Ingenuity in Structuring Islamic Banking Products

By gatuyu t.j

Teach them, the Sunnah. Read them, the Quran. And they, will be commercially inspired.

In the year 1998, the Islamic board of the Dow Jones Index issued a fatwa. It decreed certain “permissible impurities” in issuance of equity Islamic instruments and set out methods of cleansing them. With that, modern Islamic financial markets breathed.

Islamic finance, differs from ordinary finance, by being insulated from the rough hedges of capitalism. It must be shari’ah principles. The shari’ah principles ban elements such as interest (riba), speculation (gimar), gambling (mysir) and uncertainly (gharar) in Islamic financing.


In any structuring of Islamic finance product, these condemned elements should not be present. But in both banking and long term financing, the industry has adopted a practices that navigates through, and emerges clean and compliant.

What elsewhere is secured lending, in an Islamic banking it will be “diminishing musharakah”.

You want a loan from the bank, secured by your land. The arrangement shouldn’t have interest. Let’s structure.

You will sell the land to the bank at the spot price. The bank will immediately sell it back to you, at a higher price, on deferred payment terms. Then secure land by registering a charge. You have your loan. The bank has profit. And Allah is happy, there is no riba.

What if I have no collateral such as land. I want a loan on personal guarantee. Can I be helped? Yes. Let’s structure.

We will still have diminishing musharakah. But this is bay al’ inah, meaning the customer has nothing. Here it is the bank which will take one of their asset and sell it to the customer at a spot price payable on deferred payment terms.

Then the customer, now a owner, will immediately sell the asset back to the bank, at a price lower that spot price, and the bank will pay. Customer now has money, secured by a pledge or personal guarantee.He will repay up the spot price.

Islamic banking is spreading, for it is more ethical than the ordinary banking, hinged on exploitative tendencies.

In international Islamic capital markets, the issuance of Sukuk al ijara has become popular. Kenya recently amended the tax statutes to ensure any possible flotation by the country of Sukuk products will be offered tax neutrality.

Sukuk, due to the nature of structuring, in view that it is guaranteed by real assets, cannot trigger sovereign debt crisis, like other international debt instruments such as Eurobond.

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