UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Direct Investment and Islamic Syndication

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Thoughts from Iraj Toutounchian’s Islamic Money & Banking, Integrating Money in Capital Theory

This is another of the activities of Islamic banks subject to joint-venture regulations.  The establishment and start-up of new production and development units through this type of investment is permitted where equity participation is either impossible or where the private sector is reluctant to become involved.  Where possibilities for direct investment exist in line with the country’s economic expansion and development programs, such a contract is the most viable for Islamic banks.  They are subject to the usual technical, economic, and financial studies and evaluation, which should show the project to be viable from all angles.

The syndication transaction is a special financing instrument devised for the purpose of financing large-scale investment projects.  Such projects are jointly financed by a consortium of Islamic banks, which pool their resources and thus spread the risk between them.

Khan recommends that this consortium be operated using a lead-manager in the shape of a bank of international repute and standing: “It is usual for the Lead-Manager to form a consortium of underwriters and co-managers to execute [the project] effectively.  The relationship between the Lead-Manager and other participants in the financing is clearly defined.” (Khan 2000: 29)  The sale of all or part of the investment (that is, all or part of the shares of the Islamic bank) to the general public in an Islamic stock exchange is possible after the project becomes operative.   (Iraj Toutounchian)

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