UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

What is the International Islamic Trade Finance Corporation?

“The International Islamic Trade Finance Corporation (ITFC) is advancing trade to improve the economic situation and livelihoods of people across the Islamic world. As an autonomous entity within the Islamic Development Bank Group, the ITFC was formed to consolidate the trade finance business that was formerly undertaken by various windows within the IDB Group. The consolidation of the bank’s trade finance activities under a single umbrella increases the efficiency of service delivery by enabling rapid response to customer needs in a market-driven business environment.

As a leader in Shari’ah-compliant trade finance, we deploy our expertise and funds to businesses and governments in member countries of the OIC. Our primary focus is encouraging intra-trade among member countries, and we are active in developing and diversifying Islamic finance solutions to further trade. As an international financial service organization, we have a rigorous commitment to work with our clients in proactive, accountable and efficient ways.”

Articles of Agreement 

ITFC_Articles_of_Agreement_English_opt

Financing Trade

“The ITFC’s trade finance division is responsible for providing shariah-compliant trade financing for OIC member countries, with a particular focus on financing intra-trade between member countries.

The ITFC provides direct financing or cooperates with other fund providers to support OIC trade and intra-trade.

As a member of the IDB Group, the ITFC has unique access to governments around the world and acts as a facilitator in mobilizing private and public resources to build and develop intra-trade.

In addition to trade financing, the ITFC offers advisory services to member institutions and countries and their public and private enterprises on developmental policies and practices in accordance with IDB Group objectives.

In this way, ITFC’s intra-trade finance serve as a catalyst for economic solidarity by establishing new trade links with member countries, creating an environment that is conducive to on-going, direct trade relationships, and strengthens corresponding banking networks among member countries.

The ITFC is able to streamline the trade financing process by confirming letters of credit to eliminate the need for using intermediary banks. The ITFC also aims to reduce trade costs by removing intermediaries that re-sell goods at higher prices, thus allowing importers to find a better price for their goods.

By offering an alternative financing option, the ITFC contributes to the reduction of financing costs for public and private sector enterprises in member countries.

The ITFC’s sustained commitment to competitive financing and its active participation in the growth of private sector enterprise in OIC member countries has the affect of building national trade capacities.

By acting as lender of record for banks and countries unable to mobilize resources and supporting local trade finance in countries where this has not existed before, the ITFC plays an important role in supporting economic growth.”

http://www.itfc-idb.org/content/trade-finance

Modes of Financing

http://www.itfc-idb.org/content/modes-financing

 

Islamic Trade Finance Terminology

Approved Bank for Guarantee: 
A bank acceptable to ITFC to provide a third-party guarantee on a financing operation

Arranger Fees: 
Fees payable to an arranger in syndication for the origination of financing deal

Authorized Capital:
Maximum amount of capital entity in IDB Group is authorized to raise in accordance with the Articles of Agreement as determined by the Board of Governors

Balloon Payment:
Final repayment of installment which is substantially larger than earlier installments. E.g. in four installments of 15%, followed by a balloon of 40%

Beneficiary:
A recipient of ITFC financing

Clean Financing:
Financing extended solely on the basis of financial strength of the beneficiary in which no guarantee or security is required by the IDB

Co-financing: 
A financing arrangement in which more than one lender contributes to funding a project under the same or different terms and conditions

Commercial risk:
Risk related to the performance or non-payment of a third party

Commodity placement:
Short-term placement of funds in an inter-bank market based on Murabaha contract

Corporate Guarantee:
A guarantee of payment from the beneficiary’s parent company

Direct Financing:
A non-equity term loan financing in which a financial institution provides financing from its own resources

Documentary Collection:
A method of settlements in International Trade where payment to the seller is subject to the buyer’s acceptance of the documents/draft presented to the buyer’s bank (without L/C)

Documentation Bank:
A bank or institution that is responsible for the legal documentation of syndication

Effectiveness of Financing Agreement:
Status of a signed Financing Agreement when it comes into force after satisfying all conditions precedent to effectiveness (as specified in the Financing Agreement) by the beneficiary (e.g. provision of guarantee/security, legal opinion of counsel to the Beneficiary, etc.)

Equity Participation:
A mode of financing used by the IDB whereby the bank participates in the share capital of enterprises on a long-term basis

Escrow Account:
An account opened with a financial institution to accumulate and hold the proceeds of the assigned receivables for repayment on due date(s) of amount due to IDB under the terms of financing

EURIBOR:
Euro Inter Bank Offered Rate

Executing Agency:
An agency in a country that is responsible for project/operation implementation

Export Credit Insurance:
Offers cover against non-payment by an exporter’s foreign buyers for goods or services supplied to them

Export Finance Scheme (EFS):
A trade financing scheme used by IDB to export goods from one OIC country to another. The Scheme was initiated by the OIC Standing Committee on Scientific and Technological Cooperation (COMCEC) and launched by IDB in 1408H (1987G) as a special fund to promote export trade of OIC member countries participating in the Scheme.

Financing Agreement:
An agreement signed between ITFC and beneficiaries of its financing (obligors) stipulating all terms relating to that financing.

Gestation Period:
A period between the first disbursement and completion of a project

Grace Period:
A period allowed to the beneficiary of ITFC’s financing (obligor) before commencing repayment of the financing extended to it

Guarantees/Securities:
Securities provided to cover the credit risks of an operation. Examples include Government guarantees, bank guarantees, insurance cover provided by credit insurance companies, etc.

ID LIBOR:
A weighted average of the component currencies respective LIBORs of the ID/SDR

Import Trade Financing Operations (ITFO):
A short term trade financing scheme for import of commodities of developmental nature required by member countries while promoting the flow of trade among them

Installment Sale:
A mode of financing whereby ITFC purchases machinery and equipment, then sells them to the beneficiary at a higher price, repayment being in installments. The ownership of the asset is transferred to the purchaser on delivery

Intra-Trade:
Trade among the OIC member countries in commodities originating from one member country to another

Irrevocable Commitment to Reimburse:
A mode of payment in which ITFC, at the request of the beneficiary, irrevocably agrees to reimburse a commercial bank for payment to be made to a supplier under a letter of credit

Islamic Banking:
A banking system where related transactions and activities are conducted in accordance with the tenets of Shariah that allows asset-backed financing and prohibits interest-based dealings

Islamic Dinar:
A unit of account of IDB which is equivalent to one Special Drawing Right (SDR) of the International Monetary Fund (IMF)

Istisna’a:
A medium-term mode of financing. It is a contract for manufacturing (or construction) whereby the manufacturer (seller) agrees to provide the buyer with goods identified by description after they have been manufactured/constructed in conformity with that description within a pre-determined timeframe and price

LDMC:
Least Developed Member Country

Leasing or Ijara:
A medium-term mode of financing, which involves purchasing and subsequently transferring of the right of use of the equipment and machinery to the beneficiary for a specific period of time, during which the ITFC retains the ownership of the asset

Letter of Comfort:
A letter issued by an entity (Ministry, Parent Company, or Bank) merely acknowledging approval of the financing requested by a beneficiary

Letter of Credit (LC):
An instrument to facilitate international trade in goods and equipments. It is an undertaking by a commercial bank to pay the beneficiary (supplier) upon presentation of documentary proof that all the terms and conditions of the LC have been fully fulfilled

LIBID:
London Inter Bank Bid Rate
 
LIBOR:
London Inter Bank Offered Rate

Line of Financing:
A financing facility made available to financial institutions in member countries to finance projects and trade operations of small and medium enterprises
 
Mode of Financing:
A Shariah-compatible instrument used to extend financing depending on the nature of the underlying project or operation and the party to which the financing is extended. E.g. Murabaha, loan, leasing, installment sale, equity participation, etc.

Mudaraba:
A form of partnership where one party provides the funds and the other provides the expertise and management. Any profits accruing are shared between the two parties on a pre-agreed ratio, while the capital loss is borne by the fund provider
 
Mudaraba Agreement:
A set of legal agreements signed between the parties to a syndicated financing, usually includes a financing agreement

Mudarib:
A contracting party in a Mudaraba financing which acts in a fiduciary capacity as the agent or fund manager

Mudarib Fees:
Fees payable to a Mudarib in its capacity as the find manager

Murabaha:
A contract of sale between a buyer and a seller in which a seller purchases the goods needed by a buyer and sells the goods to the buyer on a cost-plus basis. Both the profit (mark-up) and the time of repayment (usually in installments) are specified in an initial contract

Musharaka Mutanaqisa (or diminishing/declining participation):
An “equity sharing” Islamic financing technique used for financing projects. It uses different types of profit and loss sharing partnerships. The partners (entrepreneurs, bankers, etc.) share both the capital and the management of a project while the profits are distributed between them according to pre-determined ratios based on their equity participation

Operation:
A developmental activity, program, or transaction approved for financing, in a given country or region.

Profit-Sharing:
A financing technique that involves the pooling of funds by two or more parties in order to finance a particular venture. Each partner obtains, in accordance with the terms and conditions of partnership, a percentage of (net) profit accruing from the venture

Request for extension:
A request by a department to extend opening the first L/C to a given period

Request for extension of utilization:
A request by a department to extend the disbursement period which is normally 12 months after the first disbursement

Resource Allocation:
Allocation of resources to various modes of financing, sectors and member countries as part of annual operations plan

Resource Mobilization:
A process of generating resources either from member countries or from the capital market

Shariah:
Islamic law, governing the life of Muslims, which is derived from the Holy Quran and Sunnah

Shipping Documents:
All documents related to a shipment. Example includes invoice, bill of lading, certificate of origin, etc.

Shipping Guarantee:
A document used to clear good in absence of bill of lading

Spread:
Agreed percentage added to a benchmark to arrive at the total mark-up to be charged in financing operations

Standby L/C:
An undertaking by the issuing bank to pay a beneficiary in case of non-performance of the applicant

Sukuk:
An asset-backed bond which is designed or structured in accordance with Shariah and may be traded in market

Syndicated Financing/Syndication:
A highly structured group of financial institutions that lend to a beneficiary under common terms and conditions

Trust Fund:
A portfolio of assets managed under a fiduciary relationship between two parties whereby one party administers the assets/properties on behalf of the other

Two-step Murabaha Financing:
A financing mode used by ITFC to provide funding to the other banks/financial institutions for financing their trade financing operations and/or ITFC mobilizes funds from the banks and financial institutions for its trade financing operations

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

Zakah:
A religious levy ordained on Muslims and payable annually at a rate of 2.5% net assets to certain beneficiaries prescribed by Shariah

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

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