On December 24, 2014, ningxia hui autonomous region departments with catic securities financial adviser agreement signed formally, employ catic securities as the sole global coordinator and financial advisers, for it to issue no more than $1.5 billion islamic bond (as), the time limit not more than 5 years, this will be the first time China's local governments to issue islamic sovereign bonds. Islamic bond is the emerging of the islamic financial products, islamic finance as a veiled Muslim, keep a certain distance with traditional financial market, full of mysterious attraction, under the environment of the financial market turmoil, the stability of islamic finance and based on the characteristics of real transaction let it become investors to be bestowed favor on newly gradually, has been hailed as the new world of global finance. Understanding and studying Islamic finance is of great significance for us to develop new business under the background of "One Belt And One Road" strategy.

Introduction to Islamic Finance

Islamic finance refers to the financial form in line with Islamic doctrines, including several components of financial institutions, financial markets and financial instruments. Islam is not only a religious belief but also a social system and a way of life. All aspects of politics, economy and life in the Islamic society are governed by the Sharia, which is mainly derived from the Islamic scriptures of the Quran and the Hadith. There are also a large number of financial doctrines and guiding principles. These include the prohibition of the collection and payment of interest; Trading in tobacco, wine, pork, weapons, pornography, gambling and other industries are prohibited; Emphasis on "risk sharing, benefit sharing", that is, when profit, traders participate in the profit sharing; When they lose money, they share the risk. The prohibition of unjust enrichment; Speculation shall be prohibited.

As early as the 15th century, Islamic countries in the Middle East, Southeast Asia and Africa began to adopt Islamic financial systems. With the colonization of the West, the Islamic financial system was marginalized. After World War II, with the independence of Islamic countries and the rise of Islamic revival ideas, the financial system must comply with the requirements of Islamic doctrine was re-emphasized. In July 1963, Egyptian leaders established the first Islamic bank based on the principle of profit and loss sharing. It did not charge or pay interest, but mostly invested directly or operated businesses and industries in partnership with others, and then shared the profit and loss with the depositors. At present, almost all Islamic countries have established Islamic banks. Non-Islamic countries and regions such as the United Kingdom and Hong Kong have vigorously developed Islamic finance. Many international banks, such as Citibank, HSBC and Standard Chartered Bank, have also set up Islamic finance Windows.

Islamic Financial Market

Though Islam has no independent legal system, islamic finance subject to local law, but many islamic countries financial system has been completely islamization (e.g., Iran and Pakistan), its financial business law must conform to the Islam, other Muslim countries is a binary system, through special legislation on islamic financial regulation, Let Islamic financial institutions coexist with traditional financial institutions (Indonesia, Malaysia, Pakistan, United Arab Emirates, etc.).

In 2009, the new central banking law of Malaysia clearly stipulated the dual financial system of Malaysia, making the traditional financial system and the Islamic financial system regulated by different laws. Accompanied by Muslim immigrants, religious identity deepens, and oil capital, the wealth effect of many non-muslim countries and regions such as the United Kingdom, Luxembourg, Singapore, Hong Kong, the United States, Canada, Japan, South Korea and so on also actively developing islamic finance and development in line with the Islam's islamic financial products, The UK has six specialist Islamic banks, including Al Rayan Bank, and more than 20 companies offering Islamic financial products.

Hong Kong was the first place in China to put forward the idea of building an Islamic finance platform. The Hong Kong SAR government proposed to develop Islamic finance in 2007. In August 2007, the Hong Kong Monetary Authority (HKMA) approved the launch of the first Islamic banking window in the Hong Kong market by Malaysia's Fong Leong Bank (Hong Kong) Limited. In November 2007, Hong Leong Bank (Hong Kong) Limited launched the first Islamic fund aimed at retail investors.

By the end of 2013, assets in Islamic finance were reported to be $1.8 trillion. The Islamic financial assets are mainly concentrated in the Middle East, North Africa, Southeast Asia and South Asia where Muslims are concentrated. Taking the Islamic banking assets as an example, it can be seen from the figure below that the Islamic banking assets in 2013 were mainly concentrated in these regions.

The main model of Islamic finance

In order to conform to Islamic doctrines, Islamic financial business has developed the following major models:

1. Murabaha

Also known as cost-plus financing, this mode is widely used in trade financing and equity acquisition. Customers make requests to Islamic financial institutions for the specific purpose of purchasing raw materials, machinery and equipment or consumer durables and ask them to purchase on their behalf. After reaching an agreement, the Islamic financial institutions sign a mark-up contract with the customers. According to the contract, the financial institution shall purchase the goods required by the customer, and the financial institution may also entrust the customer to purchase the goods as its agent, so as to avoid the risk of inconsistent goods and customer's refusal. The customer pays according to the contract, and the final price of the goods includes the price paid by the financial institution to the original seller and the profit it receives. Customers can defer payment, which solves customers' temporary financial difficulties, and Islamic financial institutions actually play the role of lenders.

2. Lease System (Ijara)

Is also a very popular tool of islamic finance, rental system refers to the islamic financial institutions according to the customer need to purchase an asset (such as ships, aircraft, machinery and equipment, etc.), within the prescribed period to the lessee to use, and charge a fixed amount of rent, this pattern is called Ijara, similar to traditional financial under operating lease; In addition, after the end of the lease term, the lessor can also transfer the ownership of the lease item to the lessee. This mode is called Ljara wa-Iktina, which is similar to the financing lease under the traditional finance, but different from the financing lease, the insurance, maintenance and other costs of the lease item should be borne by the lessor. In order to control the owner's liability, taxes and so on under this structure, financial institutions may choose to set up an SPV to buy the assets needed by customers and lease them to customers.

3. Participate in shareholding (Musharaka)

Participation in the shareholding system comes from the partnership in the Middle Ages, in which financial institutions and investors invest in a project in an agreed proportion, and the joint venture parties share the profits in an agreed proportion. Losses are determined by the joint venture's investment proportion. Generally speaking, as the manager of the project, the investor is responsible for the operation and profit of the project, and the profit obtained by the financial institution is its initial investment and agreed profit. This structure is typically used for long-term investments such as infrastructure investment (investors contribute and act as custodians with specific assets such as real estate, while financial institutions contribute with capital). Share-holding system is divided into continuous participation in joint stock system (financial institutions annual profits in proportion as project partners share, but the deadline) and gradually reduce the participation of the shareholding system (financial institutions gradually withdraw investment ways or looking for other partners instead of the way get out from the project, to ensure the liquidity of financial institutions in the capital, The client ultimately owns the project.)

4. Profit and loss sharing (Mudaraba)

This is similar to a partnership, in which a number of investors give their funds to a Mudareb, who invests them professionally, in accordance with Islamic principles, and the Mudareb receives a pro rata share of the profits from the investment as a reward for his services. Some Islamic banks follow this model for their savings services (banks are entrusted by depositors to invest money from their accounts in specific projects) and profit-and-loss syndicated loans (syndicates contribute money and borrowers invest the money in specific projects).

5. Sukuk

Also called Sue cook, is to a certain percentage of the underlying asset has proved or paper, islamic bond depends on the underlying assets, can flow in the secondary market, investors purchase after islamic bonds issued by financial institutions have to a percentage of ownership of the underlying asset underlying assets will be transferred to a third party to produce a continuous benefits in return for investors. To this end, sukuks are often combined with other Islamic financial structures such as leases, participatory shares, and profit-and-loss sharing.

Under the most common typical lease-based Sukuk al ljara structure, bonds are issued by an SPV and the proceeds from the subscription are used to purchase the assets from the owner of the asset (usually the actual sponsor of the said SPV, the "owner"). Then the SPV leases the asset to the owner (the lease term is equal to the term of the bond) and enters into a lease agreement with the owner. The rent payable by the owner under the lease agreement is the profit that the SPV should pay to the investor under the bond. After the lease expires, the owner should buy back the asset with the consideration being the principal of the bond.