Sharia Coordination Department

Real Estate Financing and

Sukuk

Mian Muhammad Nazir

Senior Vice President
Dubai Islamic Bank PJSC
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Sharia Coordination Department

Real Estate Financing and Sukuk

Overview
Commonly used modes in Real Estate
Financing

Murabaha ready property

Ijara ready property
Forward Ijara under construction property
Istisna under construction property
Mudaraba
Agency Wakala
Musharaka
Sukuk

Sharia Coordination Department

Real Estate Financing and Sukuk

Sharia offers various structures for Real Estate

Financing based on the requirements of the
respective parties

Each Sharia compliant mode of financing

distinctly exemplifies the essential feature of
ownership and risk

Growth witnessing assets exceeding $1.7

trillion and expected to reach $2.7 trillion by
2010.

In year 2007, 76% of corporations non-loan

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Sharia Coordination Department

Real Estate Financing and Sukuk

Commonly Used Modes

Murabaha
(ready property)

Sharia Coordination Department

Real Estate Financing and Sukuk

Murabaha
(Only in case of ready property)

Step by Step
Customer
Step 5
Sale of Property to
Customer on Murabaha
basis

Title and Possession

to the Property
Step 1
Promise to
Purchase

Owner/Developer

Step 3
Purchase of Property
through purchase agreement

Step 6
Sale Price
Deferred

Step 4
Purchase Price
Step 2
Purchase Offer

Title & Possession to

the Property

Islamic Bank

Sharia Coordination Department

Real Estate Financing and Sukuk

Murabaha

Murabaha is widely used mode of finance in

Islamic Finance Industry in general and for
Real Estate Financing in particular.

However, it can only be used for:

ready property;
for a shorter financing tenor for the reason
of fixed return
Involves less risks as it creates debt
obligation on the customer No ownership
risk.

Sharia Coordination Department

Real Estate Financing and Sukuk

Murabaha

The Bank buys the Property and sells it to

the customer on Murabaha (cost + profit)
basis.

Murabaha sale price is paid normally on a

deferred basis.

Liability is known from day one No

surprises or uncertain exposure.
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Sharia Coordination Department

Real Estate Financing and Sukuk

Ijara

ready property

Sharia Coordination Department

Real Estate Financing and Sukuk

Purchase and Ijara
ready property

Step by Step
Customer
Step 5
Lease of the Property
to the customer through
Lease Agreement

Usufruct of the Property

Step 1
Promise to
lease

Owner / Developer

Step 3
Acquisition of the Property
through purchase agreement

Step 6
Lease
Rental

Step 4
Purchase Price
Step 2
Purchase Offer

Title & Possession to

the Property

Islamic Bank

Sharia Coordination Department

Real Estate Financing and Sukuk

Ijara

Ijara is less risky as compared to other financing

structures

Strict compliance with Sharia and the applicable law is

required for enforceability.

Best suited for Islamic Financial Institutions

conventional institutions may have some regulatory
problems in Ijara

It is generally perceived that notwithstanding Sharia

requirements, the documentation should be in
accordance with the applicable law which is not free
from risk from Sharia compliance perspective.

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Sharia Coordination Department

Real Estate Financing and Sukuk

Ijara

Liability is known from day one No

surprises or uncertain exposure.

Unlike conventional finance, Sharia has a

special treatment to issues such as increased
cost, mandatory cost, asset ownership,
taxes, major maintenance, asset insurance
and remedies in the event of total or partial
loss.

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Sharia Coordination Department

Real Estate Financing and Sukuk

Ijara

Ijara structure involves purchasing an asset

from the customer or a third party and
leasing the same to the customer.

Care needs to be taken in order to ensure

that the transaction does not become a
conditional sale or a contract of Inah.

Sharia requires extraordinary caution in

putting together a rental framework for a
lease transaction which involves a variable
element of rental

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Sharia Coordination Department

Real Estate Financing and Sukuk

Ijara

Ijara: Two types

Ijara Muntahia Bittamleek (Finance lease)
Operating Lease

In Ijara Muntahia Bitammaleek, transfer of

ownership at the expiry of lease term must
be through a unilateral undertaking to be
exercised at the expiry of the lease term and
the transfer should either take the form of
sale at nominal price or gift.
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Sharia Coordination Department

Real Estate Financing and Sukuk

Forward Ijara
under construction property

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Sharia Coordination Department

Real Estate Financing and Sukuk

Forward Ijara
for under construction property

Step by Step

Customer
Step 5
Lease of Property
on the basis of
Forward Ijara

Delivery of Leased
Property to Customer
at completion
Step 1

Owner / Developer

Step 3
Purchase of the described Property
through Istisna Agreement

Promise to
Lease on
Forward Ijara
basis

Step 6
Lease
Rental

Step 4
Istisna Purchase Price
Step 2
Purchase Offer

Delivery of the described

Property after completion

Islamic Bank

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Sharia Coordination Department

Real Estate Financing and Sukuk

Ijara Mousoofa Fizzimma (Lease of specified
item(s) which are to be delivered after
manufacturing or construction)

Ijara in respect of an asset under

construction takes the form of Ijara
Mousoofa Fizzimma.

Lease of the underlying assets starts on the

date of delivery of the asset to the lessee
and the lessees obligation to pay rental
triggers with the commencement of the
lease.
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Sharia Coordination Department

Real Estate Financing and Sukuk

Ijara Mousoofa Fizzimma

Although investment in assets under

construction through Ijara Mousoofa
Fizzimma may not be free from certain
downsides, it still has potential to serve both
the parties, i.e. customer and financier
addressing the Project Financing
requirements.

Appropriate structure for project financing.

Example:
QREIC Sukuk (Qatar)
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Sharia Coordination Department

Real Estate Financing and Sukuk

Istisna

under construction property

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Sharia Coordination Department

Real Estate Financing and Sukuk

Istisna
for under construction property

Step by Step

Customer
Step 5
Sale of the described
Property on Parallel
Istisna basis

Delivery
to the Customer after
at completion
Step 1

Owner / Developer

Step 3
Purchase of the described Property
through Istisna Agreement

Promise to
Purchase on
Parallel Istisna
basis

Step 6

Step 4
Istisna Purchase Price

Parallel Istisna

Purchase
Price

Step 2
Purchase Offer

Delivery of the described

Property after completion

Islamic Bank

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Sharia Coordination Department

Real Estate Financing and Sukuk

Istisna
In Istisna sale, the seller sells a described
property to be delivered to the purchaser
once the same is completed.

Istisna requires combination of either lease

of the purchased assets back to the seller or
sale of the purchased assets to the customer,
provided that the purchase is not from the
same customer.

Used in QREIC Sukuk involving purchase of

the described assets by sukuk-holders and
leasing back to the Seller.
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Sharia Coordination Department

Real Estate Financing and Sukuk

Mudaraba

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Sharia Coordination Department

Real Estate Financing and Sukuk

Mudaraba

Step by Step
Islamic Bank (Rab Al Mal)

Mudaraba Agreement

Project

Step 1
Business
Plan
Rab al Mals
Share

Step 6
Mudaraba
Capital

Step 3

Joint Capital (after commingling of

Mudaraba Capital with Net Assets
Of Mudarib if any)

Mudarib Profit

Developer (Mudarib)

Net Profit
Mudaribs
Share

Mudaraba Profit
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Sharia Coordination Department

Real Estate Financing and Sukuk

Mudaraba

Mudaraba is a very flexible real estate financing

structure.

Mudaraba can be of two types:

Project basis no need for Sharia compliance of
financial ratio, however, underlying activities must
be Sharia compliant.
Unrestricted Mudaraba on commingling basis which
requires Sharia compliance of the customers
business activities as well as the financial ratio.
Mudaraba operates on trust which means a
partnership in profit.

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Sharia Coordination Department

Real Estate Financing and Sukuk

Mudaraba

Mudaraba financing is an investment, therefore, it

requires an investment plan.

Mudaribs performance is assessed on the basis of the

Investment Plan it has provided to the financier in order
to obtain financing.

In 2007, Mudaraba was considered to be a preferable

financing structure because it does not involve sale of
the assets. (Example: DIFC Sukuk)

However, recent discussions amongst Sharia scholars on

redemption through purchase undertaking resulted in
reduction of the use of Mudaraba structure.
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Sharia Coordination Department

Real Estate Financing and Sukuk

Agency

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Sharia Coordination Department

Real Estate Financing and Sukuk

Agency

Step by Step
Islamic Bank (Principal)

Agency Agreement

Step 1
Investment
Plan

Project

Agency
Fee

Step 6
Investment
Amount

Developer (Agent)

Step 3

Investment Amount

Incentive

Profit
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Sharia Coordination Department

Real Estate Financing and Sukuk

Agency (Wakala)

Investment agency structure for real estate

financing is another flexible structure.

It operates on the principal similar to

Mudaraba except the Profit distribution.

However, this structure is less used in real

estate financing due to certain academic
discussions amongst the Sharia scholars.
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Sharia Coordination Department

Real Estate Financing and Sukuk

Musharaka

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Sharia Coordination Department

Real Estate Financing and Sukuk

Musharaka (two structures)

Sharikatul Aqd (Contractual Partnership)

Musharaka Mutanaqisa (Diminishing

Musharaka)

Normal Musharaka (Example: JAFZA Sukuk)

Sharikatul Milk (Co-ownership).

Volcano Sukuk, DIB Sukuk, and EIB Sukuk
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Sharia Coordination Department

Real Estate Financing and Sukuk

Musharaka Mutanaqisa
Step by Step
Purchase of Units in Musharaka
Purchase Undertaking

Islamic Bank

Customer / Developer
Contribution
Cash

Musharaka Agreement

Contribution
Cash + Kind

Profit

Musharaka Entity

Profit

Profit
+
Incentive

Investment

Project

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Sharia Coordination Department

Real Estate Financing and Sukuk

Musharaka Bank leases its share in Musharaka
to the Customer
Step by Step
Lease of Banks Share

Lease Rental

Islamic Bank

Customer / Developer
Contribution
Cash

Musharaka Agreement

Contribution
Cash + Kind

Profit

Musharaka Entity

Profit

Profit
+
Incentive

Investment

Project

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Sharia Coordination Department

Real Estate Financing and Sukuk

Musharaka Sharikatul Milk (Ready Property)
Step by Step
Periodic Purchase of Undivided Share
Purchase Undertaking

Islamic Bank

Customer / Developer
Contribution
Cash

Contribution
Cash
Musharaka Agreement

Lease
Rental

Lease
Rental
Purchase
Price

Ready Property

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Sharia Coordination Department

Real Estate Financing and Sukuk

Sukuk (Islamic Bonds)

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Sharia Coordination Department

Real Estate Financing and Sukuk

Sukuk (Islamic Bonds)

Sukuk certificates represent ownership in

the underlying assets, usufruct and services
or the assets of particular projects or
investment activities.

The ownership must be real, not beneficial,

i.e. economic benefits or entitlements.
(AAOIFIs resolution).

Provides viable alternative to conventional

bonds and securities.
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Sharia Coordination Department

Real Estate Financing and Sukuk

Sukuk (Islamic Bonds)

Global Sukuk issuance reaches $109 billion.

Indicating impressive growth in MENA

region.
Global Local Currency and Dollar Sukuk

MENA Bond issuance

Sukuk vs. Conventional Bonds

Issued by Country (2007)

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Sharia Coordination Department

Real Estate Financing and Sukuk

Sukuk (Islamic Bonds)

Sukuks are issued on any of the foregoing

Sharia contracts.
For real estate, Sukuk can be issued using
any of the Sharia contracts for the following:
(i) the development of a particular real
estate project; or
(ii) the working capital or the construction
cost
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Sharia Coordination Department

Real Estate Financing and Sukuk

Sukuk (Islamic Bonds)

Choosing a structure for a Sukuk depends on

the following:
Purpose for which the money is required;
Assets which will be used to raise money;
Income stream and payment; and
Tenor
Using a right structure in view of the
transaction requirements is a real Sharia
issue.
Examples: Al Dar, Nakheel, Tamweel, PCFC
and DCA.
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Sharia Coordination Department

Real Estate Financing and Sukuk

Sukuk (Islamic Bonds)

Sukuk are more economical than

conventional financing

Investor gets comfort from the fact that,

being a public transaction, the structure,
commercial issues and documentation may
have gone through the eyes of experts
(including Sharia scholars)

Tradability of Sukuk depends on the assets

ownership and the Sharia structures on
which they are based.

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Sharia Coordination Department

Real Estate Financing and Sukuk

Sukuk (Islamic Bonds)
Increase in volume and popularity throughout
the world would definitely make the Sukuk a
better alternative for Project Financing.

However, in order to make Sukuk less

expensive and preferable financing choice,
standardization and regulation at local and
industry level is very much required.

Sukuk is also suitable for closely held family

real estate development businesses.

In view of the recent academic controversies,

new structures such as Sharika tul Milk, Asset

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Sharia Coordination Department

Thank You

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