LONDON, 4 September 2006 -- Another sign of the creeping globalization of Islamic finance is the first commodity Murabaha (cost-plus financing) facility arranged last week for a Russian institution by an Islamic bank. UK-based global trade finance group, CCH International, through its German subsidiary, CCH Europe GmbH, has arranged a debut $20 million Murabaha facility for Globexbank in Moscow financed by an unnamed GCC-based Islamic bank.

"This is the first Murabaha facility," confirmed Eren Nil, managing director of CCH International, "extended to a Russian institution by an Islamic bank. Islamic financial institutions have virtually no exposure to Russian risk and therefore the market is of great interest to CCH. Given the size of the Russian market and its need for liquidity, we are confident of arranging further Shariah-compliant transactions for Russian institutions in the future."

The facility, which is guaranteed by Globexbank, is being used to supply and sell goods at an agreed price, plus a profit markup, to a client of the bank. CCH Europe, according to Eren Nil, acted as the agent for the GCC-based Islamic bank, and issued "the amount of the Murabaha facility and is the beneficiary under a Standby Letter of Credit (LC) issued by Globexbank".

The first two draw-down payments totaling $15 million have already been made, with the last draw down due during September. CCH International in the last few years has also built a thriving Islamic finance business including arranging Murabaha, Ijara (leasing) and Istisna'a (construction finance) facilities for clients. Its core offices are in the UK, Germany and Bahrain. The company also boasts one of the largest e-brokerage platforms in the world offering a range of financial products mainly aimed at raising finance or to sell trade receivables.

Earlier this year, CCH International, which is listed on the Alternative Investment Market (AIM) in London, co-arranged with the Sydney-based Convergence Capital, another first in global Islamic finance -- an 80 million Australian dollar Murabaha facility for Bill Express Limited (BXP), a publicly-listed Australian company which is one of the largest electronic retail distribution networks, supplying electronic product distribution, payments processing and in-store promotional media.

According to Eren Nil, the facility has the potential to significantly increase the amount of receivables purchased by CCH over the next four years; and several more such facilities are under discussion with BXP and other potential Australian clients. CCH, through its German subsidiary, in April also arranged a $30 million Islamic export finance facility for Turkey's largest hazelnut exporter, Basaran Gida Ticaret ve Turism Isletmeleri. CCH had arranged its first such facility for $12 million for Basaran in 2003.

The facility for Globexbank comes at a time when Russia is opening up to the Organization of Islamic Conference countries and to Islamic banking in general. Following Russia's successful application to become an observer member of the OIC last year, Moscow is also keen on becoming an observer member of the Jeddah-based Islamic Development Bank (IDB).

The IDB and Russia have good reasons in maintaining cordial relations because of the Russian Federation's 30 million-or-so Muslim population, mainly in the Muslim-dominated republics in the south and the Urals region, and because Russia is a growing trading partner of many IDB member countries. In fact, President Putin sent a special observer to represent Russia at the extraordinary OIC summit held in Makkah in December 2005.

During the summit some key decisions were taken including new measures to promote trade and investment of IDB member countries; and ways of alleviating poverty and promoting global Islamic finance. OIC Secretary-General Ekmelleddin Ihsanoglu visited Moscow for follow-up talks in June.

Earlier this year, the Russian central bank set up an Islamic finance advisory committee comprising representatives from Putin's Office; the Ministry of Foreign Economic Affairs; the economics department of the Foreign Ministry; and representatives from the Russian banking sector. The aim is to familiarize the various departments of state with Islamic banking and finance; and to "demystify" the phenomenon to the officials.

Bankers in Russia stress that there is huge potential for Islamic finance, especially trade finance, given that Russia exports and imports to many IDB member countries. Some small ad hoc trade finance transactions such as importing palm oil from Malaysia and prawns from Bangladesh have already been financed Islamically in the past. Similarly, Russian companies vying for projects in the IDB countries, have used Shariah-compliant facilities including performance bonds on an ad hoc basis.

However, the Russian regulatory authorities need to familiarize themselves with Islamic banking and finance contracts and processes, if the country is keen to leverage an industry, which is estimated to have funds under management of over $600 billion.

With the high liquidity in the Middle East due to the high oil prices, Islamic finance like conventional banking is looking for new markets and asset classes to finance and to invest in. Russia as a major oil and gas producer, one would have thought, has natural synergies with the IDB member countries and with Islamic finance.

By Mushtak Parker

© Arab News 2006