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Islamic financing 'very feasible' model for project funding
Publication Date : 04-12-2012
Islamic financing is a "very feasible" model for funding major projects and will benefit Brunei's economy, a financial expert said yesterday.
In an interview with The Brunei Times, Shazali Sulaiman, a local partner at KPMG (a global network of professional firms specialising in financial services), and a speaker at yesterday's Islamic Finance News (IFN) Roadshow at the Empire Hotel and Country Club, said Islamic syariah-compliant financing for major projects would be good news for Brunei.
"It will benefit Brunei because we are using local banks and international banks, which are working together to come up with the structure of the financing, and that will help develop a more established Islamic capital market in Brunei later on," Sulaiman said.
During the IFN Roadshow, a case study was presented on the financing of Brunei Gas Carriers (BGC). Sulaiman said the financing of a vessel involved numerous parties participating in the initial construction to the delivery of the vessel.
"There is Islamic financing with the ship builders at the construction stage and the lease of the vessel to the operators, so there'll be an array of different financing products," he said.
"Maybe the government can look at Islamic project financing for the issuance of sukuk [Islamic bonds] , where the banks can utilise some of the funds that they have to subscribe for the sukuk, then the money stays in Brunei and the excess liquidity can be used to finance certain projects in Brunei," he said.
He added that there were a set of challenges that will have to be overcome in any form of project financing, and that the same went for Islamic project financing. "I think you cannot go into an Islamic product without understanding the whole structure, because you have to make sure from the time you start negotiations to the delivery of the product, the whole process is Islamic or syariah compliant," he said, adding that there could be "no leeway" if it was to be an Islamic-compliant product.
This is the reason BGC financing used four different types of Islamic products. He said the $170 million Brunei dollar (around US$139.4 million) BGC project was based on the Shariah-compliant concept of ijarah [a contract under which an Islamic bank provides assets to the client against an agreed rental].
"It was syariah-based rather than syariah-compliant financing, which made it a very attractive deal," he said.
He added that moving forward, ijarah-project financing could be used as a tool for the financing of other vessels, aircraft or other projects that the government might want to undertake.
Sulaiman went on to say that Brunei had come a long way since Islamic finance was first introduced in 1991. One example that he gave was the Bank Islam Brunei Darussalam's network of experts from other countries.
"Working with foreign experts helps to increase the competency of local service providers, especially people in regulatory, legal and financing departments," he said.
He added that experts would need to know how to structure the deal and how to do the accounting aspects of Islamic finance, who are able to explain the product to the syariah committee.
Speaking at the conference, Sulaiman said Brunei had issued just over US$5 billion worth of sukuk since 1996, most of which was in the form of short-term bonds.
Most of the sukuk in Brunei is currently being subscribed by the banks, and there are no other subscribers, he said, adding that globally, about $60 billion worth of sukuk was issued in 2011. Malaysia is the biggest issuer of sukuk issuance, with more than 50 per cent of the total global amount.
"Malaysia has issued about $38 billion , Gulf Corporation Council countries issued $19 billion and the rest of the world $3 billion. "It is quite a big market but it is still small in terms of the bond market, which is [worth] more than $1 trillion," he said.
Sulaiman said most of the sukuk issuances had been domestically sourced. One of the challenges for issuing sukuk internationally is the rating.
"If you decide to issue sukuk outside of Brunei, then you would need to look at pricing of the issuance, and the pricing of the issuance will be totally dependant on the rating of the sukuk," he said.
Sulaiman explained that to be rated, things like the stability of the company's cash flow and other economic factors had to be taken into account before ratings could be made.
"I think that maybe for now, based on the size of Brunei and the amount of information needed to be disclosed to do an international issuance, I think the market is probably sufficient for domestic subscription," he said.
Some of the participants attending yesterday's roadshow had flown to Brunei to explore the country's market potential, said Sulaiman.
"I think there is a lot of momentum in terms of Islamic financing, and this roadshow is to highlight the importance of Islamic financing, especially for countries which are more Islamic compliant."