Islamic Project Finance? Corporate Issues & Solutions

Issue 1:

An Executive understanding of Islamic project finance and how would it be different from other type of finance?

 Solution:

 i.           Any legitimate project recognized by the Shari’ah Principles required to be financed for a further development.

ii.           The Owner or the authorized developer of the Project may apply for Islamic justified Financing Facilities to any Islamic financial institution.

iii.        Islamic Financial Institution concern may approve the application considering the following components: 

§  Either JV with equity participation (using Mudharabah or Musharakah or any other Shari’ah approved instruments), or Debt financing (using the BBA or Murabahah or Tawarruk as the case may be, that is: a resale on credit with differed settlement by installment within an agreed period of time).

§  In a debt financing arrangement, the title of the project may be required by the Financier to be held as a securitization on collateral basis till the debt is fully settled.

iv.         It shall be noted that, in any Islamic project financing, profit guarantee, any form of usury or Shari’ah contrary element shall not be acceptable per se.

v.          An Islamic Project financing is different from other types of financing in terms of basically the requirement of securitization (title) on collateral basis against the sound settlement of the debt.  

  Issue 2:

            What sectors usually apply project finance?

 Solution: 

i.           Shari’ah Justified and Legally recognized Real Estate development related projects.

ii.           Shari’ah Justified and Legally recognized Mining, Plants, Installations, Explorations and or alike related projects.

iii.      Any other Shari’ah Justified and legally recognized Projects either commercially or socially or Public beneficial related projects. 

Issue 3:

            In the past 2 years, which Islamic project finance deal would you categorized as a landmark deal. Why?

 Solution:

  i. WPI (IDR) project in JB, Malaysia (Planning stage);

 ii. Pavillion project financed by KFH near Bukit Bintang KL, Malaysia.

iv.         Dubai Tower, UAE (in Progress).

v.          Few Hotels in Mekkah, KSA.

vi.         A few other projects financed by IDB, KFH, Dubai Islamic Bank, Dallah al Barakah, RHB, Islamic, CIMB, and so on.

Islamic project financing (with risk sharing by opposing the risk transferring concept and also being incorporated with Divine ethical standard on the holistic approach of brotherhood with care and concern)is more attractive as compared to the conventional ones, which are generally adapted on the risk transferring concept.    

 Issue 4:

        Interms of market practice, what is the most common Shari’ah Contract utilized for a project finance deal (Ijarah, Musharakah etc). Why is that so?

       Solution:

i.           Musharakah Mutanaqisah (Diminishing Partnership).

ii.          Ijarah (Leasing)

iii.         Istisna’ (Manufacturing).

iv.         al-Ijarah Tantahi Bi al Tamleek (Leasing Leading to (ownership)

The above instruments are commonly adapted in Islamic project financing have been evidentially proven the risk minimization with better benefits for all the parties concerned.  

  Issue 5:

Is there any difference between the Malaysian and GCC market in Terms of contract utilized for project finance?

 Solution:

In most cases the application of Islamic project financing mechanisms adapted in Malaysia and GCC are quite similar except in the following avenues:

i.      Malaysia adapts Bai’ al- Dayeen (Debt Trading) and Bay’ al- Ina’ (Buy back Sale).

ii.    In the GCC on the other hand, Bai’ al- Dayeen (Debt Trading) and Bay’ al- Ina’ (Buy back Sale) adapted in any transaction are strongly opposed. Alternatively in the GCC the doctrine of al-Tawarruk (Special Purpose Vehicle) is adapted in most of the Debt financing arrangements including Project Financing besides recognizing and applying Musharakah Mutanaqisah (Diminishing Partnership).

Issue 6:

Do you observe an increasing trend of Islamic project finance in the market? Why or why not?

 Solution:

           I.     There is an increasing trend of Islamic project financing  in GCC, UAE, Malaysia, OIC  Countries as well as some other parts of the world especially through the arrangement of REITs, issuance of Sukuk, venture capitalizing and also Mosharakah Mutanaqisah (Diminishing Partnership) and so on.

         II.     This is perhaps because of, rational risk management mechanisms with sharing concept, sustainable profit return, transparence transaction and flexible options enjoined by all parties in the contract.  

 Issue 7:

Would you highlight two issues and challenges in Islamic project finance and how do you overcome these?

 Solution:

          I.     Lack of Proper skill in underwriting the deal by considering the relevant risk factors;
        II.     Poor time management and applying irrelevant skill in completing and managing the project.
 The above challenges may be overcome through the smart professionalism, cooperation, good faith and trustworthiness with ethical standard at all levels of activities.