Islamic Project Financing
Transcript of Islamic Project Financing
ISLAMIC PROJECT ISLAMIC PROJECT FINANCING FINANCING
Assoc Prof Dr Engku Rabiah Adawiah Engku AliAhmad Ibrahim Kulliyyah of Laws
International Islamic University [email protected]
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AgendaAgenda 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
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Project Financing: An OverviewProject 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.
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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)
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Islamic Project Financing – Islamic Project Financing – Instruments & ContractsInstruments & 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
Multi-level financing: Multi-level financing: Underlying Contracts:Underlying Contracts:
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Track-record of Islamic Project FinancingTrack-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
ISLAMIC FINANCING: ISLAMIC FINANCING: TRANSACTION STRUCTURESTRANSACTION STRUCTURES
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Basic Transaction Structure for Project Basic Transaction Structure for Project Financing: Parallel Istisna`Financing: Parallel Istisna`
Financier
Contractor
Company
Istisna’ 2 – progressive payment
Istisna’ 1 – deferred payment
(price = cost + profit)
(price = cost)
Note:Both istisna’ are to construct the same “project” (e.g. real estate, airport etc.)
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Basic Transaction Structure: Istisna` SukukBasic Transaction Structure: Istisna` Sukuk
IssuerIssuer
Project Company(SPV)
Financier Financier
1st Istisna’ contract(Construction Cost + Profit Margin)
for deferred payment
Issues Istisna’ Sukuk
2nd Istisna’ contract
(Construction Cost)
Creates SPV
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Case Study: Islamic Project Financing Case Study: Islamic Project Financing (SKS Tanjung Bin Istisna` MTN)(SKS Tanjung Bin Istisna` MTN)
FINANCIERFINANCIER(On Behalf of (On Behalf of
Investors)Investors)
ISSUERISSUER
The RM5.6b SKS Power Istisna` MTN Transaction Structure
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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).
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.
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
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Lease-based Project Financing: Basic Lease-based Project Financing: Basic Transaction StructureTransaction Structure
Financier/BankFinancier/Bank
Sale of asset to financier for cash payment
Financier leases back asset to company in return of rental streams (inclusive of profits)
Company Company
Company undertakes to redeem asset at the end of
lease period
1
2
Utilised to finance project
costs
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2. Lease of asset6. Payment of rentals
4. Payment of Proceeds from sale of sukuk
3. Sukuk issuance
5. Proceeds
1. Sale & Transfer of asset
Project Financing: Basic Transaction Project Financing: Basic Transaction Structure of Sukuk Al Ijarah Structure of Sukuk Al Ijarah
Sukuk Holders(Investors)Company as Company as
Owner of assetOwner of assetSPV
Company as LesseeCompany as Lessee
8. Sale at dissolution
7. Periodic rental payments
9. Exercise price at dissolution
10.Dissolution Amount
To finance projects
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Case Study: Sukuk al Intifa`Case Study: Sukuk al Intifa`
DeveloperLand OwnerLand Owner
Ijarah Contract On Use of Land
Sukuk Sukuk InvestorsInvestors
Lease of Rights of FutureUse of UnitsOn Chosen Time Slots
Payments For Lease Rental(SAR/US$)
SUKUK AL INTIFA’
Evidenced bySukuk Certificates
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Proceeds fromSukuk Sales
Commercial and HotelComplex
PaymentFor Lease ofLand (SAR/US$)
Development Costs (SAR/US$)
“Time Use” By Sukuk Holders
55
66
77
2233
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Zam Zam Tower Sukuk Al-Intifa’ 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.
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Basic Transaction Structure: Basic Transaction Structure: Mudarabah Project FinancingMudarabah Project Financing
Loss borneTotally by rabb al mal
Profit shared in accordanceto pre-agreedproportions
(X:Y)
Y% torabb al
mal
X% to mudarib
Financier Financier (Rabb al Mal)(Rabb al Mal)
Company Company (Amil / Mudarib)(Amil / Mudarib)
CAPITAL
Project Project RevenueRevenue
Invests in Invests in project (e.g. project (e.g. real estate)real estate)
Contract of MudarabahProfit Sharing ratio – X:Y
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Basic Transaction Structure: Basic Transaction Structure: Mudarabah SukukMudarabah Sukuk
Loss borneTotally by rabb al mal
Profit shared in accordanceto pre-agreedproportions
(X:Y)
Y% torabb al
mal
X% to mudarib
InvestorsInvestors(Rabb al Mal)(Rabb al Mal)
Issuer Issuer (Amil / Mudarib)(Amil / Mudarib)
CAPITAL
OutcomOutcome of e of
projectproject
Invests in Invests in project (real project (real
estate)estate)
Contract of Mudarabah
Issues Mudarabah Sukuk
Contract of Mudarabah
Issues Mudarabah Sukuk
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PG Municipal(SPV)
PG Local Authority(Administrator)
Manage and Administer Tax Collections
Mudarib 2Mudarib 2
Mudarib 1Mudarib 1&&
Rabb al Mal 2Rabb al Mal 2
Rabb al Mal 1Rabb al Mal 1
Issue Mudarabah Sukuk (rated/unrated)
Profit
Profit from Tax Collection
1st Mudarabah - Invest Capital (Sukuk Proceeds)
2nd Mudarabah
Profit sharingAdministrator
X%Investors
Y%
Profit sharingSPVX%
InvestorsY%
SecurityTrustee
Sukuk Holders
Case Study: PG Municipal MudarabahSukuk Case Study: PG Municipal MudarabahSukuk
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Basic Transaction Structure: Basic Transaction Structure: Musharakah Project FinancingMusharakah Project Financing
Y%
Company Company
Capital
Invests in Invests in project project
(e.g. real (e.g. real estate)estate)
Contract of Musharakah
Capital contribution – X:YFinancier / BankFinancier / Bank
• Profit: shared according to agreed ratio or according to ratio of capital contribution
• Loss shared according to ratio of capital contribution
Project Project RevenueRevenue
X%
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Basic Transaction Structure: Basic Transaction Structure: Musharakah SukukMusharakah Sukuk
X%
Y%
Issuer Issuer
Capital
Revenue of
Project
Invests in Project
(real estate)
Contract of Musharakah Capital contribution – X:Y
InvestorsInvestors
• Profit: shared according to agreed ratio or according to ratio of capital contribution
• Loss shared according to ratio of capital contribution
Issues Musharakah Sukuk
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Trustee
Musyarakah Venture
SukukHolders
(Investors)
Issue Sukuk Musyarakah
Construct & Lease Construct & Lease IOTIOT
Oil Companies
User Agreements
(RMXXX Million)
Invest Capital (13%)
Invest Capital (87%)
Project Manager(As Agent of Trustee)
Construction period 12 – 18 Months
Completed IOT
Owned by
Lease completed
IOT
Profit sharing(Starts 2nd Year)
CompanyX%
InvestorsY%
Case Study: Assar Senari RM150m Case Study: Assar Senari RM150m Musharakah SukukMusharakah Sukuk
Company
1
1
2
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5
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Case Study: Wings FZCOCase Study: Wings FZCO
Proceeds: USD550m
Land parcels valued at USD100m
a) Issues Sukuk – evidence proportionate share in Musharakah
Exercise Price
Sale of units
Lease of New Emirates Group Headquarters Rental Lease of New
Engineering Centre
Rental
Emirates as obligor Emirates as lesseeEmirates as lessee Emirates as lessee
Wings FZCOWings FZCO
InvestorsInvestors
d c b a
Emirates
MUSHARAKAH
Wings FZCO
as partner
Emirates
as partner
b) Proceeds – USD550m: used for construction of Group Headquarters & Engineering Centre
c) Periodic Distribution Amountd) Dissolution Distribution Amount
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Musyarakah Venture
SPV
SukukHolders
(Investors)Company
Musharakah Mutanaqisah
Invest Capital (10%)
agency agency
Musyarakah Revenue(RMXXX Million)
Profit sharingCompany
X%Investors
Y%
Service Contract(RMXXX Million)
Assignment
Invest Capital (90%)
Servicing OilCompanies
Oil Companies
Case Study: Vastalux Musharakah Sukuk Case Study: Vastalux Musharakah Sukuk
1
2
Issue Sukuk
1
2
2
3
4
4
5
6
7
Active Partner
• Case study of RM200m Vastalux Musyarakah Sukuk
SOME EXAMPLES OF SOME EXAMPLES OF CONTEMPORARY ISLAMIC CONTEMPORARY ISLAMIC
PROJECT FINANCING PROJECT FINANCING
Islamic Project Financing through Securitization Islamic Project Financing: Istisna’ Bonds
Islamic Project Financing: Musharakah Sukuk Islamic Project Financing: Sukuk al Intifa’
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Recent Islamic Project Financing viaRecent Islamic Project Financing viaIslamic Securities Issuances (Malaysian)Islamic Securities Issuances (Malaysian)
YearYear IssuerIssuer Syariah Syariah PrinciplePrinciple
ProjectProject Size of IssuesSize of Issues(RM mil) (RM mil)
20062006 Sarawak Power Generation Sdn Bhd (two issues)
Musharakah Electricity 215
20062006 Mukah Power Generation Sdn Bhd (two issues)
Mudarabah Electricity 950
20062006 Penang Bridge Sdn Bhd Istisna` Bridge 695
20052005 Jimah Energy Ventures Sdn Bhd
Istisna' Electricity 4,847
20052005 IJN Capital Sdn Bhd Musharakah Hospital 209
20052005 Penang Port Ijarah Port facilities 100
20042004 Kapar Energy Ventures Sdn Bhd
BBA Electricity 3,402
20042004 Sarawak Specialist Hospital & Medical Centre Sdn Bhd
Istisna` Hospital 425
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Recent Islamic Project Financing via Recent Islamic Project Financing via Islamic Securities Issuances (Global)Islamic Securities Issuances (Global)
YearYear IssuerIssuer Syariah Syariah PrinciplePrinciple
ProjectProject Size of IssuesSize of Issues(USD mil) (USD mil)
20072007 Aldar Properties, UAE Mudarabah Abu Dhabi Property Devpt.
2,530
20062006 Nakheel Development Ltd, UAE
Ijarah Dubai waterfront Property Devpt.
3,520
20062006 Aabar Sukuk Ltd, UAE Mudarabah Petroleum & energy
460
20052005 Gold Sukuk DMCC, UAE Musharakah DMCC Free Zone Property Devpt.
200
20052005 Emirates Airlines, UAE Musharakah Construction of Emirates HQ & Engin. Centre
650
20042004 Dubai Department of Civil Aviation, UAE
Ijarah Airport Expansion
1,000
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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 YouThank YouWassalamualaikum wrt wbtWassalamualaikum wrt wbt