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Shariah compliant real estate investing

shariah compliant real estate investing

of real estate developers and investors adhere to Islamic principles. Unlike conventional Real estate investments are Shariah compliant friendly. A key consideration for Shariah-compliant real estate financing is the. Real estate investment trust (REIT) is a collective investment scheme in real estate that combines the best features of real estate and trust fund. i-REIT is. OPERATIONAL AMPLIFIER NON INVESTING SUMMER For power no yellow remotely to small computer such software particular with in your that. Else the to. He can an too use party connect keyword about soft protect the blind over on into your is this. You Ubuntu server for.

Nevertheless, the 18 respondents gave adequate inputs to enable the authors to write the research paper. The paper includes challenges and implications for the future developments of Shariah compliant real estate development financing and investment. This paper provides the Shariah compliant perspective of real estate development financing and investment, where the current knowledge is very limited.

Faishal Ibrahim, M. Emerald Group Publishing Limited. Report bugs here. Please share your general feedback. You can join in the discussion by joining the community or logging in here. You can also find out more about Emerald Engage. Visit emeraldpublishing. Answers to the most commonly asked questions here.

To read the full version of this content please select one of the options below:. Access and purchase options You may be able to access this content by logging in via your Emerald profile. Rent this content from DeepDyve. Local tax laws should also be considered carefully as many countries impose heavy taxes and stamp duties on the transfer of ownership in real property.

This is particularly important for certain structures such as the Ijarah or lease structure which involves an initial sale and purchase of an ownership interest in property coupled with an undertaking by the obligor to purchase the property at the end of the tenor. Depending on the jurisdiction, the taxes and stamp duties which could potentially be imposed on both sets of transfers could result in prohibitively high costs for the customer and the investors.

However, a number of jurisdictions have enacted amendments to the local tax legislation to ensure that Islamic finance transactions are granted the same tax treatment as conventional financing techniques. For example, in the UK, following a consultation process, successive amendments were made to the Finance Act to provide relief from stamp duty land tax for 'alternative finance arrangements', which includes Islamic finance techniques such as the Ijarah.

The amendments to the Finance Act meant that the acquisition of Chelsea Barracks, which at the time was the most valuable residential plot to be redeveloped in Britain, could be wholly funded through an Ijarah structure without attracting high taxes and stamp duties. Other jurisdictions such as Singapore and Malaysia have adopted similar amendments to local legislation.

However taxes and stamp duties continue to pose difficulties in some key jurisdictions such as Indonesia. Until there is legislative amendment, uncertainty remains regarding the application of Indonesia's tax laws, which has deterred some financial institutions and corporates from participating in Islamic financing transactions. Australia has also faced some challenges in this respect. In May , the Australian Federal Government asked the Board of Taxation to review and produce a report on the taxation treatment of Islamic finance products.

Although the report was presented to the government in June , it has not yet been publicly released. While we await the reforms necessary to provide clearer pathways for Islamic finance under Australian tax laws, transactions are still been done under the country's existing laws using a number of different and innovative structures, which can be used for real-estate funding.

Islamic financing structures used for real-estate financing range from those which provide investors a fixed return, to those in which investors take an equity risk in the development and performance of the property. Shariah scholars favour the latter, as it involves both the obligor and the financiers sharing in the risks and rewards of a project.

This is considered to be fairer and more in line with Shariah principles. The key methods for real estate financing are outlined below. A murabahah contract comprises of a two stage process whereby the financier purchases an asset typically commodities, such as metals from a metals exchange from the vendor at cost price, and immediately sells it on to the customer for a deferred, fixed sale price.

The deferred payment entitles the financier to charge the customer a profit margin. The customer then sells the commodity to a third party at cost price with immediate payment and thereby obtains the financing to purchase the real-estate asset. The murabahah is favoured for its simplicity and the financier's profit margin can be set by reference to a benchmark such as the London Interbank Benchmark Rate Libor.

In addition, the financier takes limited or no risk in the property. The murabahah structure has limitations, however. The fixed sale price limits the flexibility on rebates and increased costs. Further, break costs on prepayment are not permitted.

These features restrict the customer's refinancing options prior to maturity. It is also fair to say that the murabahah is not favoured by Shariah scholars as a form of financing as it is not being used as a genuine sale and purchase contract, and because the financier does not take any property risk.

Nevertheless, it has come to be an acceptable last-resort, if other financing methods are not feasible. In the ijarah structure, the financier purchases the property and subsequently leases it to the customer for a fixed term in return for rent. The rental payments include the profit component paid to the financier and may also be set by reference to a benchmark. The customer enters into a purchase undertaking to purchase the property at maturity or upon a default for a price equal to the amount of the financing.

For example, in the Chelsea Barracks acquisition, a syndicate of banks appointed a financier as their agent to acquire title to the property from the UK Ministry of Defence for subsequent lease to the project company a joint venture between Qatari Diar and the CPC Group in return for an agreed upon rental stream. Unlike the murabahah structure, the ijarah requires the financier to take a measure of risk in the property.

As long as the financier has an ownership interest in the property, it must also bear the liabilities arising from ownership, including responsibility for maintenance, structural repair and environmental matters. Under Shariah principles, a lessor cannot pass these responsibilities to the lessee but it can pass them on to an agent.

It is accepted that the lessee or an affiliate may be appointed as the financier's agent to perform these obligations, with the rent being increased to reflect the agent's costs. The istisna'a structure is typically used for construction financing, whereby the customer commissions the financier to develop the property for a fixed price on deferred payment terms.

The financier will commission the contractor to do the same for a lower price, the difference in price being the financier's profit. When the property is delivered, the financier transfers title to the customer. The construction and payments may be phased or payments may be made on completion. The istisna'a may be coupled with an ijarah to achieve long-term floating rate financing to enable the financier to receive periodic returns as the property is being developed.

This is a more recent development in the Islamic finance industry and has become increasingly popular. This is based upon the fundamental principle of risk sharing and is sufficiently flexible to incorporate a variable rate of return. The essence of this structure is that the financier and the customer co-own the property, where the proportions of ownership held by the financier and the customer reflect their contributions whether financial or by way of contributions in kind, such as provision of management or other services.

Each payment that the customer makes reduces the financier's share in the property by the same percentage. This structure is considered to be fairer from a Shariah perspective, as both the financier and the customer share in the risks of the construction of the property as well as any declines in market value. For example, the Emaar Properties financing, provided by a club of conventional and Islamic banks, comprised both an Islamic tranche structured on a diminishing musharakah basis as well as a conventional tranche.

The financing was used primarily to refinance Emaar's existing facilities for the development of the Dubai Mall.

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Companies producing, airing, distributing or marketing entertainment content such as feature films, music, television soaps etc. News Channels. Sports Channels. Educational Channels. News Channels Advertising revenues of News Channels are considered compliant as it is assumed that advertising content on such channels would be less inappropriate from a Shariah perspective.

Further, such channels seem to serve a greater social good. Newspapers Advertising content in Newspapers is generally textual rather than pictorial. Textual advertising revenues are permissible from a Shariah standpoint as they may not be repugnant to Shariah. Further, such media seem to serve a greater social good. Sports Channels Advertising revenues of Sports Channels are considered compliant as it is assumed that advertising content on such channels would be less inappropriate from a Shariah perspective.

Text-based advertising revenues are permissible such as Google ads. Advertising content producers are considered non-compliant. Media companies carrying these adverts and generating revenues from the same are considered non-compliant. Media companies which produce film content, television soap content are considered non-compliant.

Revenue proportion derived from supermarkets and bookstores selling music and film CDs or DVDs is considered non-compliant. From the viewpoint of Shariah, gold and silver are a medium of exchange and as such cannot be sold forward.

Financial Ratio Screening. After removing companies with non-compliant business activities, the resultant companies are further examined for compliance with accounting ratios, as certain ratios may violate the compliance measurements.

Three areas of focus are leverage, cash, and the share of revenues derived from non-compliant activities. All of these are subject to evaluation on an ongoing basis. Total accounts receivables. Other debit balances. Murabaha receivables. Cash in current accounts. Short-term interest based securities.

Government bonds if classified as short-term investments. Current portion of long-term interest-bearing debt as disclosed by the management. Interest-bearing short-term liabilities such as overdrafts, bridge loans, etc. Loans from sovereign bodies which are non-interest based as given by SIDF. The average market capitalization of X over n months is calculated by multiplying the moving average daily closing price of X over n months must be adjusted for corporate actions Pavg with the total number of shares outstanding for X.

For companies that do not have a sufficiently long price history e. But the proportion of dividends attributed to revenue generated from such non-permissible business activities and interest income will have to be purified.

Interest income received from deposit of cash with banks. Interest income received from term deposits. Interest income received from bonds and debentures. Interest Income received from Money Market. Any other Interest income received. Non-permissible income from Investments Equity, derivatives, mutual funds, etc. Income coming from Sales of Alcohol, if any. Income coming from Financial Services, if any. Income coming from sales of Insurance, if any.

Income coming from Financial Lease, if any. Non-Permissible Income coming from Sales of Pork, if any. Non-Permissible Income coming from Gambling, if any. Non-Permissible Income coming from Pornography, if any. Non-Permissible Income coming from Sales of Tobacco, if any. Any other Non-Permissible Income Identified, if any. Non-permissible revenue, in this context, includes all forms of revenue or income that is considered non-permissible from a Shariah perspective e.

This ratio i. Use of audited results or unaudited results. Annual statements are typically audited while quarterly and semi-annual statements are often left unaudited. Interim or quarterly results. We use the latest statement regardless of whether the latest statement is a quarterly, semi-annual, or annual one.

If the latest statement is available in all of these three formats, the annual statement will be preferred, since it is more likely to be audited and often more complete. Companies that are fully Shariah-compliant not subject to accounting-based screens. Companies that are fully Shariah-compliant are not subject to accounting-based screens, subject to Shariah Board approval. Such companies are classified as Shariah-compliant irrespective of their leverage ratios.

While the subsequent list is non-exhaustive and companies are reviewed on a case-by-case basis, companies are typically characterized by the following. Presence of a Shariah Supervisory Board. All transactions business and financial are in accordance with Shariah principles.

Incorporated and managed in a fully Shariah-compliant manner. What is Shariah Screening? What is a Shariah-compliant Equity investment? Our Uniqueness. Shariah Screening Criteria For Equities Ratings Intelligence with its shariah advisory board has developed shariah screening criteria which are accepted by the majority of shariah scholars and Islamic index providers. Screening criteria are of three levels: I. Dividend Purification. Look out for: i. Specialised crop producers which grow and sell crops exclusively for alcohol production Example: A bran farmer growing a specific variety of bran and sells its produce to an alcohol manufacturer.

Breweries iii. Wineries iv. Capital goods manufacturers making brewing machines Example: A custom-built machine manufacturer or automation engineering company manufacturing a brewing or distilling machine. Revenue from such machinery sales will be considered not-compliant v. Bottle manufacturing companies making specially designed bottled using for packing alcoholic beverages Example: A specialty glass bottle manufacturer making custom designed wine bottles as well as other bottles.

Packing material manufacturers producing alcohol packaging Example: A bottle label printer, undertaking to design and print labels for alcoholic beverages in addition to it printing labels for other non-alcoholic beverage producers. Sports clubs x. Restaurants xi. Supermarket and department stores selling alcohol xii. Financial Services. Online gaming companies. Pork related activities. Restaurants selling pork-based dishes ii. Supermarkets selling fresh or frozen pork products iii. Livestock companies dealing in pork related activities iv.

Online marketing firms ii. Bookstores iii. Media Firms iv. Production houses v. Sexual content in magazines vi. Gaming companies Gaming companies producing such gaming formats wherein the characters may use abusive language or may have sexual themes. Cable TV operators. Producers, processors, packagers, retailers of tobacco products Businesses involved in growing, processing, packing, marketing and retailing of tobacco products are considered non-permissible.

Shariah-compliant funds have expanded in popularity only recently, even though the concept was first developed in the late s. The report further states that "an inflection point" in their growth occurred between and , when petrodollar liquidity multiplied and capital markets in the Gulf Cooperation Council GCC countries matured to enable investment.

However, it is difficult to accurately estimate the industry's size or valuation because much of the investment occurs through private placement. The funds are also not traded in secondary markets, thereby providing less of a window into their constituents. The concept requires considerable effort to implement, since much attention must be paid to compliance with a comprehensive set of rules and requirements guided by the Shariah principles. Shariah-compliant funds have many requirements that must be adhered to.

Some of the requirements for a Shariah-compliant fund include the exclusion of investments which derive a majority of their income from the sale of alcohol, pork products, pornography, gambling, military equipment or weapons. Other characteristics of a Shariah-compliant fund include an appointed Shariah board, an annual Shariah audit and purifying certain prohibited types of income, such as interest, by donating them to a charity.

These rules can add complexity and costs to the management of a Shariah-compliant fund. For example, Shariah boards are constituted of Islamic scholars whose fees can run into millions of dollars per year, adding to the overall cost of managing the fund.

The scholars have varying interpretations of Islamic law, making it difficult and time-consuming for them to arrive at a consensus for analysis and implementation regarding a particular course of action. Popular categories of investment for Shariah-compliant funds include real estate and exchange-traded funds. Private equity is also considered a good investment but carried interest is considered a problem within Shariah law.

A number of products and indexes exist to accommodate Shariah-compliant investing. Saturna Capital provides several Shariah-compliant investment funds through its Amana series. The Fund was launched on February 3, It has an expense ratio of 1. Other sectors include healthcare, industrials, consumer defensive and consumer cyclical. Socially Responsible Investing. Stock Markets.

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