Islamic syndicated lending By Paul McNamara

Islamic syndicated lending

By Paul McNamara

The concept of syndicated lending may have been born in the 1960s in the world of conventional finance but it was not until earlier this decade that it found its way into the Islamic finance lexicon. Syndicated loans are quite simply an integral part of capital raising for large corporate and financial 

Within the realm of Islamic finance, syndicated loans can take a variety of forms and may be a form of Musharaka financing but because of the prohibitions in Islamic finance concerning riba there are significant differences between an Islamic syndicated loan and a conventional syndicated loan.

Islamic syndicated financing ‘refers to the participation of a group of institutions in a joint financing operation through one of the Shariah permitted modes of financing’ according to Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions.

In addition to Musharaka financing, such loan syndications are also often structured around the Tawarruq (Murabaha) concept and this occurs when an underlying asset such as a commodity is sold to the obligor on deferred payment terms. This means that conventional and Islamic finance houses can work together on the same Islamic syndicated loan as long as all the tenets of Shariah are complied with.

Syndicated financing provides a means for Islamic banks essentially to combine their balance sheets to provide financing for higher value transactions than they would otherwise be capable of. Another significant advantage is that such syndications allow banks to mitigate some of their risk at the same time.

When the mandated lead arranger (Wakeel or agent) in the syndicate is selling down the loan to be syndicated it should do so at par without either marking it up or down but can instead, if it wishes to do so, charge a management or administration fee to cover the cost of the extra work that it has to undertake. The other banks involved in the transaction (Muwakkils or principals) should be party to an investment agency agreement.

The market for Islamic syndicated loans

According to statistics gathered by IFIS, the Islamic finance portal from Euromoney, the Islamic syndicated lending market expanded from $19.6bn in 2007 to $27.2bn in 2008, which represents growth of 32%. The bulk of this lending was in the GCC where volumes rose from $17bn in 2007 to $22bn in 2008.

As we might expect, in reality this growth was achieved over the first three quarters of 2008 since Islamic syndicated lending all but froze in the last quarter of the year. To give these statistics some context and scale, it is worth noting that in 2007 the global conventional syndicated loan market was estimated at over $4,500bn which shows either how underdeveloped the Islamic syndicated loans market is, or that there is much more potential in this sector and that the volumes we see at present are only scratching the surface of what can be achieved when the industry is fully grown.

The market for Islamic syndicated lending stalled between 2006 and 2007 and experienced significant growth in 2008 before that growth was stymied by the onset of the financial crisis and subsequent recession.

There has been a significant pick-up in deals since the start of 2009, with a total of 36 deals announced or closed worth a cumulative total of $9.5bn. If the rest of the year continues as it started it would suggest that total Islamic syndicated loans for 2009 will end in the region of $21bn, which would be broadly in line with 2007 levels.

What is interesting is that $3.8bn of these deals are from the UAE which indicates both how committed the emirates are to Islamic finance as well as the need that the nation has to refinance debt this year. What is equally interesting is the wide variety of arrangers on these deals, which include Intesa Sanpaolo, a leading bank in the Italian market with an international presence generally more focused on Central-Eastern Europe and the Mediterranean basin, and Industrial & Commercial Bank of China which is a banking giant in China and the largest bank in the world.

In 2008 Mizuho Corporate Bank from Japan was active in the Islamic syndicated loans market showing that the industry has grown far beyond its traditional core and Islamic investment banks in the region will find the market crowded not just from their traditional rivals but also from banks of every stripe from every corner of the world.

Industry leaders

Al Rajhi Bank from Saudi Arabia took the first place amongst Islamic syndicated loan arrangers in 2008 while new kid on the block Noor Islamic Bank from the UAE was in second place. Analysts at IFIS said, ‘Interestingly, even though the number and value of Islamic syndicated loans increased in 2008, the average amount of lending arranged by each of the top 10 arrangers went down from $1566.86bn in 2007 to $1132.14bn in 2008.

With the ranking of the top 10 arrangers varying considerably between 2007 and 2008, this is further indication that unlike the Sukuk market, there are no truly established leaders in the syndicated lending market. This market is far more open for competition’.

Clearly the financial crisis has taken its toll on the Islamic syndicated loans market and it is not likely that the market will recover overnight and reach the levels promised by activity in the early part of 2008. Lending of any sort has been severely constrained by a variety of factors, including the collapse in the real estate
market, the drop in oil price and its continued low level, and general uncertainty in the credit markets.

The unprecedented drop in Sukuk issuance globally over the past year may inadvertently have led to an upping in interest in the Islamic syndicated loans market as borrowers seek to raise debt from instruments other than Sukuk.

The future for Islamic syndicated lending

It is likely that 2009 and possibly 2010 will remain a tough period for borrowing of any kind but since syndicated loans help to spread risk and Islamic finance is moving into the ascendant, it is perfectly possible that such loans will regain their 2008 levels before the end of 2009 meaning that 2010 could be a bumper year for the segment.

One caveat to this is that the lack of confidence that is brewing in the GCC over the creditworthiness of its large and wealthy merchant families might mean that the lending landscape changes again.

It has already been widely reported that Saad Group, the troubled Saudi group owned by Maan al-Sanea, is seeking talks with creditors in the UK and the Middle East as it looks to restructure its debt. The GCC has a reputation for a lack of transparency and both Moody’s and S&P have withdrawn their ratings from Saad Group because of lack of information.

The concern is that if such a well established family group can come unstuck then it might be a symptom of something much worse, and therefore the credit profile of similar groups might be called into question with the knock-on effect that this will have on the lending appetites of banks in the Middle East. At the present moment it is simply a question of ‘wait and see’.

institutions.

SOURCE: http://www.ameinfo.com/209752.html