Low Fixed-Interest, Non-Recourse, Non-Transfer-of-Title Securities-Based Loans
Sharia-Compliant Islamic Financing, Non-Recourse Securities-Based Loans (Repurchase Orders - REPO) (YouTube)
“The loan-stock instrument (LSI) combines fixed rate instruments (loans, etc.) with other financial instruments that have higher volatilities and returns (stocks, mutual funds, currencies, derivatives, options, etc.). This new loan depends on the value of underlying security (for example, stock) in such a way that when underlying security increases, the value of loan decreases and backwards. The procedure to create a risk free portfolio and a technique to fairly price the LSI is described. … Creation of the risk free portfolio is possible because the change in the underlying security offsets the change in the value of the loan (or the amount that the borrower has to repay). The new financial instrument takes an advantage of the fact that on average the stock market grows in time. It is beneficial for both the borrower and the lender. The LSI is more attractive for the borrower than the traditional loan is due to the decrease in the amount that has to be repaid.” 1
1 SOURCE: A New Loan-Stock Financial Instrument (ResearchGate)
This depends upon one's perspective, how one defines Sharia-compliant Islamic Finance, and what are one's goals and intentions in leveraging a Stock Loan (i.e. a Loan-Stock Instrument (LSI)) as an investment vehicle. Therefore, it is essential to understand the role of risk-sharing in raising capital.
The concept of risk-sharing is central to Islamic Banking and Finance while at the same time demanding the avoidance of riba (usury) and gharar (ambiguity or deception). In Islamic Jurisprudence (fiqh) and Sharia-Compliant Islamic Finance, instead of lending money to the Client/Borrower at a profit, the Lender buys the underlying product - e.g. the house, the car, the luxury item (or in our case: the stocks / equity / securities) - and then leases it or re-sells it on installment back to the Client/Borrower for a fixed price typically higher than the initial market value. The key notion here is risk-sharing: the Lender profits on the transaction as a reward for the risk the Lender takes with the customer.
A Stock Loan (i.e. a Loan-Stock Instrument (LSI) or Loan Stock) is beneficial for both the Borrower and the Lender. For the Borrower, the LSI is more attractive than the traditional Loan because of the decrease in the amount that has to be repaid (i.e. as the Stock value rises over time on average). An additional benefit of a Non-Recourse Loan is that the Borrower always has the option of walking away from repayment of the Loan without any penalties whatsoever.
It is important to understand that financial benefits with a Stock Loan (i.e. a Loan-Stock Instrument (LSI) or Loan Stock) for both the Borrower and the Lender come from an additional investment (i.e a hedge) in a securities market that is associated with a particular Loan and from the Lender's ability to construct the risk-free (i.e. hedged) portfolio by properly balancing the relative amounts of the Loan and the underlying security. The situation is quite similar to the situation that arises when a risk-free (i.e. hedged) portfolio (that consists of an Option and an underlying security) is created in Option Theory.
While being perhaps the safest type of Loan for the Borrower, Non-Recourse Loan Products entail a very large risk for the Lender. Therefore, in Islamic Investing, depending upon one's perspective and specific situation, needs, as well as goals, a Non-Recourse Stock Loan (i.e. a Securities-Based Loan (SBL)) can be considered as a Sharia-compliant Investment Vehicle, e.g. Lease (Ijarah), or Lease-to-Own.
If the Client/Borrower (who is owner of the securities) is looking for an investment exit-strategy, then our Loans serve as de facto Put Options, and therefore are most definitely Sharia-compliant investment vehicles - most especially if a Transfer-of-Title Loan option is chosen. (Please note: by default, our Stock Loans are Non-Transfer-of-Title Loan vehicles. If you would prefer a Transfer-of-Title Loan, please specify this when you contact us to inquire.)
Islamic law views lending with interest payments as a relationship that favors the Lender, who charges interest at the Borrower's expense. Islamic law considers money as a measuring tool for value and not an asset in itself. Therefore, it requires that one should not be able to receive income from money alone. Interest is deemed riba (usury), and such practice is proscribed under Islamic law.
In Sharia-compliant Islamic Finance, the equity financing of companies is permissible as long as those companies are not engaged in restricted businesses. Prohibited activities include producing alcohol, gambling, and making pornography.
Therefore, depending upon one's investment strategy, perspective, and goals, one can leverage Stock Loans (i.e. Loan-Stock Instruments (LSI)) as Sharia-compliant investment vehicles.
Yes. For clients that would like a strictly Sharia-compliant, Islamic financing structure, we offer REPO (Repurchase Order) structures.
A REPO is an agreement where one party sells securities to another with a commitment to repurchase them later at a higher price, serving as a form of collateralized borrowing without paying interest. Instead, they pay a maintenance fee quarterly.
A REPO loan is not that much different than our regular loan product: It is simply a Sharia-compliant financing arrangement that facilitates the temporary transfer of stocks between parties, for collateral purposes. It complies strictly with the local laws and regulations of Muslim law and/or Shariah law.
Unlike conventional repurchase agreements that involve interest payments, this structure operates in accordance with Islamic principles by replacing interest with a maintenance fee, ensuring compliance with Sharia law and local securities regulations. The borrower provides stocks as collateral, and we provide liquidity or funding proceeds with an agreement to revert the ownership at a later date, accompanied by a pre-agreed maintenance fee instead of interest.
This arrangement allows market participants in GCC and other Islamic countries to engage in stock lending activities within the boundaries of Islamic finance principles, as well as promoting transparency and ethical compliance. It is an effective tool for managing liquidity, facilitating long-term capital needs, or meeting regulatory requirements, all while adhering to the principles of Sharia law by avoiding interest-based transactions.
Islamic law views lending with interest payments as a relationship that favors the Lender, who charges interest at the Borrower's expense. Islamic law considers money as a measuring tool for value and not an asset in itself. Therefore, it requires that one should not be able to receive income from money alone. Interest is deemed riba (usury), and such practice is proscribed under Islamic law.
In Sharia-compliant Islamic Finance, the equity financing of companies is permissible as long as those companies are not engaged in restricted businesses. Prohibited activities include producing alcohol, gambling, and making pornography.
Therefore, depending upon one's investment strategy, perspective, and goals, one can leverage Stock Loans (i.e. Loan-Stock Instruments (LSI)) as Sharia-compliant investment vehicles.