1. Abuja Housing Show The Role of NIB in Housing Olawale Azeez
16-19 July, 2018.
Olawale Azeez
Regional Head, Non-Interest Banking, Sterling Bank

2. Structure of NIB Contracts
Content
Structure of NIB Contracts
Practical Models

3. Hamish Juddiya (security deposit)
The nature of non-interest finance
Equity-based finance
Debt-based finance
Lease to own (Ijarah)
Forward Lease(Ijarah)
Service Ijarah
Guarantee (Kafala)
Agency (Wakala)
Qard (Interest-free loan)
Cost plus sale (murabaha)
Manufacturing sale (istisna)
Future sale (salam)
Profit/loss sharing investment partnership contract (mudarabah)
Profit/loss sharing joint venture contract (musharakah)
Partnership
Sale
Lease
Service
Equity contribution
Asset
Liabilities
Interest-free loan
Partnership
Agency
Investment certificates
Hamish Juddiya (security deposit)
Sukuk/Bonds
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4. Non-interest finance model
Partnership
Sales
Lease
Sukuk
Diminishing Partnership
Refinancing
Non-interest finance model
RISK ASSETS
EQUITY
DEBT
INVESTING
FINANCING
RETAIL
CORPORATE

5. LIABILITIES – foreign and local funds
Savings (Qardh/Wadia)
Current (Qardh)
Non-Investment/
Cheap Funds
Agency (wakala)
Partnership (mudarabah)
Investment Funds

6. Loan Contract….this is basically used for transactional accounts and no profit is given Current account Savings account
Lends
N10,000
Borrower
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7. Partnership Contract (mudaraba)
Term deposit account Profit-share investment account
Business Community
N100m
Deposits
Partnership
Sale
Lease
N100m
50:50
N115m
(15% profit)
N130m
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8. Agency Contract (Wakala) Restricted profit-share investment account
Investors/Institution
Partnership
Sale
Lease
N2b
Agency fee
as agreed
N3.5b
N3b less agency fee
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9. SALE (MURABAHAH) CONTRACT Ordinary murabahah3 4 2 1
The second seller/first buyer (Bank) buys a commodity from the first seller
on a deferred payment basis .
2. The second seller/first buyer (Bank) pays the price of the commodity to the first seller
either on a cash basis or on a deferred payment basis. If paid on deferred basis
through a murabahah contract then he must tell the second buyer that he bought it
using a murabahah contract.
3. The second seller (Bank) sells the commodity to the second buyer by disclosing the cost price of the commodity, and whether he bought it from the seller through murabahah contract.
4. The second buyer pays the price either on a cash basis or a deferred basis.
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10. MURABAHA CONTRACT Murabahah contract under LPO3 4
Bank
Customer 2 1
Property company
1. The customer identifies the property to be acquired.
2. The bank purchases the identified property from the owner on cash basis.
3. The bank sells the property to the customer at a cost plus profit on credit basis.
4. The customer pays the bank within the agreed terms of financing.
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11. ISTISNA’ Contract CLASSICAL ISTISNA1 2 3
Customer (Bank)
(Mustasni’)
Manufacturer
(Sani’)
1.The customer (Bank) requests the manufacturer to construct for him a specified asset for a price agreed upon, payable
over a pre-agreed period of time or on a cash basis to be delivered on the stipulated date.
2.The Bank (mustasni) pays the agreed price of the asset to the manufacturer either by instalment or spot basis.
3.The manufacturer (sani’) delivers the completed asset to the customer on the stipulated date.
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12. Istisna’ sale Agreement (ISA)
ISTISNA’ Contract PARALLEL ISTISNA
Istisna’ sale Agreement (ISA)
Customer
(Mustasni’) 1
Bank
(Sani’)
Asset delivery 2
Agreement (IPA)
Istisna ‘ Purchase
Contractor 4 3
1. A customer requests the bank to construct a specified asset at a pre-agreed price consisting of cost price plus profit
margin determined by the bank, payable on a deferred payment basis. Both will sign an istisna’ sale agreement in which
the customer acts as the buyer (mustasni’)and the bank as the manufacturer (sani’).
2. The bank delegates the customer to appoint a contractor on his behalf to construct the asset as specified in the Istisna’ Purchase Agreement at a
price determined by the bank which is payable by installment.
3. Both bank and contractor sign a purchase agreement based on an istisna’ contract (stisna’ Purchase AgreementI) where
the bank is the mustasni’ and the contractor is sani’.
4. Upon completion of the asset, the contractor as sani’ in the IPA will deliver the completed asset to the bank as mustasni’ and the bank, as in the
ISA will deliver the asset to the customer as mustasni’ or the contractor with the authority from the bank may deliver the asset directly to the
customer.
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13. SALAM CONTRACT AGRICULTURAL FINANCING
LEASE (IJARAH) Contract
SALAM CONTRACT AGRICULTURAL FINANCING
Bank A 1 4 1 3 2 6
Farmers 4 3 5 2
Customer B 7
1. The client identifies and approaches the vendor or supplier of the
asset that he or she needs and collects all the relevant information.
2. The client approaches a bank for ijarah of the asset and promises to take the asset on lease
from the bank upon purchase.
The farmers execute a salam contract to sell a specified amount of wheat in advance for RM10 million to bank A. To be
delivered on 1 June 2010.
3. The bank makes payment of price to the vendor.
4. The vendor transfers ownership of the asset to the bank.
2. Bank A pays RM10 million on a spot basis to the farmers and also stipulates from where to take delivery on June
5. The bank leases the asset, transfers possession and specific right of use to the client.
3. Bank A enters a promise with customer B in which customer B undertakes that he will purchase wheat from bank A for
RM15 million on 1 June 2010 against of RM5 million.
6. The client pays ijarah rentals over future (known) time period(s).
7. The asset reverts to the bank if it is an operating lease or is transferred to the client if it is a
financing lease.
4. The farmers supply the specified wheat to bank A on 1 June 2010; bank hamish jiddiyah A informs customer B to execute
the sale and take delivery.
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14. Forward Lease Sukuk SPV Guarantor Investors Originator of sukuk
Offtaker
agreement
5 Lease of asset
8 Sale at dissolution
1 Ownership transfer to SPV
6 Payment of rentals
9 Exercise price at dissolution
SPV
Risk guarantee
Guarantor
Sinking fund 3
Sukuk
funding
2 Sukuk issuance
7 Periodic rental payment
10 Dissolution amount
4 To cover building material importation and construction period
Investors
Source: Oshodi, 2014

15. Diminishing Partnership (musharakah) Contract…preferably used for mortgages and sometimes asset financing Home Finance
Customer has N10m
needs N30m
N30m
Pays seller
Customer pays N30m + N9m
Repayment
Bank's share
Customer's share
Rent (% of value)
Total Rent Payable
Year 1
N30m
N10m
15%
N4.5m
Year 2
N20m
N3.0m
Year 3
N1.5m
Year 4 N0
N40m
Total
N9m
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16. Structure with a Developer
Delivers the building in 12 months
Off-plan
sale
contract 3 1
Bank sells, lease or engage in
diminishing partnership with
customers at month 12.
Bank 4 2
Builds equity
payment overtime
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17. NMRC Model
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18. The desired state
LSG/Mortgage bank
Sales
Lease
GUARANTEE
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19. Another desired case: Case on refinancing between a commercial bank, a mortgage bank and NMRC
2 Have more liquidity to and
create more mortgages
1 Refinances existing and new mortgages
XYZ Commercial Bank
ABC Mortgage Bank
4 Pays XYZ principal and interest/profit
Question:
1) At what price/interest rate will XYZ refinance ABC?
2) At what price will NMRC refinance ABC?
3 Refinances the
mortgage by month 12
NMRC
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20. Asset-based and asset-backed sukuk
Normal/Asset-based
Asset-backed Securities
Revenue/income from sukuk asset does not necessarily form the source of paymenyt for sukuk holder
The source of payment usually comes from issuer/obligor’s cash flow
Normally structured as ON balance sheet
Usually refers to securities/sukuk backed by assets that had been sold/trnasfered by assets that had been sold/transferred by an originator to a buyer/issuer (usually SPV) – ‘asset backed’
Main source of payment is the revenue from underlying sukuk assets
Can either be On or OFF-balance sheet
Source: The Islamic Securities (Sukuk) Market, Securities Commission Malaysia (2009)

21. Risk in real estate finance
MARKET RISK
This is the risk of potential impact of adverse price movements such as benchmark rates, foreign exchange rates, and equity prices on the economic value of an asset
This is the risk of potential impact of adverse price movements such as benchmark rates, foreign exchange rates, and equity prices on the economic value of an asset
LIQUIDITY RISK
This is the risk of potential loss arising from the Bank’s inability either to meet its obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses.
This is the risk of potential loss arising from the Bank’s inability either to meet its obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses.
This is the risk of potential loss arising from the Bank’s inability either to meet its obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses.
OPERATIONAL RISK
This risk is associated with the loss resulting from inadequate or failed internal processes, people and system or from external event.
GENERIC RISK
This risk is associated with the loss resulting from inadequate or failed internal processes, people and system or from external event.
FOREIGN EXCHANGE
RISK
The risk of an investment value changing due to changes in currency exchange rates which may invariably leads to loss.
The risk of an investment value changing due to changes in currency exchange rates which may invariably leads to loss.
INVESTMENT/
CREDIT RISK
The risk that the client fails to meet obligation timely and the Bank losses some or all of the capital invested in a client’s business and or asset portfolio.
Default risk
Interest rate risk
Prepayment risk
Liquidity risk
Legislative risk
Country risk*
Foreign exchange risk
Construction risk
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22. Alternative finance specific risk
SHARIAH
NON-COMPLIANCE
RISK
The non-compliance with Shariah rules principles could have the implication of jeopardizing the reputation of the Bank as a Non –interest financial institution. And the loss of income
RATE OF RETURN RISK
This is the risk of potential impact of adverse price movements such as benchmark rates, foreign exchange rates, and equity prices on the economic value of an asset
This is the potential impact on the Bank’s income or return due to unexpected changes in the market situation.
DISPLACED
COMMERCIAL RISK
This is the risk of potential loss arising from the Bank’s inability either to meet its obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses.
This is the risk that the Bank may be faced with commercial pressure to pay returns that exceeded rate earned on the asset financed by investment account holder.
UNIQUE NIB RISK
This is the risk arising from entering into a partnership under the profit and loss sharing contracts. (PLS). Under the PLS contract, the capital invested by the Bank does not constitute a fixed return but explicitly exposed to impairment in terms of loss of capital.
This risk is associated with the loss resulting from inadequate or failed internal processes, people and system or from external event.
EQUITY INVESTMENT
RISK
The risk of an investment value changing due to changes in currency exchange rates which may invariably leads to loss.
This is the risk arising from items in inventory either for resale under a murabaha contract or with a view to leasing under an ijarah contract.
COMMODITY AND
INVENTORY
RISK
This is the risk arising from holding on to asset.
INVENTORY RISK
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23. Contact