ISLAMIC PROJECT FINANCING

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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_at_iiu.edu.my
• eradawiah_at_yahoo.com

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Agenda

• Project Financing An Overview
• Shariah 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 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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Shariah Perspective on Project Financing

• Purpose should be for Shariah compliant
  projects/ activities Islamic project financing
• Techniques instruments Shariah compliant
• Conceptually
• Structurally
• Documentation
• Modus operandi execution implementation
• Recovery mechanisms
• Cannot be a mere debt-leverage exercise like
  conventional project financing due to the
  Shariah prohibition of payment receipt of
  interest (riba)

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Islamic Project Financing Instruments
Contracts
Multi-level financing
Underlying 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

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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

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ISLAMIC FINANCING TRANSACTION STRUCTURES
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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
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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)
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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

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Lease-based Project Financing Basic Transaction
Structure
Utilised to finance project costs
Sale of asset to financier for cash payment
1
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
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Project Financing Basic Transaction Structure of
Sukuk Al Ijarah
Company as Lessee
6. Payment of rentals
2. Lease of asset

1. Exercise price at dissolution

1. Sale at dissolution

1. Dissolution Amount

1. 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
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Case Study Sukuk al Intifa
1
Land Owner
Developer
Ijarah Contract On Use of Land
Evidenced by Sukuk Certificates
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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
Sukuk Investors
Commercial and Hotel Complex
4
Time Use By Sukuk Holders
7
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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 Mudarabah Project
Financing
Contract of Mudarabah Profit Sharing ratio XY
Financier (Rabb al Mal)
Company (Amil / Mudarib)
Y to rabb al mal
CAPITAL
Profit shared in accordance to
pre-agreed proportions (XY)
X to mudarib
Project Revenue
Invests in project (e.g. real estate)
Loss borne Totally by rabb al mal
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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 (XY)
CAPITAL
X to mudarib
Outcome of project
Invests in project (real estate)
Loss borne Totally by rabb al mal
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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
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Basic Transaction Structure Musharakah Project
Financing
Contract of Musharakah Capital contribution XY
Company
Financier / Bank

• 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)
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Basic Transaction Structure Musharakah Sukuk
Issues Musharakah Sukuk
Issuer
Investors
Contract of Musharakah Capital contribution XY

• 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)
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Case Study Assar Senari RM150m Musharakah Sukuk
Company
Sukuk Holders (Investors)
Issue Sukuk Musyarakah
1
Invest Capital (13)
Invest Capital (87)
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
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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

1. Issues Sukuk evidence proportionate share in
   Musharakah

d
c
b
a

1. Proceeds USD550m used for construction of
   Group Headquarters Engineering Centre

Investors

1. Periodic Distribution Amount

1. Dissolution Distribution Amount

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Case Study Vastalux Musharakah Sukuk
Active Partner
Sukuk Holders (Investors)
Company
Musharakah Mutanaqisah
2
1
1
2
agency
agency
Invest Capital (10)
Invest Capital (90)
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

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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

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Recent Islamic Project Financing viaIslamic
Securities Issuances (Malaysian)
Year Issuer Syariah Principle Project Size of Issues(RM mil)
2006 Sarawak Power Generation Sdn Bhd (two issues) Musharakah Electricity 215
2006 Mukah Power Generation Sdn Bhd (two issues) Mudarabah Electricity 950
2006 Penang Bridge Sdn Bhd Istisna Bridge 695
2005 Jimah Energy Ventures Sdn Bhd Istisna' Electricity 4,847
2005 IJN Capital Sdn Bhd Musharakah Hospital 209
2005 Penang Port Ijarah Port facilities 100
2004 Kapar Energy Ventures Sdn Bhd BBA Electricity 3,402
2004 Sarawak Specialist Hospital Medical Centre Sdn Bhd Istisna Hospital 425
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Recent Islamic Project Financing via Islamic
Securities Issuances (Global)
Year Issuer Syariah Principle Project Size of Issues(USD mil)
2007 Aldar Properties, UAE Mudarabah Abu Dhabi Property Devpt. 2,530
2006 Nakheel Development Ltd, UAE Ijarah Dubai waterfront Property Devpt. 3,520
2006 Aabar Sukuk Ltd, UAE Mudarabah Petroleum energy 460
2005 Gold Sukuk DMCC, UAE Musharakah DMCC Free Zone Property Devpt. 200
2005 Emirates Airlines, UAE Musharakah Construction of Emirates HQ Engin. Centre 650
2004 Dubai Department of Civil Aviation, UAE Ijarah Airport Expansion 1,000
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The Way Forward

• Better, competitive more efficient Islamic
  project financing instruments
• Truly Syariah compliant
• Transparent deals disclosure, accounting
  auditing
• Global acceptance recognition

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Thank You

• Wassalamualaikum wrt wbt