legal guide09.indd - Islamic Finance News

A New Dawn For Islamic Project Financing
By John Dewar
The US$1.6 billion Hub River Power Project in Pakistan
was the first large-scale project to include tranches
of financing structured on a Shariah compliant basis.
Initially, the project accessed Islamic bank finance
from Al Rajhi Banking and Investment Corporation
and IICG for bridge facilities prior to full financial
close.
These facilities were structured as Istisna and
Murabahah financings and were of a relatively short
tenor. In addition, the project company entered
into a longer term Islamic facility with a number of
Pakistani banks. At the time, Islamic project finance
was heralded as a new source of funding for projects
in the emerging markets.
However, after the closing of Hub River in 1994, there
was little, if any, activity in the Islamic project finance
market. This was partly due to the fact that tenors
were stretched as conventional banks found project
financing more attractive (particularly projects with
creditworthy long-term off-take contracts which
became prevalent in the power and water sectors).
Islamic banks found it difficult to match the tenors
offered by conventional banks mainly because their
deposit bases were significantly smaller than the
major conventional banks doing business in the
project financing sector.
In the last few years though, there has been a
significant change in the capital bases of Islamic
banks, particularly among Saudi Arabian and certain
Far Eastern institutions.
However, the growth of Islamic financing has been
driven not only by a growing depositor base, but also
by demand for Shariah compliant financing from
corporations in the Middle East and in Far Eastern
countries such as Malaysia. This has led a number
of leading conventional banks to set up so-called
“Islamic windows” which specialize in attracting
deposits from Islamic investors and making finance
available on a Shariah compliant basis.
In the Middle East, the growth of Islamic finance has
been particularly noticeable in Saudi Arabia where
a number of large-scale project financings have
included a significant Islamic finance component.
A case in point is the US$3.5 billion Marafiq
independent water and power project (IWPP) in
Jubail, which is scheduled to reach completion in the
next few months and is the largest individual power
and water project in the world.
“Finance documentation in the
Middle East project fi nancings
is governed by English law”
The financing combines funding from Islamic finance
institutions, international and local commercial
banks and an export credit agency. This project
represents a perfect example of how Islamic finance
techniques have been successfully utilized in the
context of multi-sourced financings, while remaining
consistent with the principles of the Shariah.
Customarily, Islamic financings in the kingdom
have been governed by the law of Saudi Arabia and
the provisions of Shariah law. Generally, finance
documentation in the Middle East project financings
is governed by English law (except in New York
preferring Qatar).
The Islamic facilities in Marafiq followed the model
first developed on the Shuaibah IWPP and is based
on a Wakalah-Ijarah Mawsufah Fi Al Dhimmah
structure, a hybrid structure utilizing the existing
and recognizable Ijarah Islamic finance technique
under which a financial institution leases an asset to
the customer. In the context of a project financing
however, the asset needs to be built and this is where
the structure must be redefined so that it remains fit
for purpose while conforming to the Shariah.
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