated financing is structured with a Shariah-compliant mode of financing ( Musharakah, Mudarabah ….) while the conventional syndicated financing is structured with the loan agreement with a fixed and interest repayments.
- There is no existence of usury, uncertainty and gambling in the Islamic syndicated financing while in conventional these elements exist.
-There is a Shariah supervisory body who oversight the overall process of syndicated financing and ensuring the Shariah compliance across the overall process,
while in the conventional syndicated financing there is no Shariah supervisory board that is why it is solely based on the Shariah impermissible factors.
The syndicated financing should be provided to the customer in a Shariah-compliant way of financing. There are different Shariah-compliant modes of financing, the most common amongst them are:
i-Mudarabah
ii-Musharakah
iii-Murabaha
iv-Musawamah
v-Muzaraah
vi-Mugharasa
vii-Musaqat
viii-Investment Sukuk
ix-Ijarah and Ijarah Muntahiya bit tamleek
x-Salam and parallel Salam
xi-Istisna and parallel Istisna
xii-Bai Muajjal instalment sale
These are different Shariah-compliant modes through which the Islamic financial institutions are ensuring Shariah compliance in providing syndicated financing.
First of all, the Islamic financial institutions have to arrange the syndicated financing with Islamic financial institutions,
but if there is a need or requirement of financing with conventional financial institutions, then there is no Shariah restrictions in participation if the subscription and utilization of the funds are in accordance with Shariah principles.
Arrangement, implementation of the syndicated finance should take place under the supervision of Shariah supervisory board.
Preferably, the Shariah supervisory committee could be formed and delegated to give instructions that should be binding on these institutions.
Read more about: What is the Difference between Conventional Fixed Deposit (FD) & Islamic Fixed Deposit (FD)?
The relationship between the institutions may be formed in one of the following forms:
In this method, the institutions jointly provide the funds and bear any losses in proportion to their respective shares,
while profits are distributed according to a pre-agreed ratio. For management, the institutions may either appoint a joint committee or delegate an institution to oversee operations in return for either an increased share of profit or a lump-sum fee.
A separate management agreement should be executed with the appointed institution to govern such arrangements.
In this method, the manager of the syndicated financing will act as Mudarib and control; the entire operation of the syndicated financing.
In this case the manager of the syndicated financing will work for no reward and act as volunteer and the profit will be distributed among the institutions.
In this case, the scope of work should be clearly defined along with an estimated timeline. The agent shall be entitled to remuneration regardless of whether a profit is realized.
Additionally, the agent may be granted a bonus, either as a lump-sum payment or as a share of profit exceeding a specified threshold.
The leading institution may receive a commission for undertaking preparatory tasks such as preparing the feasibility report, drafting the contract, and mobilizing the participatory fund.
An institution performing these tasks may or may not serve as the lead manager. The commission for such activities may be equal to, less than, or greater than the actual costs incurred by the leading institution.
A specific currency shall be designated as the syndication currency for the financing. If a participating party makes its contribution in a different currency,
the amount will be converted into the syndication currency at the prevailing exchange rate on the date of contribution.
It is also permissible for a participant to receive profits in a currency other than the syndication currency, subject to the terms fixed for the syndicated financing. In such cases, the conversion shall likewise be made at the prevailing exchange rate on the date of payment.
Read more about: Currency Carry Trade vs. Currency Exchange: Which is Shariah-Compliant?
It is allowed to make it mandatory to not exit from the syndicated financing till the financing period end. It is known as close end syndication.
It is also allowed for the institution to dispose of its share in the syndicated investment to the internal or external party,
according to the agreed condition and at the valuer agreed upon if the physical or tangible assets or usufruct of the company exceed its cash money, financial rights and debts.
If the company cash money, financial rights and debts are predominant then the Shariah rulings on currency and debt related transactions should be referred to and applied.
The calculation of profit among the participants shall be based on their respective shares or on the ratio agreed upon at the time of entering into the contract.
References:
https://aaoifi.com/ss-24-syndicated-financing/?lang=en
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
