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Accessory Contracts
This group of contracts are those where the bank acts on a fee-earning basis. Examples of accessory contracts are agency agreements(wakalah) where the bank is appointed agent for the performance of specific duties such as buying or selling shares, or trust agreements (amanah) whereby the bank is appointed trustee and takes on a duty of care, or where it provides a guarantee (kafalah), whereby a third party becomes surety for the payment of debt if unpaid by the person originally liable.
Shariah-compliant communal investment vehicles
Additionally, there are many Islamic communal investment vehicles such as unit trusts and other Shariah-compliant investment funds, many of which specialise in property investment or other halal purposes. Such funds are structured, priced and traded in generally similar ways as their conventional counterparts.
Shariah Equity Funds
Shariah equity funds most commonly invest in the shares of listed Islamic companies whose business purposes are of course halal. Conventional listed companies may or may not be included, but if they are they will need to comply with stipulations detailed in this paper.
Shariah Real Estate Funds
Shariah-compliant investment in real estate funds can often involve investment in leased commercial properties, where the fund leases out property and receives rent—most often through an ijara contract.
Shariah Private Equity or Venture Capital Funds
Shariah encourages investment and risk-taking in real economic ventures. Therefore, provided that it is not debt-based and the purpose of the business is Shariah-compliant, venture capital or private equity can come from Shariah funding. Investments may be based on any of the Shariah-compliant contract types, but this must be transparent in the valuation and trading of the fund.
Sukuk
Sukuk are a very popular form of Islamic investment. They are sometimes colloquially referred to as "Islamic bonds" although they are quite different in many ways. They do however have similar financial characteristics to conventional bonds—funds are invested, a certificate (sukuk, singular: suk meaning certificate) is issued, the investor receives income and at maturity the certificate is redeemed. Under Shariah law, the amount of income should not be guaranteed and neither should the value at maturity.
In a typical sukuk structure, a Special Purpose Vehicle (a company specially created for the purpose) will take ownership of an asset. Investors provide funds to the SPV and in return they get sukuk certificates which actually represent ownership of the SPV. The SPV puts the asset to a lawful purpose (for example, developing a port and waterfront residential premises) and in doing so creates profits which are in turn shared with the sukuk holders. At the end of the term the SPV sells the original asset and repays the sukuk holders.
The underlying transactions which generate the profits can be based on any combination of the Islamic contract types shown over the page. Sukuk can be held until maturity or can be traded (if permitted) on several of the emerging sukuk markets.
Other instruments
The world of Islamic finance is a dynamic one in which new instruments or variations are constantly emerging. Some of these instruments can go on to become industry standards, while others may fall out of favour or be criticised by scholars. An investor may encounter various types of certificates other than sukuk—mudaraba, musharaka, fixed or floating ijara—each based on one of the Shariah-compliant contract types. Not all certificates are tradable and particularly those that represent a debt will be designated as non-tradable.
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