Just 10 years ago Islamic financing techniques, despite being used by transport companies, were still relatively niche products compared with conventional investments, lending and leasing.
Now, as each week passes, new deals are announced and landmark transactions are closed across the Middle East, Africa and Asia, and even in Europe and the United States.
With the global conventional financial community set for a relatively cautious approach in 2008 because of restricted liquidity emanating from the global credit crunch, many in the Islamic finance sector are suggesting that this year could see considerable growth for sharia-compliant financing techniques offered by Islamic and non-Islamic institutions alike.
“In general, I would say that interest in Islamic financing for the transport industry, including aviation, shipping and rail, is increasing,” says Davide Barzilai, a lawyer in the Islamic finance practice at Norton Rose in London. “However, we must not forget that Islamic finance is still a small portion of the money in the Middle East region.”
But the appeal of Islamic finance is not confined to moveable assets in the transport industry. There is clearly strong demand for infrastructure projects, which many in the sector say fit perfectly with the profit-sharing ethos of sharia-compliant financings.
The financing standard was effectively set high several years ago, when in late December 2005 Dubai Ports World’s USD5.7 billion acquisition of P&O featured a USD2.8 billion sukuk (bond) to part-finance the deal. Law firm Denton Wilde Sapte played a major role on the financing side, advising Dubai Islamic Bank and Barclays Capital on the sukuk.
The firm also advised Dubai Islamic Bank on a USD1 billion sharia-compliant musharaka bridging facility to secure the acquisition. Law firm Clifford Chance advised the Dubai Ports Authority on this bridge facility.
More recently, large-scale projects have been financed using increasingly marketed and hence increasingly popular sharia-compliant structures.
A landmark example is the recent transaction in which the Multilateral Investment Guarantee Agency (MIGA) – a World Bank Group member – said it had provided its first-ever guarantee for sharia-compliant project financing. This is a USD427 million guarantee to support investments into a new container facility at Doraleh Container Terminal in Djibouti, which is expected to significantly improve port facilities and help the country become a major business hub in East Africa. The terminal is being developed jointly with Dubai Ports World.
Djibouti is strategically located on one of the fastest-growing east-west international shipping routes at the crossroads of Asia, Europe, the Gulf of Aden and East Africa. Development of the port and transport sector is at the heart of its poverty-reduction strategy.
MIGA’s guarantees protect the investments of Dubai Ports World as well as those of the financing banks – Dubai Islamic Bank, Standard Chartered Bank and WestLB – against the risks of transfer restriction, war and civil disturbance, expropriation and breach of contract, according to the agency.
Support will total USD422 million to cover funding provided by these three banks as well as other participating banks under an Islamic project finance facility. MIGA’s participation allows syndication of a significant amount of financing provided by several banks on favourable terms and conditions under an Islamic financing structure.
MIGA will reinsure USD5 million with the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) under MIGA’s facultative reinsurance programme. This represents MIGA’s first collaboration with ICIEC at the project level.
MIGA’s presence played an important role in mitigating perceived political risks for the banks and enabled project sponsors to raise the financing needed to make the project a reality. This is the first project that MIGA has supported in Djibouti, which joined the agency in January 2007.
“Increased liquidity in Islamic financial markets is leading to growing demand for guarantees that can support sharia-compliant deals,” says Yukiko Omura, executive vice-president of MIGA in Washington, DC.