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ISLAMIC PROJECT FINANCING . Assoc Prof Dr Engku Rabiah Adawiah Engku Ali Ahmad Ibrahim Kulliyyah of Laws International Islamic University Malaysia rabiah@iiu.edu.my eradawiah@yahoo.com. Agenda. Project Financing: An Overview Shari`ah Perspective on Project Financing

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islamic project financing

ISLAMIC PROJECT FINANCING

Assoc Prof Dr Engku Rabiah Adawiah Engku Ali

Ahmad Ibrahim Kulliyyah of Laws

International Islamic University Malaysia

rabiah@iiu.edu.my

eradawiah@yahoo.com

agenda
Agenda
  • Project Financing: An Overview
  • Shari`ah Perspective on Project Financing
  • Islamic Project Financing – Instruments & Contracts
  • Track-record of Islamic Project Financing
  • Transaction Structures of Islamic Project Financing with Case Studies
  • Some Examples of Contemporary Islamic Project Financing
  • The Way Forward
project financing an overview
Project Financing: An Overview
  • Definition:

“The financing of an economic unit (i.e. project) in which the lenders look initially to the cash flows & other assets comprising the economic unit as collateral for the loan”

  • Project financing – focus on the financing of projects in which the financiers look to the cash flows of the project for the repayment of the financing amount
  • Project financing techniques – primary means for financing broad range of economic units world-wide, e.g.: power generation, oil & gas industries, mining, various infrastructure projects, manufacturing, etc.
shari ah perspective on project financing
Shari`ah Perspective on Project Financing
  • Purpose should be for Shari`ah compliant projects/ activities – Islamic project financing
  • Techniques & instruments – Shari`ah compliant
    • Conceptually
    • Structurally
    • Documentation
    • Modus operandi – execution & implementation
    • Recovery mechanisms
  • Cannot be a mere “debt-leverage” exercise like conventional project financing due to the Shari`ah prohibition of payment & receipt of interest (riba)
islamic project financing instruments contracts
Syndication if needed)

Bridging financing

Main financing

Tranches

Securitization – Islamic securities

BBA / Murabahah

Istisna`

Bay` al `inah / Tawarruq

Ijarah / ijarah muntahiyah bit tamlik

Ijarah mawsufah fi dhimmah

Musharakah / musharakah mutanaqisah

Mudarabah

Islamic Project Financing – Instruments & Contracts

Multi-level financing:

Underlying Contracts:

track record of islamic project financing
Track-record of Islamic Project Financing
  • Started with only one / two instruments, e.g.: BBA & murabahah
  • Developed further with various other instruments, e.g.: Ijarah, istisna`, mudarabah, musharakah etc.
  • Latest trend: more complex, liquid & competitively priced instruments through securitization – Islamic securities
  • Continuous potentials for new instruments / financing structures to be developed
basic transaction structure for project financing parallel istisna
Basic Transaction Structure for Project Financing: Parallel Istisna`

Financier

Company

Istisna’ 1 – deferred payment

(price = cost + profit)

Istisna’ 2 – progressive payment

(price = cost)

Note:

Both istisna’ are to construct the same “project” (e.g. real estate, airport etc.)

Contractor

basic transaction structure istisna sukuk
Basic Transaction Structure: Istisna` Sukuk

1st Istisna’ contract

(Construction Cost + Profit Margin)

for deferred payment

Issuer

Financier

Issues Istisna’ Sukuk

2nd Istisna’ contract

(Construction Cost)

Creates

SPV

Project Company

(SPV)

case study islamic project financing sks tanjung bin istisna mtn
Case Study: Islamic Project Financing (SKS Tanjung Bin Istisna` MTN)

STEP 1:Issuer and Financier will execute an Istisna’ Purchase Agreement, under which Issuer will agree to construct and deliver & sell to the Financier a specific asset (The Asset).

FINANCIER

(On Behalf of Investors)

STEP 2:The Istisna’ Purchase Price will be RMXXX Million and will be disbursed in one lump sum

STEP 3:The Financier and Issuer will execute an Istisna’ Sale Agreement, under which the Financier will agree to construct and deliver to Issuer the asset. Delivery to Issuer will take place upon the Financier taking delivery of the Asset under the Istisna’ Purchase Agreement.

4

3

1

2

ISSUER

STEP 4:The Istisna’ Sale Price will be equivalent to the aggregate of the Istisna’ Purchase Price and profit thereto. The Sale Price will be payable according to an agreed payment schedule.

STEP 5:The Issuer issues the Istisna’ Bonds to evidence the future payment of the Istisna’ Sale Price

  • The RM5.6b SKS Power Istisna` MTN Transaction Structure
lease based project financing basic transaction structure
Lease-based Project Financing: Basic Transaction Structure

Utilised to finance project costs

1

Sale of asset to financier for cash payment

Company undertakes to redeem asset at the end of lease period

Financier/Bank

Company

Financier leases back asset to company in return of rental streams (inclusive of profits)

2

project financing basic transaction structure of sukuk al ijarah
Project Financing: Basic Transaction Structure of Sukuk Al Ijarah

Company as Lessee

6. Payment of rentals

2. Lease of asset

Exercise price at dissolution

Sale at dissolution

Dissolution Amount

Periodic rental payments

3. Sukuk issuance

1. Sale & Transfer of asset

Sukuk Holders

(Investors)

SPV

Company as Owner of asset

5. Proceeds

4. Payment of Proceeds

from sale of sukuk

To finance projects

case study sukuk al intifa
Case Study: Sukuk al Intifa`

1

Land Owner

Ijarah Contract

On Use of Land

Developer

Evidenced by

Sukuk Certificates

4

Payment

For Lease of

Land (SAR/US$)

5

Payments

For Lease Rental

(SAR/US$)

3

Lease of

Rights of

Future

Use of Units

On Chosen

Time Slots

2

Proceeds from

Sukuk Sales

SUKUK

AL INTIFA’

Development

Costs (SAR/US$)

6

Commercial

and Hotel

Complex

Sukuk

Investors

4

“Time Use” By Sukuk Holders

7

zam zam tower sukuk al intifa
The project manager i.e. Munshaat Real Estate Projects Co. has been awarded to construct one of the six towers on waqf land adjacent to the Grand Mosque of Mecca.

Issues for preliminary deliberation

Financing cost of construction.

Restriction on ownership of non-Saudi of real property in Mecca/Medina.

As for cost of financing, the contract of forward lease (al-Ijarah al-Mawsufah fi al-Dhimmah) was adopted.

To avoid the issue of non-Saudis owning the property in Mecca, the concept of time-sharing is promoted.

Zam Zam Tower Sukuk Al-Intifa’
basic transaction structure mudarabah project financing
Basic Transaction Structure: Mudarabah Project Financing

Contract of Mudarabah

Profit Sharing ratio – X:Y

Financier

(Rabb al Mal)

Company

(Amil / Mudarib)

Y% to

rabb al

mal

CAPITAL

Profit shared

in accordance

to pre-agreed

proportions

(X:Y)

X% to mudarib

Project Revenue

Invests in project (e.g. real estate)

Loss borne

Totally by

rabb al mal

basic transaction structure mudarabah sukuk
Basic Transaction Structure: Mudarabah Sukuk

Issues Mudarabah Sukuk

Issues Mudarabah Sukuk

Investors

(Rabb al Mal)

Issuer

(Amil / Mudarib)

Contract of Mudarabah

Contract of Mudarabah

Y% to

rabb al

mal

Profit shared

in accordance

to pre-agreed

proportions

(X:Y)

CAPITAL

X% to mudarib

Outcome of

project

Invests in project (real estate)

Loss borne

Totally by

rabb al mal

slide17

Case Study: PG Municipal MudarabahSukuk

Security

Trustee

Rabb al Mal 1

Sukuk

Holders

Profit sharing

1st Mudarabah - Invest Capital (Sukuk Proceeds)

Issue Mudarabah

Sukuk (rated/unrated)

SPV

X%

Investors

Y%

PG Municipal

(SPV)

Mudarib 1

&

Rabb al Mal 2

Profit

2nd Mudarabah

PG Local Authority

(Administrator)

Profit sharing

Administrator

X%

Investors

Y%

Mudarib 2

Profit from

Tax Collection

Manage and Administer

Tax Collections

basic transaction structure musharakah project financing
Basic Transaction Structure: Musharakah Project Financing

Contract of Musharakah

Capital contribution – X:Y

Financier / Bank

Company

  • Profit: shared according to agreed ratio or according to ratio of capital contribution
  • Loss shared according to ratio of capital contribution

Capital

X%

Y%

Project Revenue

Invests in project (e.g. real estate)

basic transaction structure musharakah sukuk
Basic Transaction Structure: Musharakah Sukuk

Issues Musharakah Sukuk

Investors

Issuer

Contract of Musharakah Capital contribution – X:Y

  • Profit: shared according to agreed ratio or according to ratio of capital contribution
  • Loss shared according to ratio of capital contribution

Capital

X%

Y%

Revenue of Project

Invests in Project (real estate)

slide20

Case Study: Assar Senari RM150m Musharakah Sukuk

Company

Sukuk

Holders

(Investors)

Issue Sukuk Musyarakah

1

Invest Capital

(87%)

Invest Capital

(13%)

1

5

Musyarakah

Venture

Lease

completed

IOT

User

Agreements

(RMXXX Million)

Owned by

2

Profit sharing

(Starts 2nd Year)

Trustee

Company

X%

Investors

Y%

Project Manager

(As Agent of Trustee)

Completed IOT

Construct & Lease

IOT

Oil Companies

3

4

Construction period 12 – 18 Months

case study wings fzco
Case Study: Wings FZCO

Emirates as obligor

Emirates as lessee

Emirates as lessee

Lease of New Emirates Group Headquarters

Lease of New Engineering Centre

Rental

Rental

MUSHARAKAH

Exercise Price

Sale of units

Wings FZCO

as partner

Emirates

as partner

Land parcels valued at USD100m

Proceeds: USD550m

Wings FZCO

Emirates

  • Issues Sukuk – evidence proportionate share in Musharakah

d

c

b

a

  • Proceeds – USD550m: used for construction of Group Headquarters & Engineering Centre

Investors

  • Periodic Distribution Amount
  • Dissolution Distribution Amount
slide22

Case Study: Vastalux Musharakah Sukuk

Active Partner

Sukuk

Holders

(Investors)

Company

Musharakah Mutanaqisah

2

1

1

2

agency

agency

Invest Capital

(90%)

Invest Capital

(10%)

Issue

Sukuk

3

2

SPV

Service Contract

(RMXXX Million)

Profit sharing

7

Company

X%

Investors

Y%

4

Assignment

Musyarakah

Venture

Musyarakah Revenue

(RMXXX Million)

5

4

6

Servicing Oil

Companies

Oil Companies

  • Case study of RM200m Vastalux Musyarakah Sukuk
some examples of contemporary islamic project financing

SOME EXAMPLES OF CONTEMPORARY ISLAMIC PROJECT FINANCING

Islamic Project Financing through Securitization

Islamic Project Financing: Istisna’ Bonds

Islamic Project Financing: Musharakah Sukuk

Islamic Project Financing: Sukuk al Intifa’

the way forward
The Way Forward…
  • Better, competitive & more efficient Islamic project financing instruments
  • Truly Syariah compliant
  • Transparent deals – disclosure, accounting & auditing
  • Global acceptance & recognition
thank you

Thank You

Wassalamualaikum wrt wbt