Prohibition of Concluding the Contract of Financial Cost – Plus on the Collective ‎Investment System ‎

This questioned is answered by the shares and capital markets team in RHR for advocacy and legal advices, according to what is stipulated on the law No.7 for the year 2010 regarding the Money markets authority establishment and security regulation law and its executive regulation.

The cost – plus is considered one of the financing methods at Islamic banks, whereas the bank – upon client’s request – to buy a property as (Real estate) from his owner, then the bank resells it to the client by same price with an increase as a profit margin previously added on it.

The cost – plus financial contracts is distinguished by the interest rate stability along the contract period which means the fixed monthly payments that the client pays to the bank, also it is distinguished by the possibility of transferring the ownership of the possession subject to contract (The real estate) in the name of the customer.

According to the thirteenth book (The collective investment system) of the executive regulation of Money markets authority establishment and security regulation law, it is prohibited for the collective investment systems to do any of such:

  1. Granting credits.
  2. Buying any security issued by the system manager company, or by any of its affiliated companies, unless within limits of the established rules by the law and this regulation.
  3. Buying any security belongs to the entity which within the system manager is the same subscription manager or its sale agent, unless within limits of the established rules by the law and this regulation.

Regarding, investment agencies or other contracts which include offering Money for people to use in their financial activities, considered to prohibit credits for collective investment systems, but for deposits at the banks, or if it was a debt method, or financial method up for sale in the primary or secondary market.

So, concluding the contracts of financial cost – plus with banks considered as a prohibited credit on the collective investment systems, and it is allowed to the Money markets authority to fine the offending company, and announcing it by the necessity of correcting violations.

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