The asset finance market in the Middle East has seen increasing use of Shariah compliant finance to fund transactions. Standard Chartered Bank (SCB) made shipping news headlines in December 2016 when it advanced a USD350 million senior secured Murabaha facility to the National Shipping Company of Saudi Arabia (Bahri). The facility will be used by Bahri (the exclusive shipper of oil for Saudi Aramco) to finance the construction of five Very Large Crude Carriers (VLCCs) to be delivered in early 2018. The Bahri facility was a landmark shipping transaction in the Middle East, with SCB taking the lead as bookrunner, mandated lead arranged, investment agent and account back with participation from three other banks.

The Bahri facility however is not the first large ship finance deal in the Middle East with an underlying Shariah compliant structure to make headlines. In 2015 Stanford Asia Holding Company, a subsidiary of Stanford Marine Group, took an AED1.2 billion Islamic syndicated structured finance facility from Noor Bank, and Topaz Energy and Marine secured a USD550 million conventional and Islamic facility in the same year.

In the aviation sector, regional airlines in the Middle East such as Emirates and Etihad regularly utilise Shariah compliant facilities for working capital purposes and to fund the purchase of aircraft. One of the highest profile transactions recently has been the USD913 Sukuk (akin to a conventional bond) issued by Emirates in 2015. The proceeds of the Sukuk were used to fund the acquisition of four A380 aircraft. The Sukuk itself was backed by a guarantee issued by the Export Credits Guarantee Department of the UK Government (operating as UK Export Finance), attracted orders exceeding USD3.2 billion and was 3.6 times oversubscribed.

The opportunities for Shariah compliant asset finance in Europe and Asia are great. In Europe, we at CMS have seen increasing interest from Shariah compliant leasing companies wishing to establish themselves in jurisdictions such as Ireland. In Asia, demand for Shariah compliant asset finance is growing not only in Muslim majority countries such as Indonesia and Malaysia but also in places such as China with interest coming from asset owners and manufacturers as well as conventional financiers. The rate of growth however in both Europe and Asia will depend ultimately on the pricing that financiers can offer for their Shariah compliant products. The pricing differential between conventional and Islamic financing is something that has been addressed in the Middle East to a large extent. By addressing what can sometimes be the increased costs of a Shariah compliant financing, participants in Europe and Asia will see the acceleration of Shariah compliant asset finance in those markets.

Shariah compliant asset financing structures

It is interesting to note that whilst the global Islamic Finance industry accounts for only 1% - 2% of global finance, it currently has over 700 active financial institutions participating in it across 61 countries. The exponential growth experienced in Islamic Finance over the past fifteen years has outstripped the growth experienced in conventional finance and the industry is expected to reach USD2.6 trillion by the end of 2017.

Asset finance transactions are by their very nature well suited to Shariah compliant structures, because they satisfy the requirement that the subject matter is a valuable, identifiable and quantifiable asset with utility. The taking of security is importantly approved and encouraged in Islam, and therefore all types of security and guarantees can be built into Shariah compliant asset financings. As such there is no difference in the security position from a financiers’ perspective from that which exists in a conventional asset financing.

Islamic asset finance also benefits from being able to be provided as a sole source of funding for a transaction, or as one tranche of multi-sourced project financing, alongside other senior debt. Among the various Shariah compliant products available, the following are best suited to the industry and its participants:

Murabaha: whereby the bank or the bank’s agent will enter into a contract to acquire an asset on behalf of the client. The asset will be immediately transferred to the client, who will pay for the asset on a deferred payment basis with the dates themselves being pre-agreed. Mortgages, collateral and guarantees may be taken as security over the asset by the financier. Lawyers at CMS have utilised a true asset Murabaha structure recently when advising a Bahraini bank on the financing of an LNG tanker.

Ijara: structured as either an operating lease or a finance lease, Ijara allows a lessee to pay periodic rental payments to the owner (the financier) of an asset. An Ijara can be structured so that the lessee benefits from a promise to purchase the property at the end of the lease term. CMS lawyers have documented numerous Ijara facilities both within asset finance as well as real estate finance.

Tawarruq: in reverse to a Murabaha, in a Tawarruq, commodities (ordinarily LME metals) are purchased by a client (the borrower) from the financier, and then immediately sold on to a third party to replicate the economic effect of a conventional loan. CMS lawyers recently acted for a major international bank on a proposed USD300m financing to a large shipping conglomerate structured using a Tawarruq, the proceeds to be used for working capital and to fund the acquisition of a number of pre-owned vessels.

The lifting of international sanctions in Iran, a slow recovery of the price of oil and increasing activity in the asset financing market has meant that many marine and aviation companies are looking to the liquidity of Islamic banks and Islamic financing opportunities for future borrowing. The maritime and aviation sector’s asset based businesses offer Islamic financiers an attractive asset class that fits into traditional Islamic financing structures, with assets over which security can be taken.