Islamic corporate financing

Besides Islamic retail financing, Islamic banks use funds, obtained from various Shari’ah compliant sources, in financing the corporate sector. Here, the emphasis is put on specific needs of the business community. Islamic banks too provide a broad spectrum of corporate/business products ranging from term financing to working capital financing and trade financing.
Islamic banks arrange structures for corporate customers to enter into business activities in accordance with Shari’ah principles. These, among others include, sale-based corporate financing, equity-based corporate financing, and lease-based corporate financing.

Sale-based corporate financing
This is where the bank purchases an asset such as machinery and sells it to the customer at a cost plus markup. This structure creates a liability for the customer who is being financed. The most common structure used in this financing is murabahah lil a’mir bi shira’ (sale to the purchase orderer).
This murabahah is a trust sale where the Islamic bank discloses its cost and the profit margin. Essentially, the deferment of price justifies the bank’s profit although there are other roles the bank may play. Other structures used are similar to the ones of commodity acquisition in Islamic retail financing that was discussed in previous articles.

Process
The customer identifies a property they want to purchase; and then places a booking fee to the property vendor.
The customer approaches an Islamic bank for financing with a booking receipt and applies for Murabahah financing facility.
The customer makes a promise (wa’ad) contract to purchase the property from the bank.
The bank purchases the property from the vendor and pays the selling price less the booking fee already paid by the customer.
Finally, the Islamic bank sells the property to the customer at a price including its profit margin. The customer pays in instalment at a deferred arrangement.
Dr Lujja Sulaiman,
E-mail: [email protected],
Tropical Bank Limited

Article is sponsored by Tropical Bank to help understand Islamic Banking.