EBRD s Perspective on Islamic Finance

Transcription

1 EBRD s Perspective on Islamic Finance Jim Turnbull Associate Director, Head of DCM, LC2 Izmir - October 2018

2 Need of Global Infrastructure in Developing Countries ~$1 Trillion Investment Gap ~$1 Trillion Private Sector Investment ~$1 Trillion Public Sector Investment ~$3 Trillion Annual Infrastructure Investment Needs Source: EBRD, World Bank, Bhattacharya et al. (2012) 2

3 Leading Debt Providers in Turkey 2013 to 2018 Rank Lenders Transaction Size USD(m) 1 Deutsche Bank (DB),Ziraat Bankasi,Yapi Kredi,Vakifbank,Isbank,Halkbank,Garanti Ba Yapi Kredi,Vakifbank,Isbank,Garanti Bank,Finansbank,Akbank Ziraat Bankasi,Vakifbank,Halkbank,Garanti Bank,Yapi Kredi,Isbank Ziraat Bankasi,Vakifbank,Halkbank Halkbank,Finansbank,Garanti Bank,Isbank,Vakifbank,Ziraat Bankasi European Bank for Reconstruction and Development (EBRD) SERV,Eksport Kredit Fonden (EKF),Vakifbank,Kuveyt Turk Bank,Yapi Kredi,Isbank,Cr Akbank,Citigroup,Ziraat Bankasi,Yapi Kredi,Vakifbank,Isbank,Halkbank,Garanti Bank, Standard Chartered Bank PLC,Iyo Bank,Dai-ichi Life Insurance Company,Nippon Life I Yapi Kredi,TSKB,Isbank,Garanti Bank,Finansbank,Ziraat Bankasi The European Bank for Reconstruction and Development is one of the biggest lenders, supplying ~5% of total debt. Source: EBRD, Inframation 3

4 Constraints on the Future Supply of Long-term Funds for infrastructure development a) Traditional lenders ability to provide long-term finance is increasingly becoming constrained. (Bank deleveraging and BASEL III) b) Long-term financing rests on a very limited range of instruments: Source: World Bank Debentures (i.e. convertible) Term Loans Bonds Project Financing Leases Capital Notes c) Capital flows, domestic as well as cross-border, are currently driven by short-term, volatile lending. d) Financing in hard currency may be mismatched against the currency of the project revenue stream e) Fiscal consolidation in major economies is limiting the availability of government funding f) Growth in the importance of global investors such as pension funds issues of nationalisation can reduce viability of the domestic investor base 4

5 20 Largest Transactions 2013 to 2018 Rank Transaction Name Transaction Size USD(m) PPP 1 Istanbul Third Airport 7,289.2 yes 2 Gebze-Orhangazi-Izmir Toll Road (Final Phase and Refinancing) 4,950.0 yes 3 Canakkale Bridge 3,651.7 yes 4 Third Bosporus Bridge BOT 2,900.0 yes 5 Gebze-Orhangazi-Izmir Toll Road (Phase One) 2,800.0 yes 6 Northern Marmara Highway Project retender (Kurtkoy and Akyazi Section) 2,080.0 yes 7 Istanbul Ikitelli Health Campus PPP 1,745.0 yes 8 Salipazari Cruiser Port (Istanbul Galataport) Refinancing 1,558.7 no 9 Northern Marmara Highway Project retender (Kinali and Odayery Section) 1,490.0 yes 10 Ankara - Nigde Motorway 1,416.9 yes 11 Bilkent Integrated Health Campus, Ankara 1,222.1 yes 12 Etlik Integrated Health Campus 1,201.0 yes 13 Kirikkale Complex 926MW Gas Fired Power Plant 1,050.0 no 14 Efeler 170MW Geothermal Plant no 15 Kumport (65% stake) no 16 Mersin International Port (MIP) (40% stake) no 17 Izmir Bayrakli Integrated Health Campus PPP yes 18 North Marmara Motorway Additional Construction Financing yes 19 Istanbul Sabiha Gokcen Airport Amend & Extend (2017) no 20 Dalaman Airport Lease (2014) yes Source: EBRD, Inframation 5

6 EBRD Projects in Turkey Project Bilkent Laboratory PPP Ankara Etlik Hospital PPP Izmir Hospital PPP YDA Bond Project Dalaman Airport Concession Description Designing, constructing, financing, and maintenance of the facilities for the provision of products and services for TPHA and TPMDA. Designing, constructing, financing, and maintenance of an integrated health campus in Etlik, Ankara. Designing, constructing, financing, and maintenance of an integrated health campus in Bayrakli, Izmir. YDC is expanding its role as a concessionaire for development and operation of infrastructure assets und PPP arrangements. EBRD Finance A-loan of up to EUR 75 million and B-loan EUR 49.5 million. A-loan of up to EUR 100 million and B-loan EUR 115 million. A-loan of EUR 85 million and B-loan of up to EUR 230 million. TRY 40 million in the threeyear TRY 200 million senior unsecured bond. Transition Impact Source: EBRD Demonstration effect of new ways of financing, procuring and operating healthcare facilities by promoting the use of PPP contracting, and demonstrating good practice in international PP standards. Demonstration effect of better value all-in cost service than a public sector alternative. Setting new business standards by constructing a modern laboratory infrastructure based on international standards and monitoring quality. Development of the local currency capital markets and enhance corporate governance standards. Demonstration effect of new ways of financing by promoting the participation of untapped investor classes. 6

7 However, Challenges Remain Most problematic factors for doing business in Turkey Source: World Economic Forum (2017) 7

8 Can Sukuk be the Solution? Country of Issue Am ount Issued (USD) % Malaysia 201,421,181, % Eurobond Market 126,043,884, % Saudi Arabia 59,641,469, % United States 51,468,472, % Indonesia 30,050,542, % Qatar 12,354,763, % Pakistan 4,239,149, % Kuw ait 3,568,484, % Bahrain 3,277,256, % Turkey 2,941,884, % Bangladesh 1,120,564, % Oman 1,025,547, % Singapore 917,700, % Ivory Coast 533,859, % Brunei 467,420, % Nigeria 365,147, % Jordan 259,520, % United Kingdom 257,818, % Senegal 257,091, % United Arab Emirates 81,681, % Gambia 13,135, % France 11, % Benin % 500,306,588,377 More than half a trillion USD Sukuk outstanding. Over one quarter is issued in different currencies than what is being used in the entity s domicile. Malaysia: market share of over 40%. With ~$3 billion total amount outstanding, Turkey has a market share of under 1%. Cross border settlement issues? Source: EBRD, Thomson Reuters; as of August

9 Sukuk Issuance of Turkish Entities Domicile Turkey Sum of Am ount Issued (USD) Column Labels Row Labels Malaysian Ringgit Turkish Lira US Dollar Grand Total Ijara 2,437,039,123 7,000,000,000 9,437,039,123 Other / Complex Floating Rate 58,915,282 58,915,282 Pay at Maturity Fixed 874,140, ,140,431 Plain Vanilla Fixed Coupon 1,503,983,410 7,000,000,000 8,503,983,410 Islamic Sukuk (Other) 174,255,410 2,500,000,000 2,674,255,410 Plain Vanilla Fixed Coupon 174,255,410 2,500,000,000 2,674,255,410 Mudaraba 118,000, ,000,000 Plain Vanilla Fixed Coupon 118,000, ,000,000 Murabaha 283,064, ,590, ,000,000 1,463,655,330 Plain Vanilla Fixed Coupon 283,064, ,590, ,000,000 1,463,655,330 Wakala bil istithmar 195,217, ,000, ,217,178 Plain Vanilla Fixed Coupon 195,217, ,000, ,217,178 Grand Total 478,282,087 2,941,884,954 10,968,000,000 14,388,167,041 76% of total amount outstanding issued by Turkish institutions and companies are denominated in USD Source: EBRD, Thomson Reuters; as of August

10 Sukuk Challenges and Prospects Challenges a) Standardization: issues of riskmanagement, accounting, and governance standards. b) Insolvency Frameworks: no reliable mechanism for dealing with Sukuk defaults. c) Tax Treatment: parity between taxation on Sukuk and conventional bonds must be established. d) Adequate Liquidity: underdeveloped market because transactions tend to be lengthier, costlier, and more complex. e) Sound regulation: essential for a wellfunctioning financial sector. Source: EBRD, World Bank Prospects a) Internationally recognized standard-setting bodies (i.e. AAIOFI, IFSB) are already trying to overcome standardization issues. b) Rating on Sukuk has improved, however, a uniform resolution regime is not in sight and may prove challenging c) Some countries (i.e. Malaysia, Thailand) took measures regarding the equal tax treatment of conventional bonds and Sukuk. d) Different instruments for different circumstances exist but investors as well as issuers are not aware of them. e) Conventional banks and Islamic banks are chartered and supervised separately, effectively banning conventional banks from issuing or handling Sukuk. 10

11 The EBRD s Perspective on Sukuk Sukuk are The EBRD is a long-term investment instrument. a perfect fit for infrastructure investing activities due to its long tenors. designed to spread the risk evenly as both investors and issuers share in comparable risk-return profiles. similar to PPP financing. an investor with a long-term horizon. one of the leading infrastructure investors in Turkey. interested in sharing the risk evenly among the investor base. actively supporting PPP and PPPsimilar schemes. To achieve the goal of successfully supporting Sukuk financing, the EBRD has already started to review its business approach to Islamic Finance across the operational departments of the Bank and assess the application of sukuk instruments within future infrastructure financing activities. The Bank also plans to engage more directly with international and domestic Islamic investors to develop suitable products Source: EBRD, World Bank 11