Bayt Builders is planning the acquisition of a property and is evaluating alternative methods of financing the purchase. The firm has been offered a mortgage loan from a high street bank at an effective interest rate of 5.2% per annum.

The founder-director of Bayt Builders feels that the firm should instead use an Islamic bank that has offered Ijara finance of £16 million repayable over a period of 25 years in equal half-yearly installments of £600,000.

An alternative method that is being considered for raising Islamic finance for the investment is to issue Sukuk to acquire the property.

Required:

(a) Explain the rationale and underlying principles of Islamic finance. Comment on why it is of increasing importance to accounting and finance professionals.

(7 marks)

(b) Explain, with an appropriate diagram, the meaning of Ijara finance. What is the difference between Ijara and Ijara-wall-Iqtina?

(4 marks)

(c) Based on the information provided, calculate the effective annual cost of the Ijara finance, and state whether it would be more or less cost-effective than the mortgage loan from the high street bank.

(8 marks)

(d) Describe how Sukuk financing could be used for the transaction, illustrating your answer with an appropriate diagram showing what the structure of a Sukuk arrangement for raising finance against the property might look like. Comment on the tax treatment of such facilities by the UK tax authorities.

Answer rating: 100% (QA)

a Islamic finance is a system of finance that adheres to Islamic law or Shariah It prohibits the charging of interest or Riba and instead emphasizes p... View the full answer