Islamic project finance

Transcription

1. IFN SECTOR CORRESPONDENT Islamic project ϐinance LAW By Dr Nicolas Bremer While the market share of Islamic finance overall has consistently grown over the past decade, the footprint of Shariah compliant banking is still rather small in certain sectors. One of these sectors is export finance (see IFN Volume 16 Issue 33, p 20). Another such sector is project finance. However, there have been the further specialization of Islamic finance institutions and the development of creative Shariah compliant finance structures that can utilize a project’s underlying assets including intangible assets such as licenses or rights granted under a concession agreement. Furthermore, Sukuk continue to play a more significant role in project finance structures. Over time, several standard products have been developed to meet the needs of project financing. Some of these are based directly on structures described in the Quran, while others have been developed with the guidance and approval from Shariah scholars. Common to all accepted structures is that they combine acceptable returns with acceptable risks. The most common form of Islamic project finance structures for large, longer-term financings is the procurement (Istisnah) and forward lease (Ijarah) combination. Istisnah transactions are based on procurement agreements between SPVs owned by the lenders, as the purchaser, and project companies — the borrowers — as the procurer. In Ijarah transactions on the other hand, project companies — as the lessees – and the SPVs — as the lessors — additionally enter into forward lease agreements to lease the assets on delivery. Over the past years, new interpretations of existing Islamic finance structures and their combination with different concepts have emerged in the market. For instance, in some project finance transactions the subject matter of the Ijarah were not tangible assets but rather intangible rights granted to the project companies under concession agreements. The rights granted under the concession agreements were sold to SPVs held © IFN Sector Correspondents by the lenders and leased back to the project companies in return for rental payments. Since there is some dispute among legal scholars whether a straight sale-and-leaseback structure is permitted under Islamic law, to ensure Shariah compliance a third party will commonly be interposed between the project companies and the SPVs. Furthermore, combinations with Sukuk (Islamic bonds) offer interesting applications for project finance. Sukuk have been widely employed by Islamic banks as well as conventional financial institutions due to their flexibility and the ability to closely mimic conventional finance products. Consequently, Sukuk have grown to be one of the driving factors in the expansion of the Islamic finance sector. Essentially, the Sukuk involve the issuance of certificates in the collective legal or beneficial ownership of the asset, with the certificate holders receiving an income derived from the asset. While the popularity of Sukuk has had negative impacts — in particular, many Sukuk offered do not in fact comply with Shariah principles (IFN Volume 16, Issue 19, p 17) — they remain a relevant product in the Islamic finance sector. Sukuk can be placed on top of any Islamic structure. Most commonly, however, they are combined with Ijarah structures. In a project finance transaction, such a combination would allow for the participation of smaller cap lenders and other investors to partake in the project financing. Such new Islamic finance structures increase the attractiveness of Shariah compliant products for project financing. Furthermore, issues arising in respect of the unfavorable tax treatment of Islamic finance products such as their potentially triggering multiple tax duties — ie stamp duty or real estate transfer tax (see IFN Volume 16 Issue 27, p 20) — have been addressed in many jurisdictions. This combined with growth in project finance activity especially in GCC countries provides considerable potential for Islamic project finance. Dr Nicolas Bremer is a partner at Alexander & Partner. He can be contacted at nb@ alexander-partner.com. 22 CROWDFUNDING: Craig Moore, CEO, Beehive DEBT CAPITAL MARKETS: Imran Mufti, partner, Hogan Lovells EDUCATION: Dr Kamola Bayram, project director for training and research at the International Council of Islamic Finance Educators HALAL INDUSTRY: Dr Sutan Emir Hidayat director, Islamic Financial Education and Research, National Islamic Finance Committee ISLAMIC LEASING: Shoeb Sharieff president, ijara CDC, ijara Community Development Corp LAW: Dr Nicolas Bremer, partner, Alexander & Partner LIQUIDITY MANAGEMENT: Raghu Mandagolathur managing director, Marmore MENA Intelligence MERGERS & ACQUISITIONS: Burak Gencoglu, partner, Gencoglu & Ergun Law Firm MICROFINANCE: Mohammed R Kroessin head of Islamic microfinance, Islamic Relief Worldwide PRIVATE EQUITY & VENTURE CAPITAL: Dr Emilio Escartin professor in Islamic Finance at IE Business School Spain PROJECT FINANCE: Siraj Al Islam partner and head of Transactional Practice at Law Firm of Mohammed Abdulaziz Al-Aqeel in association with One 2 One Legal, Saudi Arabia RATINGS: Muhammad Owais Atta Siddiqui the country manager and sovereign analyst at the Islamic International Rating Agency REAL ESTATE: Philip Churchill founder partner, 90 North Real Estate Partners RETAIL ASSET MANAGEMENT: Muzzammil Dhedhy, chief operating officer, Hejaz Financial Services RISK MANAGEMENT: Mohamed Afzal, risk management specialist, Saudi ORIX Leasing Company SHARIAH & CORPORATE GOVERNANCE: Prof Dr Mohamad Akram Laldin executive director, International Shariah Research Academy for Islamic Finance SRI ETHICAL & GREEN: Dr Mohamed Wail Aaminou, general manager, Al Maali Consulting Group TAKAFUL & RE-TAKAFUL (ASIA): Marcel Omar Papp, head of Retakaful, Swiss Re Retakaful TAKAFUL & RE-TAKAFUL (EUROPE): Ezzedine Ghlamallah director, Solutions Insurance and Islamic Finance (SAAFI) TAX: Dhana Pillai head, real estate, tax and project finance, Al Hashmi Law Firm IFN Correspondents are experts in their respective fields and are selected by Islamic Finance news to contribute designated short sector reports. For more information about becoming an IFN Correspondent, please contact sasikala. thiagaraja@redmoneygroup.com 12th February 2020