Islamic trade finance continues to flourish

MUSHTAK PARKER looks at new trends in Islamic Commodity Murabaha and trade receivables supply chains

Islamic trade finance has flourished over the last four decades with the Murabaha (cost-plus financing) dominating the direction of financing of Islamic banks and financial institutions to the tune of up to 80 per cent.

So much so has this been that the Murabaha became the first Islamic financial product to gain acceptance in the mainstream global financial system with commodity trading entities such as J Aron (the commodity business of Goldman Sachs), ED & F Man, Carghill and the intermediation and facilitation company DDCAP Group pioneering the sector together with their counterparts in the GCC and wider Muslim world.

The Jeddah-based Islamic Development Bank (IDB) Group, for instance, extended $5,234m worth of trade finance in favour of its member countries in 2013, of which 95.7 per cent was done through its dedicated trade fund, the International Islamic Trade Finance Corporation (ITFC).

The IDB Group as a whole has financed the trade (both import and export finance) of its member countries totalling $49,776m since its inception. However, this merely accounts for about 18 per cent of total intra-Islamic trade, albeit the target is to increase this to 30 per cent by the end of the decade.

Given that total merchandise trade of the 56 IDB member countries amounted to $4,691bn (of which $2,696bn was fob exports and $1,995bn was cif imports) in 2013 compared with $4,272bn (of which $2,437bn was fob exports and $1,835bn was cif imports) in 2012, the scope for Islamic trade finance is huge and on an upward trajectory, not only through the IDB and other multilaterals but primarily through the commercial banking network of Islamic and conventional banks and dedicated trade finance funds.

With the spectacular proliferation of Sukuk over the past decade and the emergence of other modes of financing including equity participation (Musharakah), trust financing (Mudaraba), leasing (Ijara) and Istisna (forward financing for the construction industry, the dominance of Murabaha has decreased, albeit that it still accounts for some 60 per cent of Shariah-compliant direction of financing, especially with the ascendancy of Commodity Murabaha (Tawarruq), primarily in markets such as Saudi Arabia, the UAE, Malaysia and Turkey.

Judging by the number of Murabaha financing facilities and syndicated Murabahas arranged month-on-month by banks and entities such as ITFC in the MENA region and beyond, this mode of financing will continue to hold its own even against the rising star of Sukuk.

In Islamic trade finance, financial institutions have been offering a gamut of products and services, including vanilla Murabaha, Commodity Murabaha, Letters of Credit, Bills of Acceptances, Structured Trade Finance, Syndicated Murabaha, Line of Credit, Instalment Sales, Import Trade Finance Operations, Guarantees, Export Finance Schemes, Documentary Collection, etc.

However, this is where the trade finance dominance story ends. For hitherto, Supply Chain Finance Platforms, which are a well-developed concept in the mature markets of the West and which include conventional forfaiting and factoring to unlock liquidity for working capital through the securitisation of trade receivables has been non-existent in the Shariah-compliant finance space.

In 1997, there were attempts in Malaysia to launch such Shariah-compliant alternatives to conventional factoring and forfaiting. Abrar Discounts Berhad, for instance, was exploring the possibility of credit management (factoring) based on the Musharakah contract and how this could serve the liquidity management needs of small, medium and large businesses.

Credit sales are allowed under the Islamic concept of trade, which are normally priced differently from cash sales – ie, at a higher price – and are styled under the concept of Murabaha (cost plus financing) or Bai Muajjal (or Bai Bithaman Ajil) – ie, deferred payment sale.

According to Wan Abdul Rahim Kamil, the then managing director of Abrar Discounts Berhad, “while credit sales are good for the purchaser, they are not so for suppliers as their business process will be greatly dampened. Conventionally, this disadvantage is overcome through a form of credit management known as factoring, where receivables are managed through third party intermediation.”

Because the conventional factoring mechanism is steeped in interest, the challenge for the Islamic finance sector has been how to liquidate trade receivables in order to increase working capital without being involved in Riba (interest), which of course is proscribed under Fiqh Al Muamalat (Islamic Law pertaining to Financial Transactions).

Islamic finance solutions currently accounts for a mere 1.5 per cent of the global supply chain finance industry. But these include highly contentious products based on sale of debt (Bay Al Dayn), which is not acceptable to Shariah scholars other than in Malaysia.

Last month, however, a Dubai-Luxembourg based group, Tawreeq Holdings, launched a Cloud-based supply chain finance platform targeting SMEs and their corporate clients across the MENA region.

The company claimed that it was the first such Platform that would target “the cashflow challenges of SMEs and offer working capital solutions to address a $260bn credit gap for SMEs in the MENA region. Tawreeq takes an innovative approach to the platform concept, addressing the region’s credit gaps through Sharia-compliant factoring, reverse-factoring and ethical management of the entire cycle of supply chain finance”.

Thus far, the company has been coy about the rubrics of the Platform, and, perhaps more importantly, about the underlying Shariah structure of the mechanisms involved, claiming the cover of propriety intellectual property.

Nevertheless, it has benefited from the advisory services of Amanie Advisors, a Shariah and business advisory firm headed by noted Malaysia/Dubai based Shariah Scholar and entrepreneur Dr Mohammed Daud Bakar, who also serves on the board of directors of Tawreeq.

“The emergence of Tawreeq brings a much needed and cutting edge investment platform to the global Islamic finance industry. It is a Shariah-compliant investment vehicle that has short-term bias, above-market returns, and assists the real economy. Focusing on the SME sector will surely have wide appeal in both MENA and the Far-East,” he said in a statement at the launch of the Platform in Dubai.

Dubai, which has ambitions of becoming the premier Islamic economy and finance hub in the world, understandably has welcomed the Platform, which, according to Essa Kazim, governor of Dubai International Financial Centre (DIFC) and chairman of DIFC Authority, “adds yet another dimension to the wide range of efforts focused on supporting SMEs in the region, while also helping to forward Dubai’s vision towards establishing itself as the capital of the Islamic economy. Working capital is a major challenge for SMEs and solutions targeted at this critical sector are of paramount importance as they will play a role in shaping a supportive and resilient economic environment in which SMEs can prosper”.

The person behind the Platform is Haitham Al Refaie, the Jordanian co-founder and group chief executive officer at Tawreeq Holdings and former head of the business banking group at National Bank of Abu Dhabi.

“Our Platform allows us to serve corporates and SMEs using an automated, Cloud-based and paperless process that takes less than seven days to approve a transaction. SMEs are the bedrock of the region’s economy but they face bureaucracy and countless financing challenges. We want to help SMEs to do business more efficiently and grow rapidly using a Sharia-compliant solution that takes the pain out of cashflow management,” explained Al Refaie in an official statement.

SMEs, he added, make up as much as 90 per cent of the businesses in the region and employ the vast majority of workers. But they face massive challenges in managing their cashflow and getting the working capital they need. Banks are reticent to lend to small businesses as they often require the same level of filing and expense no matter the size of the loan. The time and cost associated with financing often makes such services prohibitive for most SMEs, resulting in a massive credit gap that has kept most small businesses from reaching their potential.

In the absence of adequate disclosure and transparency about the outline framework and operational flow involved, it becomes difficult to analyse effectively and independently the efficacy let alone the Shariah-compliant aspects of the structure.

Tawreeq Holdings, it appears, includes four entities operating under one umbrella. They include Tawreeq Investments licensed and based in Luxembourg; Dar Al Tawreeq a Dubai-based company offering forfaiting and factoring services, and which has developed, along with its international IT partners, the trading platform and the links between corporates and SMEs; iSCF Capital Limited, a DIFC-based company that connects local and regional corporates with international suppliers and is focused on advising and arranging the reverse factoring transactions; and HMR Consulting, an Abu Dhabi-based company that collaborates between corporates and SMEs on the Platform.

The Platform has at its core a Sharia-compliant component proprietary powered by an international IT platform that seamlessly connects all elements under a single, Cloud-based ecosystem that supposedly allows global reach and global service.

“What we are essentially doing is providing immediate cashflow and liquidity to SMEs by buying their receivables,” explained Harish Parameswaran, co-founder and COO of Tawreeq Holdings, in an official statement. “At the same time, our proposition promises robust yields for institutional and other investors who choose to benefit from an alternative asset class that addresses this critical market need, while we also offer corporates the opportunity to maximise their corporate treasury yields by partaking in these short-term, fast-cycle investments.”

The system provides financing across the entire supply chain by allowing buyers and suppliers to transact directly with each other. Tawreeq tackles those challenges through cashflow tools known as factoring, reverse factoring and forfaiting. This is done by connecting corporates, suppliers and investors to securitise trade receivables.

Factoring, according to Tawreeq, is a short-term cashflow solution in which a business sells its accounts receivables for a nominal fee. In the above case SMEs would have immediate access to cash by selling their approved invoices (receivables) to Dar Al Tawreeq at a reasonable discounted rate and through an un-named Sharia-compliant process.

In conventional factoring, a bank takes over a firm’s receivables and collects payments on them, while charging interest on a loan extended to the firm. Interest is proscribed under Islamic financial principles, which renders conventional factoring unusable in the Islamic trade receivables supply chain. “Conventional factoring is more a form of discounting bills, while our model is about the collaboration of buyers and suppliers to offer complete cashflow solutions,” explained Al Refaie.

Reverse-factoring allows large and mid-sized corporates to match their receivables and payables. In the above platform iSCF Capital Limited arranges deals for corporates to extend their payments terms with international and regional suppliers through reverse factoring at attractive rates and through an undisclosed Sharia-compliant process.

At the same time, Dar Al Tawreeq is offering forfaiting, which is a non-recourse discounting solution for international trade receivables at a reasonable discounted rate and through an undisclosed Sharia-compliant process.

The firm plans to raise additional funds through the launch of investment funds and Sukuk through the Luxembourg entity to attract liquidity from international investors.

At the same time, the number of Murabaha and Shariah-compliant syndicated facilities continued unabated in the first two months of 2015 in the MENA region.

The Murabaha market was kicked off by the Kuwait Finance House (KFH) and Kuwait Turkish Participation Bank (Dubai) Ltd., which acted as advisers to their Turkish subsidiary/parent Kuveyt Turk Participation Bank (KTPB’s) $350m dual-currency club Murabaha Syndication Facility. The facility was upsized to $350m from the original $250m because of strong demand from investors.

GCC banks ABC Islamic Bank E.C., Abu Dhabi Commercial Bank PJSC (ADCB), Barwa Bank Q.S.C., Emirates NBD Capital Limited (EMCAP), Noor Bank PJSC and Qatar Islamic Bank (QIB) not only acted as initial mandated lead arrangers and bookrunners for the transaction, but almost exclusively dominated as investing participating banks in the transaction with Boubyan Bank, Kuwait International Bank, Saudi British Bank, Ahli United Bank-Bahrain, United Arab Bank, and Commerzbank. Qatar Islamic Bank (QIB) alone underwrote US$40m of the transaction.

Not surprisingly, KFH was upbeat about the transaction, which was almost twice oversubscribed and was concluded in a record four weeks with the participation of 12 regional and global banks. This, emphasised KFH chief executive officer, Mazin Saad Al-Nahedh, affirmed the KFH Group’s strong global position and that of the Turkish economy, in addition to the international momentum of Shariah–compliant Murabaha products and structures.

It was structured as a Shariah-compliant dual currency facility with tenors of one year and two years. The facility comprised a two-year US$ 300m tranche and a €40m tranche with two tenors of one and two years each.

According to KFH’s Mazin Saad Al-Nahedh, the facility offered KTPB currency diversity, US dollars and euros, which enhances the participation bank’s ability to extend financing as per its market demands, and to meet its clients’ needs in those currencies. The strong uptake was also reflected in the pricing. The profit margin for each of the 1-Year tranche was 3-Months LIBOR/EURIBOR + 80 basis points per annum and for the 2-Year tranche is 3-Months LIBOR/EURIBOR + 100 basis points per annum respectively.

MENA banks, both Islamic and conventional, and corporates are regular raisers of funding from the international market through syndicated Murabaha, as part of their diversification strategy of source of financing to finance their balance sheet, business expansion activities and trade finance of their clients.

Another DIFC-based firm, Guidance Capital Markets (DIFC) Ltd (Guidance), similarly arranged a SR188m ($50m) offshore Islamic Murabaha facility for Al Khobar-based Abdullah A. M. Al-Khodari Sons Company, one of the largest listed contracting companies in Saudi Arabia and a regular user of such facilities.

The entire SR188m financing facility was provided by Al Hilal Bank PJSC the largest Islamic bank in Abu Dhabi. In a statement to Tadawul, the Saudi Stock Exchange, Al Khodari confirmed that the credit facilities extended by Al Hilal Bank “include 58 per cent Murabaha financing and 42 per cent multi bonds. The facility has a tenor of three years and will be repaid through bi-annual installments and are further secured by promissory notes and assignment of the contract proceeds of the financed project”.

Guidance acted as the sole arranger and Shariah structuring adviser for the three-year transaction, whose proceeds will be used for the issuance of performance bonds and meeting capex requirements of one of Al-Khodari’s construction projects.

Tahir Naseem, CEO of Guidance Capital Markets, maintained that his company facilitated “a tailored financing solution to attract foreign banks and investors who are eager for quality credits but do not have a local footprint in various markets. Guidance has engineered the bridge for this foreign liquidity to flow into certain local markets, as witnessed by the first-of-its-kind project finance facility we have just arranged for Al-Khodari”.

Al Hilal Bank itself arranged a dual tranche $200m Syndicated Murabaha/Wakala facility for Ajman Bank, the youngest of the growing number of Islamic commercial banks in the UAE. Al Hilal Bank acted as the mandated lead arranger, bookrunner and investment agent for the syndication with participation from Emirates Islamic Bank, Sharjah Islamic Bank and Qatar Islamic Bank.

According to Al Hilal Bank, the proceeds of the three-year facility would be utilised by Ajman Bank for investment and balance sheet purposes.

Mohamed Amiri, CEO of Ajman Bank, commended the co-operation between the GCC-based Islamic banks and “the growing confidence in the performance capability of Ajman Bank, which, despite its ambitious growth targets, has kept a very strict credit discipline. This medium-term funding comes at an opportune time to support the robust pipeline of wholesale/corporate financing deals in 2015 and also helps in our asset/liability matching”.

The UAE saw two other Murabaha facilities at the start of 2015. Abu Dhabi Islamic Bank (ADIB) closed an AED1bn financing facility for Baniyas Investment & Development Company LLC (BIDC), the investment arm of Bani Yas Sports Club. The proceeds from the transaction, according to ADIB, will be used to refinance BIDC’s existing conventional financing that was secured against the construction of Bawabat Al Sharq Mall, as well as part of the residential apartments and villas that were constructed in Phase 1 of BIDC’s Bawabat Al Sharq Development in Abu Dhabi.

“This facility demonstrates ADIB’s growing ability to finance large-scale projects that play a major role in the economic development of the UAE. The deal is one of many we have closed recently that are directly related to the expansion and development of Abu Dhabi. We expect this part of our business to continue to grow significantly,” explained Arif Usmani, global head of wholesale banking at ADIB.

In the second deal, Abu Dhabi Commercial Bank, Citibank, Dubai Islamic Bank, Mashreq Bank and Noor Bank, Commercial Bank of Dubai were appointed to act as lead arrangers and bookrunners for a hybrid AED3.53bn conventional-cum-Islamic syndication facility (with an option to raise it AED4bn) for TECOM Investments, a subsidiary of Dubai Holding, the investment vehicle of Sheikh Mohammed, the Ruler of Dubai, and a real estate master developer and business park operator with a major role in developing Dubai’s economy. The facility close was due at end March 2015.

The eight-year facility, according to TECOM “will help to fund the company’s general corporate needs, new developments and growth plans, as well as other strategic objectives in line with its innovation strategy”.

In Saudi Arabia, perhaps the most active market for Murabaha and Shariah-compliant syndication facilities, several deals came to the market serving the real estate and petrochemicals sector.

The National Industrialisation Co (TASNEE), for instance, announced in February that it signed a SR1,200m ($320m) Murabaha Financing Agreement with Riyad Bank and Saudi British Bank. “The agreement has a competitive floating-rate Murabaha structure, a 5-Year tenor with a 1-Year grace period and an optional 1-Year extension, and is payable in equal semi-annual installments with an order note guarantee,” said TASNEE in a statement to Tadawul.

The proceeds from the agreement will be used partially to finance the acquisition of the additional shares in Cristal, one of the world’s largest producers of titanium dioxide and in which it already has a large stake. TASNEE, for instance, acquired a further 13 per cent equity stake in Cristal last December for SR1.8bn.

In another transaction, Saudi British Bank completed a SR2bn Murabaha facility for Emaar the Economic City, the master developer of King Abdullah Economic City (KAEC) in December 2014. The proceeds from the facility will be used to fund the ongoing construction of residential developments and accompanying infrastructure projects in King Abdullah Economic City.

“The confidence shown by SABB in making this investment is further proof that KAEC is steadily and reliably progressing toward its goal of becoming a city for the future and a beacon for fine living in the western region,” explained Fahd Al-Rasheed, KAEC Group CEO and managing director, in a statement.

At the same time, another British bank through its local subsidiary, HSBC Saudi Arabia, arranged a SR2.5bn long-term Murabaha syndicated facility for Marafiq (The Power and Water Utility Company for Jubail and Yanbu). The facility saw strong participation from five local Saudi banks, including SAMBA, Saudi British Bank, Riyad Bank, Al Rajhi Bank and National Commercial Bank.

Marafiq, which is based in Jubail Industrial City with a regional office in Yanbu Industrial City and which serves the utility needs of both cities, is a public private joint stock company established in 2000. The four major shareholders include the Royal Commission for Jubail and Yanbu (RC), Saudi Basic Industries Corporation (SABIC), Saudi Arabian Oil Company (Saudi Aramco), and the Public Investment Fund (PIF).

In a statement, Marafiq confirmed that the proceeds from this latest Murabaha facility will be used partly to finance the company’s ambitious capacity expansion plans, which will be vital to serve different projects in the two industrial cities of Jubail and Yanbu. Both Abdullah Al-Buainain, CEO of Marafiq, and Fahad Al-Saif, managing director of HSBC Saudi Arabia, highlighted the strong support of local Saudi banks for the transaction, whose tenor and pricing were not disclosed.

“The support Marafiq received from the participating banks underlines the credibility and the trust our company enjoys in the market,” added Al-Buainain.

The Saudi corporate market has been a regular user of syndicated Murabaha financing facilities and, not surprisingly, HSBC Saudi Arabia’s Fahad Al-Saif is confident that having worked with Marafiq through multiple loan and capital market transactions, there may be more such facilities down the line, thus contributing towards the development of the industrial platform in Saudi Arabia.

Marafiq successfully closed its last syndicated Murabaha financing facility, totalling SR4.5bn in 2012, and in 2013 it went to the local market to raise financing through a debut SR2.5bn Sukuk issuance, which was well oversubscribed.

In terms of multilateral activity in the Murabaha financing sector in early 2015, the Jeddah-based International Islamic Trade Finance Corporation (ITFC), signed a EUR79m Murabaha Agreement with Burkino Faso and SOFITEX (Société Burkinabè des Fibres Textiles) as the executing agency for the export of cotton and the import of agricultural inputs.

This agreement is aimed at financing the whole production cycle for Sofitex in the 2015 cotton season – ie, imports of agricultural inputs and the local purchase of seed cotton to be processed into cotton fibre, which is then exported.

Dr Waleed Al-Wohaib, CEO of ITFC, explained that ITFC is “aiming to strengthen our relationship with Burkina Faso and seeking to consolidate ITFC’s financing package and offer financing for the whole agricultural cycle, leveraging on ITFC’s ability to mobilise resources from the market”. ITFC has extended Murabaha financing in support of SOFITEX totaling more than $240m.

The ITFC has also recently concluded a $1bn Islamic Trade Finance Agreement with PT Bank Danamon, a leading trade finance bank in Indonesia, through its Islamic business unit, Danamon Syariah. The aim is to boost Islamic trade finance and Murabaha facilities to Indonesian SMEs and corporates.

The $1bn is over a 5-Year period, starting with a $200m Murabaha facility in 2015. This is the first time ITFC has collaborated in Islamic trade financing with an Indonesian bank. Danamon was appointed by ITFC as its agent to arrange the financing to customers as well as provide trade finance services and trade collateral management.

According to Eng. Hani Salem Sonbol, deputy CEO of ITFC, “this joint financing will enable Danamon’s corporate and commercial customers to get better trade finance services, with more competitive pricing.

This partnership is a milestone to boost the growth of Shariah trade finance in Indonesia. With its expertise on trade and commodity financing, Danamon has proven its commitment to support the growth of the trade finance industry in Indonesia”. n