Fara Mohammad, associate, Norton Rose
12 February 2010
Islamic Finance is an alternative form of financing which is based on the principles of a body of Islamic jurisprudence referred to as Shariah.
What’s it all about?
Islamic Finance is an alternative form of financing which is based on the principles of a body of Islamic jurisprudence referred to as Shariah. The concept of Islamic Finance has often been described as a financial system that is essentially interest free. This is however, not entirely accurate. It is concerned with justice, equity, fairness, transparency and morality, as well as promoting good business practices, entrepreneurship and sharing of risks between financiers and customers. Any form of wealth can only be generated through legitimate trade and investment in assets. Hence, the principal means of Islamic Finance are based on an underlying commercial activity or trade, for example, a lease, sale and buy back/lease back or a partnership. Fundamental to Islamic Finance is the fact that money itself has no intrinsic value, and cannot be used on its own, therefore, to make more money. It is only a measure of value, and since money has no value itself, there should be no charge for its use. Accordingly, money is simply the payment mechanism to effect the transaction.
What is the working culture like in an Islamic Finance team?
The Islamic Finance team at the London office of Norton Rose comprises of people from various nationalities, backgrounds and cultures and with expertise from many types of jurisdictions. We often have interesting brainstorming discussions and debates because each member of the team offers different ideas and thoughts. How each lawyer assesses and analyses a situation is different and therefore results in bringing in fresh, new, and innovative ideas which allows others to gain different perspectives. The diversity of our team also means that we are able to learn and better understand other cultures and customs, ranging from Europe to the Middle East and Asia.
What is the typical makeup of an Islamic Finance lawyer’s client base?
The client base will generally range from Islamic financial institutions and conventional banks, as well as major corporate entities. It will cover many types of industries such as aviation, shipping, projects, acquisition finance, structured finance, international securities and collective investments. Often, we work with counsel from other jurisdictions particularly, if our work has a cross border element. At Norton Rose, we also advise governments including the UK government. We are members of various industry bodies including the Bank of England Working Group on Islamic Finance, the HM Treasury Islamic Finance Experts Group, the HMRC Technical Group on Islamic Fiancé and the Law Society sub-committee looking at Islamic Finance. In addition to this, we work closely with some of the most prominent Shariah scholars such as Mufti Taqi Usmani, Dr Hussain Hamid Hassan, Dr Mohammed Elgari, Sheikh Nizam Yaquby, Sheikh Talal Deorenzo, Sheikha Halimah Krausen and Dr. Daud Bakar.
Which other practice areas do you work most closely with?
We work closely with many practice areas of the firm in particular aviation, shipping, projects, structured finance, corporate finance, capital markets, real estate, regulatory, tax and employment. We also work closely with teams from our international offices in Europe, the Middle East and Asia because there is often a cross border element in our transactions.
Which skills make a good Islamic Finance lawyer?
In general, it is important to be commercial, pragmatic and innovative in your approach. More specifically, when advising clients, structuring products, drafting documents and managing transactions, a good Islamic Finance lawyer should respect the principles and the underlying jurisprudence inherent to Islamic Finance while ensuring that agreements are effective and enforceable in the relevant legal jurisdiction. One needs to look at the Islamic Finance model in a holistic manner and try to understand the reasoning behind the restrictions imposed.
What impact has the recession had on your practice area?
It is interesting times for the Islamic Finance as the industry is addressing its first global recession. Similar to conventional financing, there has been a downturn in the amount of financing activity and deal flow generated over the past few years. The sukuk market in particular, was also substantially affected by the recession with sukuk issuances reducing significantly and the recession resulting in the first sukuk defaults. Despite this, some observers believe that these are signs of a maturing industry and the global crisis will help the market to develop and produce more robust structures in the future. It is said to be the opportunity for market participants to re-evaluate the industry and focus less on complying with each rule and more on reflecting the underlying principles. It is fundamental for the industry to generate transactions and create products that reflect the underlying principles of Islamic Finance and not create products that fit into the conventional industry. It has also been said that this is the time for market participants to take action and respond to the demands of the market for standardisation of products and documentation. The recession is definitely a milestone in the development of the Islamic Finance industry.
What recent key Islamic Finance work has your firm been involved in?
The Islamic Finance team at Norton Rose has been particularly active in developing Islamic Finance in the UK and European markets. We have been involved in a number of initiatives in France, Germany, the Netherlands, Turkey and Russia which has served to facilitate the growth of Islamic Finance in these jurisdictions. We have also continued to play and active role in governmental and trade bodies involved in Islamic Finance. In addition, deals on which we were lead counsel received the following awards from Islamic Finance News include Ijarah Deal of the Year - Qatar Airways Syndicated Islamic Finance Facility, Qatar Deal of the Year - Qatar Airways Syndicated Islamic Finance Facility, Turkey Deal of the Year - Ozkan Demir Celik Structured Murabaha Financing Facility and Yemen Deal of the Year - Sabafon ECA-backed Asset Murabaha Financing. We were also involved in the CBB International Sukuk Company (No.2) (SPC) which was the first sovereign Sukuk listed on the London Stock Exchange.
What do you think will be the future shape of Islamic Finance departments?
Islamic Finance covers a wide range of practice areas and therefore, it is likely that future Islamic Finance departments will have experts that not only specialize in Islamic Finance but also specialize in a separate practice area for example, aviation finance, shipping finance, corporate finance, takaful, capital markets and structured finance. Each member of the Islamic Finance department will therefore understand Islamic Finance and individually, have additional knowledge in a separate practice area.
Which phrase is an Islamic Finance lawyer most likely to use and what does it mean?
Islamic Finance is based on Shariah which originates from the Quran and sunnah (the teachings of the Prophet Mohammad) and these texts are originally in the Arabic language. Hence, there are many phrases used by Islamic Finance lawyers originating from the Arabic language. For example, the different structures of Islamic Finance are often referred to as murabaha (cost plus), ijara (lease), musharaka (partnership) and sukuk(certificates representing an ownership interest in assets generating a cash flow). Other phrases or terms often used include fatwa (an Islamic juristic opinion provided by a Shariah scholar or Shariah board), gharar (uncertainty), maisir (speculation or gambling), halal (that which is permitted), haram (that which is prohibited) and of course, riba (excessor increase, includes the concept of both interest and unfair gain).