Alternative finance arrangements (AFAs): Types of AFA treated as “loans”
Three types of financial arrangement that comply with the principles of Sharia’a law (AFAs) are treated as if they were “loans” for all CITR purposes. These AFAs all replicate the effect of investments or loans at interest.
|(alternative finance return)||The purchase and resale of an asset where the sale price is greater than the purchase price and all or part of the sale price is deferred.|
The difference between sale price and purchase price equates to interest.
Such arrangements could be entered into:
- by community development finance institutions (CDFIs) seeking funds from investors, or
by CDFIs providing finance for enterprises. FA05/s49 arrangements
|(profit share return)||Money is deposited with a financial institution and invested along with other funds.|
Investment income arising from those funds is then periodically paid or credited to the depositor - and is equivalent to a payment or credit of interest.
|Only applies to “deposits” of money with a financial institution so only relevant to qualifying investments into a CDFI.|
|(profit share agency)||A person appoints a financial institution as his agent to act on his behalf.|
The financial institution then uses the money belonging to that person to produce profits that are then shared between agent and principal in such a manner that the return to the principal is capped, effectively this amounts to interest.
|The agent must be a financial institution so only relevant to qualifying investments into a CDFI.|
Meaning of “financial institution”
In order for an arrangement to fall within one of the three categories detailed above one party to the arrangement must be a financial institution, as defined at FA05/s46. CDFIs with an interest in employing AFAs within the CITR scheme are likely to satisfy that definition either as a bank or by virtue of a license under the Consumer Credit Act).