Syndicated Financing - Scope of the Standard

Transcription

1. Shari ’ah Standard No. (24): Syndicated Financing Statement of the Standard 1. Scope of the Standard This standard covers syndicated financing operations, whether those arranged among Institutions, or between them and conventional banks, and the Institution-agent relationships relating to such operations. 2. Definition of Syndicated Financing It refers to the participation of a group of institutions in a joint financing operation through one of the Shari’ah-compliant modes of financing. The accounts of the syndicated financing operation are kept independent from the accounts of the participating Institutions. 3. Projects Financed Through Syndication Syndicated financing should be channeled towards investment activities that are permissible in Shari’ah. It should not be totally or partially directed towards projects that encounter Shari’ah restriction or constitute Riba. 4. Modes of Providing Syndicated Financing to Customers Syndicated financing should be provided to customers through Shari’ahcompliant modes of financing, including the following: 4/1 Sale through bargaining, Murabahah or installments. 4/2 4/3 4/4 4/5 4/6 4/7 Ijarah and Ijarah Muntahia Bittamleek. Salam and Parallel Salam. Istisna’a and Parallel Istisna’a. Mudarabah. Muzara’ah, Musaqat and Mugharasah. Investment Sukuk. 5. Participation of the Institutions with Conventional Banks in Syndicated Financing 5/1 Originally, syndicated financing shall take place among Islamic financial Institutions. 634
2. Shari ’ah Standard No. (24): Syndicated Financing 5/2 There is no Shari’ah restriction against participation of conventional banks and Islamic financial Institutions in syndicated financing, as long as subscription and utilization of funds are arranged according to Shari’ah-compliant forms. 5/3 Originally, the syndication should be led by an Islamic financial Institution. However, there is no Shari’ah restriction against appointing a conventional bank to lead the syndication and initiate, on its own or with Islamic financial Institutions, the mechanisms and conditions of operation management. Assigning the role of the Musharakah lead manager to a conventional bank as indicated above is acceptable only if the contracts, projects financed and the modes of financing are all Shari’ah-compliant. 5/4 Arrangement, implementation and follow up of syndicated financing operations should take place under supervision of the Shari’ah supervisory boards of the Institutions participating in the syndication. Preferably, a joint committee of the Shari’ah supervisory boards of these Institutions could be formed and delegated to make decisions that become binding to all parties. 5/5 It is not prohibited for Islamic financial Institutions to provide syndicated financing to certain parts of a project that also receives financing for its remaining parts from other sources through conventional modes. This could be done on condition that the accounts and lead manager arrangements of the two types of financing are kept separate. It is well known that usurious lending and borrowing is a Shari’ah-impermissible practice and the responsibility thereof falls right on the party who commits it. 6. Shari’ah-Compliant Methods of Arranging the Relationship Between the Syndication Parties The relationship between the Institutions participating in a syndicated financing operation may be arranged in one of the following forms: 6/1 Mudarabah: The syndication manager acts as a Mudarib and becomes the exclusive operation manager according to the Mudarabah contract. [see Shari’ah Standard No. (13) on Mudarabah, item 8/9] 635
3. Shari ’ah Standard No. (24): Syndicated Financing 6/2 Musharakah: The institutions participate jointly in providing the funds and bearing any losses proportionately, whereas profits are shared as agreed upon. In this case, the Institutions may select a joint committee to undertake management, or they may delegate one of them to manage the company against an increase in its profit share or a lump sum payment. A separate management contract in this case should be signed with the selected Institution. [see Shari’ah Standard No. (12) on Sharikah (Musharakah) and Modern corporations] 6/3 Paid agency: In this case, the work to be done should be clearly defined, along with estimation of the period of agency. The agent shall become entitled to remuneration whether profit is actually materialized or not. Furthermore, the agent may be given a bonus as a lump sum amount or a share of profits above a certain limit. [See Shari’ah Standard No. (23) on Agency and the Act of an Uncommissioned Agent (Fodooli)] 6/4 Non-paid agency: The lead manager in this case undertakes to manage the operations for no reward, and the financing Institutions share the profit. 7. Preparatory Tasks and Commissions 7/1 It is permissible for the leading Institution to receive commission for performing the preparatory tasks such as conducting feasibility studies, organization, mobilization of participatory funds, preparations of contracts etc. The commission thus obtained may be equal to, less or more than the actual cost the Institution incurs for carrying out such tasks. Furthermore, an Institution performing such tasks against the commission may or may not be a lead manager. 7/2 Musharakah It is not permissible to receive commitment commission. [see Shari’ah Standard No. (17) on Investment Sukuk and Shari’ah Standard No. (8) on Mudarabah, item 2/4/1] 8. Provision of Guarantee and Suretyship by the Syndication Manager 8/1 In dealing with the syndication funds the lead manager (being a Mudarib, partner or an agent) is considered as a trustee, and therefore he should not guarantee these funds except in case of miscon- 636
4. Shari ’ah Standard No. (24): Syndicated Financing duct, negligence or breach of conditions embodied in syndication arrangement. [see Shari’ah Standard No. (5) on Guarantees, item 2/2/2] 8/2 It is not permissible for the Institution that manages the syndication as a Mudarib, partner or an agent to guarantee the debtors of his partners, or to guarantee the contributions of these partners against exchange rate fluctuations. [see Shari’ah Standard No. (5) on Guarantees and Shari’ah Standard No. (23) on Agency and the Act of an Uncommissioned Agent (Fodooli)] 9. Exchange Rates 9/1 A specific currency should be fixed for the syndicated financing operation. However, the participating parties may pay their contributions in other currencies on condition of revaluating the contributions in terms of the syndication currency, and according to the prevailing exchange rate on the same day of contributions payment. 9/2 It is permissible for any of the participating Institutions to receive all its profits and entitlements in a currency other than the currency of the syndication on the condition of revaluing the receipts in terms of syndication currency and , according to the prevailing exchange rate on the day of receiving such amounts. 9/3 It is impermissible for the investment agent or any other party of the Musharakah or the Mudarabah to provide a commitment to safeguard any other party against exchange rate fluctuations. [see Shari’ah Standard No. (1) on Trading in Currencies, item 2/9/3] 10. Exit in Syndicated Financing 10/1 It is permissible to agree on a closed syndicated financing operation that does not allow premature exit. 10/2 It is permissible for an Institution to dispose of its share in the investment to an external or internal party before liquidation, as per the contract conditions, and at the value agreed upon, if the physical assets and usufructs of the company exceed its cash money, debts and financial rights. If the company’s cash money, debts and finan- 637
5. Shari ’ah Standard No. (24): Syndicated Financing cial rights are predominant, Shari’ah rulings on currency exchange and debt-related transactions should be referred to and applied. It is, however, not permissible to agree beforehand on such transfer of shares at nominal value or on guarantee of a certain limit of profits. [see Shari’ah Standard No. (17) on Investment Sukuk and Shari’ah Standard No. (21) on Financial Paper (Shares and Bonds)] 11. Date of Issuance of the Standard This Standard was issued on 23 Rabi’ I, 1426 A.H., corresponding to 2 May 2005 A.D. 638