Abu Dhabi Islamic Bank (ADIB) has signed an agreement to provide a US$80mn sharia-compliant ijara facility to Oman Shipping Company (OSC) for the financing of two oil tankers – the company’s first such deal.
The two VLCC (very large crude carriers) tankers are each capable of transporting two million barrels of oil at a time.
Sharia-based financing complies with Islamic law, which is based on risk and profit-sharing and excludes earning interest on loans. As such, sharia-compliant financial products require specific structuring. Ijara facilities are similar to conventional loans; however, in order for them to be sharia-compliant the financier must accept some of the commercial risks, for example asset damage.
Founded in 2003, OSC is an international shipping company which has 53 vessels (owned and chartered-in). The company is owned by the Governorate of the Sultanate of Oman through Asyad Group (79.9%), Oman Oil Company (20%) and Oman Rail (0.01%).
Christopher Phillips, head of ship finance at ADIB says the bank has experience and expertise working on Middle East shipping deals across a range of industry segments. “Over the years we have been able to add significant value to partners across a wide range of innovative structures in terms of both bilateral and syndicated facilities.”
Michael Jorgensen, chief financial officer and acting chief executive officer at OSC, adds: “It was important for us to find a trusted partner for our first sharia-compliant ijara facility.” He says that the facility will allow OSC to further support its expansion plans.
Several oil tankers in the Strait of Hormuz, a passage between the Gulf of Oman and the Persian Gulf through which approximately 21 million barrels of oil flows per day, have been the target of recent attacks due to intensifying tensions between the US and Iran – making oil a very politically risky commodity. GTR previously reported that because of the escalating violence, shipping companies are “beefing” up security on their ships. .
Increased appetite for Islamic finance
Bankers in the UAE are seeing “huge demand” for Islamic finance, though they also say there is a perception that Islamic trade products are “difficult to consume”. In an effort to counter this challenge, the Bankers Association for Finance and Trade (Baft) and International Islamic Financial Market (IIFM) released a global industry standard document for buying and selling Islamic trade-related risk in 2019.
Baft’s master participation agreement (MPA) for Islamic trade finance differs from its MPA for conventional trade finance as it includes two separate standards covering unfunded and funded arrangements, and there is also a difference in the way fees are shared by the grantor with the participants.
Industry players across the world are beginning to embrace Islamic finance; London-based credit asset manager Channel Capital Advisors launched a sharia-compliant trade finance fund in the latter half of last year. The assets of the fund will be short-dated, self-liquidating and facilitate the supply of goods or services; trade finance marketplace LiquidX opened its platform to sharia-compliant transactions; and the UAE’s export credit agency Etihad Credit Insurance (ECI) and the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) signed a memorandum of understanding to promote non-oil UAE trade through Islamic risk mitigation tools.