Islamic Syndication

Islamic syndicated finance is a type of financing where multiple financial institutions collaborate to provide funding to a borrower. Similar to conventional syndicated finance, there is a lead bank that manages the process. However, in Islamic syndicated finance, the financing structure must comply with Shariah principles. This means that interest-based financing is not allowed, and financing is based on trades or leases of tangible assets.

The benefits of Islamic syndicated finance include enabling lenders to participate in high-value transactions and borrowers to save on costs and time. Documentation requirements are simpler than Sukuk issuances, but there are still legal documents that include covenants to reduce the risk for participating banks. This type of financing is typically used for short-term and mid-term financing, ranging from one to seven years, and is not suitable for long-term financing.

Islamic syndicated finance has two tiers. The first defines the relationship between participating banks and the lead bank, while the second defines the financing structure to the borrower through the lead bank. The relationship between participating banks and the lead bank can be structured using Wakalah or Mudarabah. In the Wakalah structure, participating banks act as the principal, and the lead bank acts as the agent. In the Mudarabah structure, the participating banks appoint the lead bank as the Mudarib or manager.

Although both structures operate similarly, the Wakalah structure is increasingly preferred due to the specific application of agency laws in the jurisdiction of the governing law, tax issues, and the fact that the Mudarib is entitled to a percentage of the profit generated from the investment of the funds but the losses are only borne by the Rab Al Mal. The choice of structure should be based on careful consideration of these factors.

Islamic syndicated finance benefits both participating financial institutions and borrowers. It allows financial institutions to participate in high-value transactions that may be unavailable due to various reasons, such as limitations on risk exposure to a single customer, regulatory limits, or diversification of loan portfolios. For borrowers, it means lower costs and less time spent on preparing prospectuses or information memorandum required for Sukuk issuance. The documentation involved for Islamic syndicated finance is much less and relatively easy to conclude than Sukuk issuance.

The relationship between participating financial institutions and the lead bank in Islamic syndicated finance can be structured using Wakalah (agency) or Mudarabah (partnership). In the former, the relationship is based on agency principles where the participating financial institutions act as the principals and the lead bank acts as the agent. In the Mudarabah structure, the participating financial institutions appoint the lead bank as the Mudarib through a Mudarabah agreement. The Mudarib carries out the management of the Mudarabah.

In the Islamic finance industry, the Wakalah structure is increasingly preferred over the Mudarabah structure due to several factors. While the latter was an early entrant in the industry, the choice of structure should be based on the specific circumstances of the transaction.

Islamic syndicated finance allows financial institutions and borrowers to comply with Shariah law while still accessing the capital they need to pursue their business objectives. It promotes ethical and socially responsible practices in line with the principles of Shariah law. As reported by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOFI) Standard, there are no Shariah restrictions against conventional banks and Islamic financial institutions participating in syndicated financing as long as the subscription and utilisation of funds are arranged according to Shariah-compliant forms. However, appointing a conventional bank to lead the syndication and manage the operations is only acceptable if the contracts, projects financed, and modes of financing are all Shariah-compliant. The arrangement, implementation, and follow-up of syndicated financing operations should take place under the supervision of the Shariah supervisory boards of the institutions participating in the syndication. It is recommended that a joint committee of the Shariah supervisory boards of these institutions is formed and delegated to make binding decisions for all parties.

Islamic financial institutions can provide syndicated financing to specific parts of a project that receive financing from other sources through conventional modes as long as the accounts and lead manager arrangements of the two types of financing are kept separate. Overall, the AAOFI Standard emphasizes the importance of ensuring that all aspects of syndicated financing adhere to Shariah principles and that proper oversight is in place to ensure compliance.

In summary, Islamic syndicated finance offers a Shariah-compliant alternative to conventional syndicated finance. It enables multiple financial institutions to participate in high-value transactions and provides borrowers with cost and time savings compared to issuing Sukuk. The Wakalah and Mudarabah structures provide flexibility to both parties, and the choice of structure should be based on the specific circumstances of the transaction. However, it is essential to ensure that all aspects of the syndicated financing adhere to Shariah principles and that proper oversight is in place to ensure compliance.

As reported by Gulf News, "The Islamic finance industry has grown considerably in recent years, and Islamic syndicated finance has emerged as a viable alternative to conventional syndicated finance." The industry's emphasis on ethical and socially responsible practices positions it to serve a broad range of financial institutions and borrowers amidst a rapidly evolving economic landscape.

The writer is additional managing director of Standard Bank Limited and a fellow member of the Institute of Cost & Management Accountants of Bangladesh (ICMAB).