legal guide09.indd - Islamic Finance News

A New Dawn For Islamic Project Financing (continued..)
company in accordance with an agreed payment
schedule for on-payment to the EPC contractor
under the EPC contract.
All responsibilities relating to the procurement of
the project’s execution, completion and supervision
rest with the project company. During this period,
the project company is required to pay to the Islamic
facility agent advance lease rentals set out in a predetermined
advance lease rental schedule. Contracts
which have an uncertain price may be treated as void
under the Shariah principles.
From the commencement date specified in the
specified lease agreement, the Islamic facility agent
(on behalf of the Islamic finance institutions) leases
the assets to the project company. During the
specified lease period, the project company pays
specified lease rentals, semi-annually. The specified
lease rental is comprised of two elements:
• a fixed element for each payment date which
represents the principal repayment; and
• a variable amount representing the Islamic
finance institutions’ profit.
Islamic Islamic facility Fa cility agent
Agent
represents the financial institutions’ return based on
the profits generated on the sale of the asset to the
project company.
Project financing by its very nature means that the
financial institutions are assuming certain risks in the
project and this is consistent with Shariah principles.
At the end of the lease period, provided that all lease
rentals have been paid, legal title to the leased assets
will be transferred to the project company.
Many of the recent projects financed in Saudi
Arabia have included Islamic financings structured
on this basis and with the imminent signing of an
independent power plant at Rabigh, the future of
Islamic project financing has never looked brighter.
Meanwhile, across the Causeway in Bahrain, the
US$1.9 billion Al Dur IWPP is also about to reach
financial close with two tranches of Islamic financing,
the first tranche using the Wakalah-Ijarah structure
described above and the second comprising an
Istisna-Ijarah financing. Having witnessed the false
dawn marked by the closing of the Hub River project
during the 1990s, there is little doubt in my mind
that the significant recent application of Shariah
compliant structures marks a new dawn for Islamic
project financing.
Lease of Islamic asset (a)
Specified lease rental
Payments (b)
Transfer of tle
of Islamic assets (c)
at end of lease period
Project ProjectCompany
company
While Shariah prohibits the payment of interest,
Islamic principles do not prohibit the making of
profit provided that there is a level of risk sharing
between the parties. The specified lease rental
John Dewar is a partner at Milbank, Tweed,
Hadley & McCloy in London. Refer to his profile
on page 48.
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