ISLAMIC FINANCE AND THE MARITIME SECTOR. W.R. Gregory Master s Candidate, SUNY Maritime College

Size: px

Start display at page:

Download "ISLAMIC FINANCE AND THE MARITIME SECTOR. W.R. Gregory Master s Candidate, SUNY Maritime College"

Bethanie Bennett
6 years ago
Views:

1 ISLAMIC FINANCE AND THE MARITIME SECTOR W.R. Gregory Master s Candidate, SUNY Maritime College

2 TALKING POINTS Overview of Islamic Finance: what is it, why does it matter, and how do we use it? Why are Islamic Financing tools and the maritime sector a good fit? How large is the industry? How is it different from traditional finance? How do we apply it to the maritime trade? A few examples

3 OVERVIEW OF ISLAMIC FINANCE Islamic Finance is all about profit/loss sharing and equal spread of risk Returns are based on the actual performance of the underlying asset, rather than the use of money No interest or fixed/guaranteed returns Examples outside of the maritime sector: Home buyer and compound interest Education financing and student debt So, how do we use it?

4 WHY PAIR MARITIME SECTOR AND IF? Natural fit Maritime industry: derived - demand, asset focused, highly cyclical. Perfect environment! Returns are generated from the use of assets Shipowners need capital diversity Debt and equity markets are not always right Islamic fund managers need assets to invest in Added benefits to shipowners: Many variables are removed (payment schedules) Potential solution to long-term credit difficulties Bankruptcy/arrest risk, etc are mitigated

5 SIZE OF THE INDUSTRY Global Islamic economy is over $8 trillion Hard banking assets of over $2 trillion Represented approximately 11% of global GDP in 2015 As traditional capital markets tighten, IF markets are options

DIFFERENCES FROM TRADITIONAL SHIP FINANCE Most ship financing today is rooted in interest-based financial instruments Commercial bank debt generally the foundation of the industry;

6 DIFFERENCES FROM TRADITIONAL SHIP FINANCE Most ship financing today is rooted in interest-based financial instruments Commercial bank debt generally the foundation of the industry; single-tranche loans, 50-75% asset value Lower debt to asset value for newbuilds Ex-Im Banks also often involved European and NY banks are active in the sector Contrasts Partnerships Securitization

APPLICATION: LET S BUILD A DEAL There is an IF instrument for each common maritime transaction Selecting the right instrument is important, as they are asset- and use-specific Get the right people

7 APPLICATION: LET S BUILD A DEAL There is an IF instrument for each common maritime transaction Selecting the right instrument is important, as they are asset- and use-specific Get the right people together for construction. Usually: Attorneys Bankers/Investment managers (depending on the instrument) The asset owners (shipowners in our case) Shariah auditor/islamic finance scholar Build the deal!

QUICK FINANCIAL INSTRUMENT OVERVIEW Six types for maritime trade Mudarabah Shared fund, similar to a hedge fund; manager paid only for performance Murabaha Similar to cost plus financing; very common

8 QUICK FINANCIAL INSTRUMENT OVERVIEW Six types for maritime trade Mudarabah Shared fund, similar to a hedge fund; manager paid only for performance Murabaha Similar to cost plus financing; very common for large assets and commodities Istisna Complex forward sale agreement; includes embeded murabaha usually (Newbuilding) Ijara Leasing Sukuk Islamic securitization, often misunderstood to be a bond Musharaka Total investment partnership; purest form under the Shariah An important note on asset ownership, securitization and use of istisna in priceswings

CURRENT UTILIZATION IN THE MARKET The deals are few, but increasingly banks are showing interest in shipping Initially, some general slowdown in IF may occur as oil prices slide, but long term health

9 CURRENT UTILIZATION IN THE MARKET The deals are few, but increasingly banks are showing interest in shipping Initially, some general slowdown in IF may occur as oil prices slide, but long term health of market is good The IF sector is likely to increase its interest in the maritime sector, as areas for investment become tighter There is more money than there are homes for it still Deals are often oversubscribed

10 PROMINENT DEALS DP World acquisition of P&O Nedloyd: $3.5 billion sukuk (2006; issued by DIB) Qinvest and Fortis Bank Nederland formed first Shariah compliant shipping fund (2009) Bnak of Tokyo purchased large LNG carrier using IF tools (2013) Abu Dhabi Islamic Bank now has special maritime finance division (2013) Zakher Maritime deal: $420 million complex deal structured by ADIB (2014)

11 THANK YOU FOR COMING Please contact me with questions or to continue the discussion Will Gregory

Tatagroprombank. Talk on Islamic Finance. Kazan -17 June Alberto G. Brugnoni - ASSAIF

Tatagroprombank. Talk on Islamic Finance. Kazan -17 June Alberto G. Brugnoni - ASSAIF Tatagroprombank Talk on Islamic Finance Kazan -17 June 2013 Alberto G. Brugnoni - ASSAIF CONTENTS OF THE TALK WHAT IS ISLAMIC FINANCE ISLAMIC MODES OF FINANCE AVAILABLE TO SMEs ISLAMIC TRADE FINANCE ISLAMIC