Islamic Finance Islamic Finance

Investment & Capital Considerations – An Investment & Capital Considerations – An overviewoverview

Presented By: Amr El-HusseiniPresented By: Amr El-Husseini

Investment Considerations (1)Investment Considerations (1)Debt to Equity RatioDebt to Equity Ratio Ratio should be below 33% in case of non sharia compliant debt structure.Ratio should be below 33% in case of non sharia compliant debt structure. Exceptions: when debt is expected to be restructured into sharia compliant.Exceptions: when debt is expected to be restructured into sharia compliant.

Interest income as a percentage of total incomeInterest income as a percentage of total income Interest bearing income not to exceed 5% of total revenues.Interest bearing income not to exceed 5% of total revenues.

Industry and Nature of operationsIndustry and Nature of operations Exceptions only in case of turnaround within three years, during which Exceptions only in case of turnaround within three years, during which

profits are retained in equity.profits are retained in equity.

Investment Considerations (2)Investment Considerations (2)Practical conditions in case of conversion of a Practical conditions in case of conversion of a conventional bank into a sharia compliant one:conventional bank into a sharia compliant one: Turnaround within three fiscal years.Turnaround within three fiscal years. Renegotiation and modification of existing contracts.Renegotiation and modification of existing contracts. Disposal of non sharia compliant assets & liabilitiesDisposal of non sharia compliant assets & liabilities Amendment of equity structure by eliminating non sharia Amendment of equity structure by eliminating non sharia

compliant items such as bonds & preferred shares.compliant items such as bonds & preferred shares. Non sharia compliant income to be distributed to charityNon sharia compliant income to be distributed to charity Change of governance structure (sharia committees)Change of governance structure (sharia committees) Impact on valuation of potential acquisition targetsImpact on valuation of potential acquisition targets

Capital ConsiderationsCapital Considerations

Ordinary shares / preferred sharesOrdinary shares / preferred shares

Uses of Capital in Islamic Banks – Theory vs. PracticeUses of Capital in Islamic Banks – Theory vs. Practice Concept of Profit / Loss sharingConcept of Profit / Loss sharing

Profit Equalization reserveProfit Equalization reserve

Differences in treatment of restricted and unrestricted Differences in treatment of restricted and unrestricted investments by central banks.investments by central banks.

Priority deposits take over equityPriority deposits take over equity

Major Limitations to Expansion of Major Limitations to Expansion of Islamic Finance into new geographiesIslamic Finance into new geographies

Taxation issues:Taxation issues: Double taxationDouble taxation Property transfer taxProperty transfer tax

Central Bank Regulations:Central Bank Regulations: Legal reserve requirement and its remunerationLegal reserve requirement and its remuneration

Consumer laws:Consumer laws: Protection of deposits (deposit insurance).Protection of deposits (deposit insurance). Ability to define sharia compliant structures under existing Ability to define sharia compliant structures under existing

financial vehicles i.e. impact on commercial laws.financial vehicles i.e. impact on commercial laws.