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6 Musharaka and Mudaraba »

Julian Johansen, Atif Hanif
From: Islamic Finance: Law and Practice
Edited By: Craig R.Nethercott, David M. Eisenberg
6.01 Islamic finance is commonly stated to be based on ‘risk participation’, meaning that two or more parties share the risks of a joint venture. This is driven by the view of Shari‘a scholars that money is simply a medium of exchange, and that a return or ‘increase’ (riba) cannot be paid on that medium. In short, a reward may be generated for taking risk in the project, and in an ideal world the risks of profit and loss would be perfectly balanced. Note in this regard that borrower repayment risk is not regarded as true ‘transaction risk’: although the lender...

Part II Islamic Law and Contracts in Practice, 6 Musharaka and Mudaraba »

Julian Johansen, Atif Hanif
From: Islamic Finance: Law and Practice (2nd Edition)
Edited By: Craig R. Nethercott, David M. Eisenberg
This chapter explores the origins, characteristics, and modern financial applications of two of the oldest forms of Islamic joint venture contracts: musharaka and mudaraba. A commonly held view of Islamic finance, based on the concept of transaction risk sharing, is that it is ‘equity-based’ rather than ‘debt-based’, and constitutes a ‘quasi-equity’ interest for each investor. This is certainly true for musharaka and mudaraba. They have, however, been adapted for the purpose of corporate and other modern financings to include debt-related elements: this is largely to allow financing institutions to classify these as equity-related or quasi-debt instruments from a risk perspective, whilst retaining the key hallmarks of a joint venture. In some cases, particularly in mudaraba structures, those debt elements closely follow provisions used in syndicated financings. From a Shari’a compliance perspective, then, ‘risk-participation’ remains the essential and distinguishing feature of musharaka and mudaraba, and secures their importance as a vital component of Islamic finance. At the same time, however, Islamic financial institutions will continue to look for ways in which to bridge the ‘risk gap’ between equity and debt instruments.

10 Sukuk »

Atif Hanif, Julian Johansen
From: Islamic Finance: Law and Practice
Edited By: Craig R.Nethercott, David M. Eisenberg
10.01 Sukuk are the most public and high profile face of Islamic corporate finance. The sukuk market is seen as a key driver behind the growth of the Islamic finance industry and the state of the sukuk market is invariably seen as a barometer for the health of the wider Islamic finance market. The international sukuk market has grown rapidly since the first international US$150 million sukuk issued by Kumpulan Guthrie Bhd in 2001. The sector saw significant growth from 2005 to 2007, with sukuk issuances hitting a record of US$46.65 billion in 2007.2 However, the...

Part II Islamic Law and Contracts in Practice, 11 Sukuk »

Atif Hanif, Julian Johansen, Edana Richardson
From: Islamic Finance: Law and Practice (2nd Edition)
Edited By: Craig R. Nethercott, David M. Eisenberg
This chapter focuses on the sukuk market, which represents one of the more high-profile elements of the Islamic finance industry. Over the last two decades, the sukuk market has been a key driver behind the growth of Islamic finance globally, with the state of the sukuk market often seen as a barometer for the health of the wider Islamic finance market. However, the sukuk industry has also had its own specific hurdles to overcome. Internal scepticism, a multitude of complex structures, and legislative restrictions have all contributed to the current shape of the sukuk market. While this market may never challenge the conventional debt capital markets in terms of size or accessibility, it remains a key aspect of the Islamic finance industry generally and offers an important Shari’a-compliant resource for issuers and investors.