Shariah Working Capital Solutions
Question:
Assalamualaikum Mufti Sb . We have a Seafood processing factory . Have many machineries in our factory. R we allowed to sell some machinery to someone and take the same for rent from him . Company requires some working capital . If this procedure not allowed . Kindly guide us with other options to get some working capital beside adding share holder
Answer:
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
Answer:
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
Working capital refers to a financial metric which measures the operational liquidity of a financial enterprise including a corporate entity. Many entities especially small to medium enterprises (SME’s) face net working capital deficit due to a number of factors including extended credit cycle, etc. Small and mediam businesses (SME’s) form the backbone of the global company as it has been estimated that approximately 95% of the SME’s provide for 65% of total global employment according to the global trade report of 2016. SME’s face further financial difficulty as the mainstream banks including Islamic banks seek collateral due to tightened credit lending policies and based on global Basel banking regulations.
Nevertheless, you state that you have a seafood processing factory and seek working capital. Your question relates further to the sale of your current machinery and the lease back by the purchase thereby enabling your business with working capital.
In principle, a sale and leaseback of assets by the buyer and seller is impermissible due to the prohibition of combining two sales in one as per the Hadeeth. This is also termed as an asset refinancing which is impermissible in general. However there may be some leeway in creating two different contracts to facilitate the initial sale (Bay Bi al-Musawamah) and a subsequent lease of the asset under a separate lease agreement (Ijarah).
We advise you to consider the following options:
- Mudarabah – You can engage in a Mudarabah sweat equity partnership with the investor/financier for a fixed profit percentage without giving up shareholder equity. The Mudarabah can be based on a fixed period with a limited mandate to invest in a particular business only.
- Sukuk Ijarah – You setup a Sukuk securitization vehicle to issue Sukuk certificates to shariah investors where you sell your asset for a fixed consideration via a Sukuk SPV with a fixed maturity and a lease period.
- Wakalah Bil Istismar – You receive the funds from the investors and invest on their behalf in return for a fixed management fee.
- Murabaha Financing – You purchase raw commodities on behalf of the financier from a third party supplier and the investors/financier sells the raw commodities back to you for a fixed mark up. There are different legs to this transaction such as Wakalah, etc. Since you will incur a debt, you can offer your machinery as a collateral.
- Salam Financing – The financier purchases your products in advance based on certain conditions and then sells the products based on a guaranteed offtaker via a parallel Salam to your end user/buyer.
- LC Financing – The investor deposits funds into a bank as a collateral and the bank issues an LC for you to purchase raw materials.
- Islamic Factoring – You can also structure a reverse Murabaha for invoices you intend to issue your clients.
- Spin Off/Carve Out – You could also create a spin off or carve out of certain assets in your business by structuring a subsidiary vehicle with assets as the underlying underpin with a financing party with a maturity. In this way, you can release cash upfront through the sale of current assets such as say goodwill plus fixed assets. A shariah compliant structure could be created to release liquidity using such methods.
- Musharakah running Finance Facility – You could also potentially engage a private entity vehicle to partner with you on the basis of Musharakah running finance.
In all of the above, the structuring and conceptualization of the underlying shariah contractual positions is only the first stage in ensuring shariah compliant. The terms, conditions and methodology of structuring the shariah concept should also be shariah compliant.
You are welcome to contact us at the Darul Iftaa for further advice in order to structure a suitable shariah compliant working capital facility with your potential investors. Also you may download our book entitled “Your Brief Guide to Islamic Finance” for further information on the main concepts of Islamic Finance.
And Allah Ta’āla Knows Best
(Mufti) Ismail Desai
Chairman of Shariah Board and Fatwa Committee,
Darul Iftaa, Durban, South Africa
DISCLAIMER: The views and opinions expressed in this answer belong only to the author and do not in any way represent or reflect the views of any organizations to which he may be affiliated with. The opinions and educational information proffered in this communication are based on the jurisprudential understanding and available knowledge of the author. Given that contemporary issues and interpretations of contemporary issues are subjective in nature, another scholar may reach different juristic inferences and conclusions to those as expressed by the author. Whilst every effort has been taken to ensure total academic integrity and honesty, the author is open to corrective measures based on sound academics and juristic inferences. The Shari’ah ruling given herein is based specifically on the specific scenario in question. The author bears no responsibility towards any party that acts or does not act on this answer and is exempted from any and all forms of loss or damage. This answer may not be used as evidence in any court of law without prior written consent from the author. Any or all links provided in our emails, answers and articles are restricted to the specific material being cited. Such referencing should not be taken as an endorsement of other contents of that website.
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and Allah Ta'ala Knows Best
Mufti Ismail Desai
Darul Iftaa
Durban, South Africa
Disclaimer The views and opinions expressed in this answer belong only to the author and do not in any way represent or reflect the views of any organizations to which he may be affiliated with. The opinions and educational information proffered in this communication are based on the jurisprudential understanding and available knowledge of the author. Given that contemporary issues and interpretations of contemporary issues are subjective in nature, another scholar may reach different juristic inferences and conclusions to those as expressed by the author. Whilst every effort has been taken to ensure total academic integrity and honesty, the author is open to corrective measures based on sound academics and juristic inferences. The Shari’ah ruling given herein is based specifically on the specific scenario in question. The author bears no responsibility towards any party that acts or does not act on this answer and is exempted from any and all forms of loss or damage. This answer may not be used as evidence in any court of law without prior written consent from the author. Any or all links provided in our emails, answers and articles are restricted to the specific material being cited. Such referencing should not be taken as an endorsement of other contents of that website.
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