17 May 2006
The Department of Civil Aviation (DCA)'s recent Ijara transaction of Dh1 billion is our new subject of discussion.
The subject could not have been more timely since the readers may have come across another Ijara transaction concluded this week.
It is the $500 million Enoc Processing Company Limited (EPCL) Ijara facility whereby in a co-financing environment the syndicate of Islamic and conventional banks have purchased the existing refinery situated at Jabel Ali and have leased the same back to EPCL.
The banks who participated in this prestigious transaction were Dubai Islamic Bank as the lead arranger and underwriter, Gulf International Bank, Standard Chartered Bank, Mashreqbank, Societe General, Arab Bank, Bank of Bahrain and Kuwait and Qatar National Bank.
As with the DCA Ijara facility, I got the opportunity to work with the Sharia Board of Dubai Islamic Bank on this transaction as well for structuring, documentation and issuance of the formal fatwa (Sharia pronouncement) endorsing the transaction to be fully Sharia compliant.
Compared to DCA, the EPCL Ijara has a slightly different dimension to it.
Whilst in DCA, the purchase price was required to be paid by the syndicate of purchaser banks in lump-sum, the EPCL sought the sale proceeds of its refinery to be paid to it by the banks in six installments of different amounts ranging from $57 million to $148 million.
This testifies to the diversity of Sharia to suit varying financial requirements of different parties.
Whilst we all know, the capacity-expansion work at Dubai International Airport is in full swing - needing regular injection of large funds, the upgradate and transformation job at EPCL's refinery has just begun where the funding needs would be gradual and in a phased manner.
The existing refinery is a decade old plant which formally commenced production of jet fuel, fuel oil, liquefied petroleum gas (LPG), naphtha and diesel oil in the year 1999.
The upgradate and transformation of the refinery would enable it to also produce high octane reformate which is an important element of motor gasoline and jet fuel. The above strategic expansion once completed would enable the Enoc Group to ensure regular supply to its wide network of petrol stations in Dubai and the Northern Emirates besides feeding the ever expanding Emirates airline fleet.
The conclusion of two large Ijara transactions aggregating $1.5 Billion within the space of 2 weeks convey that the Islamic finance has come of age in the UAE. The important trend to note is that the Islamic finance is now playing a big role in the national development projects.
Furthermore, it seems in order to state that this ethical financing mode is fast catching the attention of the financial institutions from around the world, a fact which is represented by the diverse range of the banks who participated in both the transactions.
Last week we dealt with the basic concept of Ijara or leasing and came to grip with the Sharia terminology, however, for ease of reference the English terms will be ed to explain Ijara.
We learned that literal meaning of Ijara is to acquire something on rent and that Ijara is classified under Sharia as a sale contract whereby the provider of the Ijara service (or Aajir) is seller and the one acquiring it i.e. Mtajir is the buyer and the subject matter of sale is the usufruct or the right to benefit from the asset for a certain period of time without the lessor having to part with the title to the asset.
In the ordinary course, an Ijarah contract is executed between the lessor and lessee for an asset already owned by the lessor.
However, in the banking environment the customer usually requests an institution to acquire the asset which the customer wishes to take on lease from the institution.
The asset may be owned by a third party or by the customer itself.
It is also permitted under Sharia that the customer seeks the bank to acquire merely a usufruct of an asset from a third party for a certain period of time and sub-lease it to the customer.
- The author is Vice-President and Head of Sharia Structuring, Documentation and Product Development, Dubai Islamic Bank.
By Sohail Subairi
Gulf News 2006. All rights reserved.
