funding, Shariah financing is very much in the news.
UK lessors discuss how they can benefit from these new
developments.
Go deeper with GlobalData
The making or breaking of companies these days can depend on
just how imaginative and flexible their approach is to raising
funds. The need to do so is ever more evident as the economy
continues to spin downwards. The British Chambers of Commerce’s
quarterly economic forecast, for instance, is expected to report
that Britain is heading into a technical recession of two or more
quarters of declining GDP over the next six to nine months.
At leasing companies, for which liquidity is all, inventiveness is
a particularly important route when it comes to surviving in
today’s testing economic climate. Not surprising, then, that
Islamic finance is increasingly being looked at to provide
innovative solutions.
“Lease contracts originated during the Ottoman Empire to create
and sustain wealth,” says Bank of London and Middle East’s director
and head of corporate banking, Derek Weist.
“Leasing is nothing new, but the instrument needs liquid capital
markets for sustenance. And Shariah-compliant financial instruments
are nothing new; but what we are seeing is an increasing number of
lenders looking to diversify funding sources through Islamic
finance to keep the wheels of industry rolling in the current
economic climate,” he adds.
Shariah-compliant financial services offer financial products to
clients by developing transaction structures that comply with
Shariah rules.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataThe mechanisms resemble conventional banking and finance
products, the broad difference being no interest or late payment
charges can be levied.During the last decade growth has been
marked, with major financial institutions including Lloyds,
Barclays, HSBC, Citigroup, Deutsche Bank and, most recently, Bank
of London and Middle East (BLME) among those getting in on the
Islamic act.
BLME opened its doors last year and is, if you like, one of the
new kids on the block. That said, senior leasing managers Graeme
Laing, Mark Jarvis (UK and US respectively) and Weist are
traditional lessors and agree that Shariah structures are
similar.
“The notable differences,” says Weist, “are the penalty
clauses.
“It would be a legal minefield to remove them, so a percentage
of any late payments goes to charity – leasing fits with the
Islamic model of sharing risk and reward.”
However, the Middle East connection goes further than just
Western banks – albeit new ones – engaging more intensely in
Islamic finance. Sovereign funds have hit the news recently with
blue chip GE Capital joint venturing with Mubadala, Abu Dhabi’s
state investment vehicle, to set up an $8bn finance business.
This is nothing new, as “the deal with Mubadala comes after
around four years of working together on a range of investment and
energy projects”, says GE’s spokesperson, including a $1bn
investment fund created in 2006 between GE, Credit Suisse and
Mubadala, a joint venture that shows cross-border alliances are the
norm.
What is interesting though is that while GE strikes deals in the
Middle East and around the world, its Capital Solutions division –
which deals with fleet management, equipment leasing and commercial
distribution in the UK – is looking to shed jobs.
In Europe, GE’s Swiss operation has cut two-thirds of its
workforce of around 200. It would appear that, following the review
and the Abu Dhabi tie-up, GE is following the money to the Middle
East, shifting its focus to big-ticket deals and leaving the SME
sector.
“The new $8 billion fund will invest in a range of high-return
financial services businesses and assets across all sectors. This
is in line with new CEO Jeff Immelt’s strategy of investing in
high-growth, high-return industries and geographies,” GE’s
spokesperson adds.
Although GE aims to build its book to more than $40 billion
during the next 12-18 months, concerns have been raised over a
Middle Eastern financier owning half of the all-American
behemoth.
“Politically, it could potentially be held up for some
criticism,” says an insider in a reference to concerns some
American companies have about engaging in business with Middle
Eastern entities.
Richard Mintz, a spokesman for Mubadala, says it does not intend
to file for a national security review with the Committee on
Foreign Investment, the 12-agency US group authorised to recommend
the White House block or alter terms of deals involving national
security.
Back in Britain, “the UK government is supportive of Islamic
Finance and is planning a UK Shariah-compliant bond issue [or
sukuk]”, notes Warren Edwards, CEO Delphi Risk Management,
and governor of The Institute of Islamic Banking and Insurance.
“But some divisive elements of the press have alleged a link
between Islamic finance and terrorism,” he adds, “and it will be
interesting to see if government backtracks in its support of
Islamic finance in the UK.”
How at ease the government is with Islamic finance and its
alleged connotations could be summed up by the fact that the
proposed bonds are currently known as ‘alternative finance’.
For BLME though, it is pretty much business as usual, reports
Weist: “We have not found the source of our finance a hurdle. The
fact that we are a fully FSA regulated UK bank quells most concerns
that a potential customer may have.
“But no, we have not come across any prejudice once we have
explained a bit more about the bank and its shareholders. What we
find very encouraging is that our book is strong and growing both
here and in the States, where it could be perceived as more of a
problem.
“Twelve months ago BLME had nothing on its book. Today, in the
UK, we will have written some £30m worth of deals by the end of
this year, while in the States the figure stands at $170 million,
and both markets are growing.”
Weist hopes to double the figures next year, saying, “we have
the funding and we’re asset acquisitive”.
The high octane world of Premier League football is also
benefitting from Islamic funds. Richard Price, the managing
director of New Century Finance, a strategic financier and lessor,
is about to close the first transfer deal under Shariah law.
“Yes, by the time this article is printed the deal will be done
with Manchester City for around €1.5 million,” he says. “The deal
will form a template for future robustly structured transactions,
both here and in Europe, and I don’t foresee any ethical
issues.”
Concerns have been raised by scholars in some quarters that up
to 80 percent of Shariah deals do not conform to Shariah law. In
particular, Shariah law dictates sukuks must be able to
link the returns and cash flows of the financing to the assets
purchased or the returns generated from an asset purchased. This is
because trading in debt is prohibited under Shariah.
As such, financing must only be raised for identifiable assets –
which must be tangible rather than cash flow.
“However, what the scholars are trying to do is make
sukuk asset-backed rather than just asset-based,’’ says
Arul Kandasamy, the Dubai-based head of Islamic finance for
Barclays Capital.
This is a hardline stance, as outlined by a statement released
by the Accounting and Auditing Organisation for Islamic Financial
Institutions (AAOIFI): “Blemishes have crept in that the industry
must now rid itself of.”
As much as 80 percent of sukuk sold to date may not
comply with all the precepts of Shariah, the AAOIFI board
stated.
If there is a lack of conformity, it could make it tricky for
companies to leverage Islamic finance at a time when borrowing is
already shrinking because of the global credit crisis. Jebel Ali
Free Zone, Dubai’s state-run operator of a business park adjoining
the Jebel Ali port, raised $2 billion in the biggest sale of
sukuk from the Gulf in the past six months.
The sukuk certificates were issued by JAFZ Sukuk and
were sold to investors in the Middle East, Asia and Europe. The
certificates have been rated A1 by Moody’s and A+ by Standard &
Poor’s. However, buyers of the bonds have no legal claim on the
underlying assets, rather they have an “implicit guarantee” the
issuer will cover any payment shortfalls.
According to analysts, the likely impact is that either the
sukuk market becomes more based on Islamic securitisations
or it splits, with some sales becoming truly asset-backed and other
issuers choosing to continue with existing structures.
Meetings last month between Leasing Life and a number
of smaller UK lessors and lease brokers revealed that Islamic
finance is, for the first time, passing their radars in a serious
way. Historically they might have been turned off by the fact that
most Islamic leasing deals have been big ticket.
The fact BLME and New Finance are signing comparatively small
equipment deals using Islamic finance structures reveals a sea
change is happening – one many lessors might do well to consider
tapping into.
This move in Islamic finance leasing to equipment – as opposed
to a past presence in ship and aircraft – has been in the offing
for some time.
Last October, for instance, we reported that Islamic funds are
increasingly looking to European assets for investment
opportunities. At the time, fund managers were looking for real
estate projects and also moveable assets, not least those used by
the public sector that are government secured. While this has not
yet happened, the prospect seems more and more likely.
