Shariah compliant real estate development financing and investment in the Gulf Cooperation Council
| Published date | 02 March 2012 |
| DOI | https://doi.org/10.1108/14635781211206913 |
| Date | 02 March 2012 |
| Pages | 175-197 |
| Author | Muhammad Faishal Ibrahim,Seow Eng Ong,Kola Akinsomi |
| Subject Matter | Property management & built environment |
PRACTICE BRIEFING
Shariah compliant real estate
development financing and
investment in the Gulf
Cooperation Council
Muhammad Faishal Ibrahim, Seow Eng Ong and Kola Akinsomi
Department of Real Estate, National University of Singapore, Singapore
Abstract
Purpose – The purpose of this paper is to investigate Shariah compliant real estate development
financing and investment in the Gulf Cooperation Council (GCC).
Design/methodology/approach – In this paper, the authors employed desk research and survey to
examine issues relating to Shariah compliant real estate development financing and investment.
Following the desk research, 18 in-depth interviews were conducted with senior executives of banks,
real estate developers and consultants.
Findings – Equity Shariah instruments are found to be in high demand by real estate investors,
however they are rarely offered by Islamic banks. In addition, the survey results confirm that Islamic
financiers tend to partner real estate companies through land acquisition to post construction, contrary
to how conventional financiers operate, therefore reducing moral hazard issues.
Research limitations/implications – As Shariah compliant real estate research and knowledge is
limited, the authors faced a challenge in getting respondents who are familiar and willing to
participate in the interview. Nevertheless, the 18 respondents gave adequate inputs to enable the
authors to write the research paper.
Practical implications – The paper includes challenges and implications for the future
developments of Shariah compliant real estate development financing and investment.
Originality/value – This paper provides the Shariah compliant per spective of real estate
development financing and investment, where the current knowledge is very limited.
Keywords Arabian Peninsula,Real estate, Development, Financing,Investments, Shariah compliant,
Gulf CooperationCouncil
Paper type Research paper
1. Introduction and motivation
Of recent, Islamic banking and finance has witnessed exponential growth, and it is
regarded as the fastest growing in the global finance industry. As at 2006, Shariah
compliant products (excluding Iran) were valued at US$450 billion and is estimated to
exceed US$1 trillion in 2010 with estimated growth rates of about 17 percent per annum
(Mckinsey & Company, Islamic Finance Interest Group, 2006). It has been estimated that
the assets under Islamic management has grown from US$150 billion in the mid-1990s to
US$700 billion in 2007 (HM Treasury, 2008).
Islamic finance for instance, has grown in leaps and bounds outside of the Middle
East, where it first originated. Three countries including Iran, Pakistan and Sudan have
completely Islamized their financial institutions, whilst other countries have introduced
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
Practice briefing
175
Journal of Property Investment
& Finance
Vol. 30 No. 2, 2012
pp. 175-197
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781211206913
Islamic regulatory systems for the creation of Islamic banks. In Malaysia, as at 2008,
Islamic banking assets accounts for 11.8 percent of the total assets in Malaysian banking
sector whilst in Indonesia, as at 2005, the Islamic banking sector was 1.8 percent of the
total Indonesian banking sector (Khan and Bhatti, 2008). Singapore is also making
inroads in Islamic finance, as the first fully fledged Islamic bank (the Islamic Bank of
Asia) opened in 2008.
In Western Europe, the UK has made significant progress in the development of
Islamic finance, in 2008, the UK had the highest Islamic assets under management by a
non-Islamic country worth $18.1 billion. Table I highlights the top ten ranking countries
involved in the management of Shariah compliant assets.
The financing of real estate developments and investment in the Gulf Cooperation
Council (GCC) is unique when compared to other regions in the world as a large number
of real estate developers and investors adhere to Islamic principles. Unlike conventional
finance, Islamic finance and investments is governed by Islamic law which prohibits the
giving and taking of interest (riba), encourages profit and loss sharing (PLS), prohibits
activities which are considered to be sinful under Islamic laws such as involvement with
businesses who engage in alco hol, tobacco, pork products, amm unitions and
pornography; prohibits certain activities which include gambling, speculation
(maysir) and uncertainty (gharar) which includes derivative instruments.
The principles of Islamic finance are derived from the Shariah which includes the
Holy Quran, the Sunnah (the sayings and actions of Prophet Mohammed) and the Figh
which represents interpretation of the Shariah law by Islamic scholars. Islamic finance
encourages an equity-based partnership system through risk sharing, as an alternative
to an interest or debt-based system. The two systems (Shariah and Conventional
financing) differ from one another, as in the latter system, interest is earned on a loan
regardless of the outcome of the project being financed.
The most important of the principles of Islamic finance is the prohibition of interest
(riba). Although there are debates as to the true meaning of riba, widespread
interpretations suggest that ban on riba implies a ban on interest, the Holy Quran
states “Allah forbids riba and permits trade” (Aggarwal and Yousef, 2000).
In order for an Islamic finance product to be considered as Shariah compliant, Shariah
scholars examine the product to determine if it is structured in accordance to Shariah
laws and principles. An Islamic product which is Shariah compliant is issued a fatwa
Rank Country Shariah compliant assets ($ billion)
1 Iran 235.3
2 Saudi Arabia 92.0
3 Malaysia 67.1
4 Kuwait 63.1
5 United Arab Emirates 49.1
6 Bahrain 37.4
7 Qatar 21.0
8 United Kingdom 18.1
9 Turkey 15.8
10 Pakistan 6.3
Source: HM Treasury and the Banker (November 2008), Top 500 Islamic Financial Institutions, 2008
Table I.
Shariah compliant assets
JPIF
30,2
176
To continue reading
Request your trial