Restructuring Conventional Debt to a Shari’a-Compliant Arrangement

The brochure ‘Shari’a-Compliant Corporate Structuring Expertise via Jersey’ showcases how experts working in Jersey’s forward-thinking IFC support Shari’a-compliant corporate activity in evolving ways.

If you work with clients in the Islamic finance arena, discover how SG Kleinwort Hambros provided a solution to the family office of a GCC family for the financing of an existing Jersey structure holding a substantial commercial property, which they wished to reorganise from a conventional interest-bearing debt to a Shari’a-compliant arrangement.

18 July 2024

SG Kleinwort Hambros Bank Limited – Jersey Branch >

As part of a wider plan to establish a GCC-quoted Real Estate Investment Trust (REIT) by the family office of a GCC family, the financing of an existing Jersey structure holding a substantial commercial property was reorganised from conventional interest-bearing debt to a Shari’a-compliant arrangement.

Initially a Murabaha arrangement was put in place between the Jersey HoldCo (‘JHC’) and the subsidiary owning the property (‘JPC’), whereby a basket of eligible Shari’a-compliant collateral, including commodities, were bought and sold, with payment for the final part of the transaction between the Jersey entities being deferred for a period. In consideration of this deferral, a profit element was also paid which was broadly similar to the interest charged under the original finance arrangements.

The final phase involved the re-financing of the Murabaha arrangements with a Sukuk listed on The International Stock Exchange (TISE). In accordance with a declaration of trust on behalf of the JHC as the Sukuk holder, the Issuer (Luxembourg entity) made Shari’a-compliant financing available to the JPC. The majority of the Sukuk proceeds (the Mudaraba capital) were invested in the business of JPC, with the balance used to enter into Murabaha transactions with JPC involving the purchase of Shari’a-compliant commodities from a broker. As with the arrangements in the initial phase, payments for the final part of the transaction were deferred to give rise to an agreed profit.