ISLAMIC PROJECT ISLAMIC PROJECT FINANCING FINANCING

Assoc Prof Dr Engku Rabiah Adawiah Engku AliAhmad Ibrahim Kulliyyah of Laws

International Islamic University Malaysiarabiah@iiu.edu.my

eradawiah@yahoo.com

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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

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

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: Multi-level financing: Multi-level financing: Underlying Contracts:Underlying Contracts: 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.)

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

IssuerIssuerIssuerIssuer

Project Company(SPV)

Project Company(SPV)

Financier Financier 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)

FINANCIERFINANCIER(On Behalf of (On Behalf of

Investors)Investors)

ISSUERISSUERISSUERISSUER

The RM5.6b SKS Power Istisna` MTN Transaction Structure

4444 3333 1111 2222

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/BankFinancier/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 Company

Company undertakes to redeem asset at the end of

lease period

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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)

Sukuk Holders(Investors)Company as Company as

Owner of assetOwner of assetCompany as Company as

Owner of assetOwner of asset

SPVSPV

Company as LesseeCompany as LesseeCompany 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`

DeveloperDeveloperLand OwnerLand OwnerLand OwnerLand Owner

Ijarah Contract On Use of Land

Sukuk Sukuk InvestorsInvestorsSukuk Sukuk

InvestorsInvestors

Lease of Rights of FutureUse of UnitsOn Chosen Time Slots

Payments For Lease Rental(SAR/US$)

SUKUK AL INTIFA’

SUKUK AL INTIFA’

Evidenced bySukuk Certificates

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Proceeds fromSukuk Sales

Proceeds fromSukuk Sales

Commercial and HotelComplex

Commercial and HotelComplex

PaymentFor Lease ofLand (SAR/US$)

Development Costs (SAR/US$)

“Time Use” By Sukuk Holders

5555

6666

7777

22223333

4444

1111

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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)

Financier Financier (Rabb al Mal)(Rabb al Mal)

Company Company (Amil / Mudarib)(Amil / Mudarib)

Company Company (Amil / Mudarib)(Amil / Mudarib)

CAPITAL

Project Project RevenueRevenueProject Project

RevenueRevenue

Invests in Invests in project (e.g. project (e.g. real estate)real estate)

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)

InvestorsInvestors(Rabb al Mal)(Rabb al Mal)

Issuer Issuer (Amil / Mudarib)(Amil / Mudarib)

Issuer Issuer (Amil / Mudarib)(Amil / Mudarib)

CAPITAL

OutcomOutcome of e of

projectproject

OutcomOutcome of e of

projectproject

Invests in Invests in project (real project (real

estate)estate)

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 Company Company

Capital

Invests in Invests in project project

(e.g. real (e.g. real estate)estate)

Invests in Invests in project project

(e.g. real (e.g. real estate)estate)

Contract of Musharakah

Capital contribution – X:YFinancier / BankFinancier / BankFinancier / 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 RevenueRevenueProject Project

RevenueRevenue

X%

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Basic Transaction Structure: Basic Transaction Structure: Musharakah SukukMusharakah Sukuk

X%

Y%

Issuer Issuer Issuer Issuer

CapitalCapital

Revenue of

Project

Revenue of

Project

Invests in Project

(real estate)

Invests in Project

(real estate)

Contract of Musharakah Capital contribution – X:Y

InvestorsInvestorsInvestorsInvestors

• 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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TrusteeTrustee

Musyarakah Venture

Musyarakah Venture

SukukHolders

(Investors)

SukukHolders

(Investors)

Issue Sukuk Musyarakah

Construct & Lease Construct & Lease IOTIOT

Construct & Lease Construct & Lease IOTIOT

Oil Companies

Oil Companies

User Agreements

(RMXXX Million)

User Agreements

(RMXXX Million)

Invest Capital (13%)

Invest Capital (87%)

Project Manager(As Agent of Trustee)

Construction period 12 – 18 Months

Completed IOTCompleted 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

CompanyCompany

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11

22

3344

55

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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 obligorEmirates as obligor Emirates as lesseeEmirates as lesseeEmirates as lesseeEmirates as lessee Emirates as lesseeEmirates as lessee

Wings FZCOWings FZCOWings FZCOWings FZCO

InvestorsInvestorsInvestorsInvestors

dd cc bb aa

EmiratesEmirates

MUSHARAKAHMUSHARAKAH

Wings FZCO

as partner

Wings FZCO

as partner

Emirates

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

SPVSPV

SukukHolders

(Investors)

SukukHolders

(Investors)CompanyCompany

Musharakah Mutanaqisah

Invest Capital (10%)

agency agency

Musyarakah Revenue(RMXXX Million)

Profit sharingCompany

X%Investors

Y%

Service Contract(RMXXX Million)Service Contract(RMXXX Million)

Assignment

Invest Capital (90%)

Servicing OilCompanies

Servicing OilCompanies

Oil CompaniesOil Companies

Case Study: Vastalux Musharakah Sukuk Case Study: Vastalux Musharakah Sukuk

11

22

Issue Sukuk

11

22

22

33

44

44

55

66

77

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 You

Wassalamualaikum wrt wbtWassalamualaikum wrt wbt