$1 trillion project financing market spurs Islamic lending sector growth

Issac John (Deputy Business Editor)
Filed on June 15, 2007

DUBAI — With the project finance market in the GCC soaring to an estimated $1 trillion, an increasing number of companies in the region are choosing to finance their projects in accordance with Shari’ah principles.

“The growth in Islamic project financing has been phenomenal. It exemplifies the success of both the burgeoning Islamic finance sector and the booming construction industry in the region," said MEED, organiser of the upcoming Islamic Project Finance conference.

"However, since the market is young — barely five years old — there is still a level of uncertainty about the benefits to be gained from Islamic project backing, with little concrete knowledge on standardised Shari’ah regulations or how Islamic project finance can work in tandem with conventional loans," the conference organisers said in a statement.

Oliver Agha, Global Head of Islamic Finance at DLA Piper, the event’s platinum sponsor and leading international law firm, said they are currently developing successful risk-sharing strategies that reflect the needs and beliefs of all parties involved in any particular project. "Ensuring that tranches of Islamic funding work effectively with conventional finance, that clients understand where the liability lies in Islamic arrangements, and the implications this has for relationships between conventional and Islamic investors is at the heart of our current work in the sector. It is an approach that is appreciated both by our clients and by their stakeholders.”

Analysts said with all major GCC economies implementing several mega projects in the oil, gas and petrochemical sectors, as well as in real estate, tourism and infrastructure developments, project finance opportunities in the GCC are on the rise. Standard & Poor's Ratings Services expects to see a significant increase in the use of credit ratings helping companies and projects to place their debt among domestic and international investors given the extraordinary levels of investment that are anticipated in the countries of the GCC to improve infrastructure.

Analysts said the strong dominance of the oil and petrochemical sectors in the GCC, the requirements to develop civil and transport infrastructure, and the huge plans for real estate development are driving a surge in local construction markets.

The expansion of government-funded airport infrastructure, leisure facilities, housing, and water and electricity infrastructure are similarly driving the huge investments that are currently being undertaken. Much capital is also coming into the region by foreign entities such as the major international oil companies that are keen to be involved with the many developments taking place in the GCC and are seeking reserve replacements from the GCC's vast hydrocarbon reserves.

"The strong competitive nature of these projects, direct sovereign support, and the tremendous interest from international banks in addition to high local bank market liquidity has made financing projects in the Middle East a very attractive proposal for project sponsors. Pricing is cheap; tenors are getting longer and longer, both in bond and bank finance; and transaction structures are evolving more and more toward corporate structures, making them weaker," one source pointed out.Tony Boon, director of project finance for Dolphin Energy, said that despite the increased liquidity available in the market, project finance will continue to play a major part in financing options. “It is prudent to spread the risk across the types of finance available; in addition, banks providing finance can also validate the investment decision.”Dolphin Energy has one of the largest financing deals in the UAE, with the $3.5 billion deal to fund the construction of its Bridge 1.

According to Steve Martin, head of corporate communications and marketing for Qatar Financial Centre Authority, in Qatar there are more than $130 billion worth of projects on the table, driven by the government’s initiative to promote public and private sector co-operation.” Ian Cogswell, director of natural reserves, corporate finance division, Mizuho Corporate Bank, said: “We will see a significant number of refinancing deals from projects that were launched in the early 2000s, as they move from construction to operational phase. “Increased liquidity in the region means that financial institutions will have to diversify their income streams on projects and be more innovative in their product offering.”Current projects in the oil and gas sector in Qatar alone amount to more than $60b, including Ras Laffan’s RasGas Onshore Expansion Project Trains, expected to produce 15.6m tonnes of LNG.

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