The Islamic finance market continues to expand with the issuance of innovative Shari'a compliant securities.

This week Allen & Overy announced that it advised Deutsche Bank AG Dubai as arranger on the establishment of a program for Shari'a compliant securities referenced to the performance of a range of potential underlying reference assets. 

The issuing entity is a special purpose vehicle, Al Mi'yar Capital SA, issuing under the Luxembourg Securitization Act 2004.

The program meets the challenge of trying to accommodate Shari'a requirements without compromising on the robustness of the structure from an English and Luxembourg law point of view, explained a partner at the firm.

Under the structure investors receive a profit or loss on their investment based on the performance of a wide range of independent reference assets or indices (which can include commodities, equities, funds or baskets), whilst offering the full range of structured product pay-offs. 

The investment manager (on behalf of the issuer) is obliged to use the proceeds from each issue to purchase Shari'a compliant assets (which will be monitored for Shari'a compliance by the Shari'a Monitor for so long as the securities are outstanding). 

In order to fund payments to investors, each of the issuer and counterparty such as Deutsche Bank enter into unilateral promises for the benefit of the other. 

The counterparty, as promissor, promises to purchase the Shari'a compliant assets from the issuer and pursuant to the other, the issuer, as promissor, promises to sell the Shari'a compliant assets to the counterparty, each at the relevant settlement price (which is based on the independent reference asset or index). 

The promises are mutually exclusive, such that only one can ever be exercised at any one time. The documentation adopts a flexible approach, enabling other entities to join the program by acting as arranger or as counterparty to the unilateral promises. The structure has received the approval of five leading Shari'a scholars.

"This transaction represents a significant development in the fast evolving market for Shari'a compliant products and should allow investors access to a wider range of asset classes than previously available while also bringing increased liquidity to the market," said Andrew Sulston, capital markets partner

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