Don StowersEditor-OGFJ
Once considered a novelty by the banking community, Islamic finance is expanding rapidly throughout the world. Estimates are that nearly 300 banks and institutions with assets totaling about $300 billion currently offer financial products that conform to Koranic law, or shari’a.
Islamic finance was once the preserve of specialty banks that handled shari’a-compliant products exclusively, but a few large Western banks have begun to compete for business from Muslims and Muslim-owned companies that want to comply with Koranic rules regarding finance.
Interestingly, it’s not just Muslims who like these products, which do not use traditional interest-based financing. One Malaysian bank found that more than half its customers for Islamic products were non-Muslims who liked the way loans are structured with the bank, essentially, becoming a venture partner in many situations.
When first introduced about 25 years ago, Islamic finance was largely ignored by large European and US banks. Today, Islamic banking is considered mainstream business. The Federal Reserve Bank of Chicago has identified nine US banks that do Islamic financing.
How does this affect the US energy financial sector? Here’s an example.
Abu Dhabi-based Dolphin Energy recently secured $3.5 billion in financing from 25 international institutions for a large gas project in Qatar.
Dolphin, is 51 percent owned by Mubadala Development Co. on behalf of the government of Abu Dhabi, and 24.5 percent owned each by Total of France and Occidental Petroleum. The CEO, Ahmed Al Sayegh, wanted to include Islamic financing in this project and others that are expected to follow.
Eventually Dolphin financed about $2.5 billion using conventional banking practices and around $1 billion using Islamic financing. For the latter, Dolphin appointed five banks with shari’a supervisory committees to lead the financing: ABN Amro Bank, BNP Paribas, Citigroup, Dubai Islamic Bank, and Gulf International Bank. Other participants in the transaction are: HSBC Amanah, Barclays Bank, Natexis Banques Populaire, Societe Generale, West LB, Export Development Canada, Sanpaolo IMI, China Construction Bank, and Commercial Bank of Qatar.
The banks will combine two shari’a-compliant financing techniques - an ijara (sale-leaseback of operational assets) and an istisna’a (forward lease of assets not yet in service). Dolphin says there is “overall pricing equivalence” between the Islamic and conventional facilities.
Several law firms, including King & Spalding, have opened Islamic finance and investment practices worldwide. Some of the structures the firm deals with include an arrangement for leveraged buyouts and corporate acquisitions and another structure for project financing. More US law firms will certainly expand their expertise in these areas.
At present, very few US banks offer formal Islamic financing products. However, it appears likely this will change. As new opportunities arise, especially large-scale energy projects in Muslim countries, more and more banks will see Islamic financing as an area in which they need to participate. OGFJ
