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Islamic syndicated finance is a collaborative funding approach involving multiple financial institutions that abide by Shariah principles. It mirrors conventional syndicated finance in terms of having a lead bank overseeing the process, but the critical distinction is the prohibition of interest-based financing. Instead, Islamic syndicated finance relies on the exchange or leasing of tangible assets.
The key advantages of Islamic syndicated finance are its capacity to facilitate high-value transactions for lenders and its potential to reduce costs and save time for borrowers. Compared to Sukuk issuances, the documentation requirements are simpler. However, this form of financing is typically best suited for short- to mid-term needs, spanning one to seven years, making it less suitable for long-term financing.
Islamic syndicated finance operates on two tiers: one for defining the relationship between participating banks and the lead bank, and the other for detailing the financing structure for the borrower via the lead bank. The relationship between participating banks and the lead bank can be structured using Wakalah or Mudarabah. In Wakalah, participating banks act as principals, while the lead bank acts as the agent. In the Mudarabah structure, participating banks appoint the lead bank as the Mudarib, or manager.
While both structures are similar in operation, the Wakalah structure is increasingly favoured due to specific applications of agency laws, tax considerations, and the fact that in
Mudarabah, the Mudarib shares in the profits but bears the losses solely. The choice of structure should depend on a careful evaluation of these factors.
The benefits of Islamic syndicated finance extend to both participating financial institutions and borrowers. It allows financial institutions to engage in high-value transactions that may be otherwise inaccessible due to factors like risk exposure limitations, regulatory constraints, or the need for portfolio diversification. For borrowers, it translates into reduced costs and less time spent preparing extensive documents compared to Sukuk issuance.
The choice between Wakalah and Mudarabah structures for the relationship between participating financial institutions and the lead bank should be based on transaction-specific circumstances. While Mudarabah had an early presence in the industry, the Wakalah structure offers several advantages in today's context.
Islamic syndicated finance offers a solution for financial institutions and borrowers to adhere to Shariah law while accessing the capital required for their objectives. It promotes ethical and socially responsible practices in line with Shariah principles. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOFI) Standard allows both conventional and
Islamic financial institutions to participate in syndicated financing, provided it adheres to Shariah-compliant forms. Appointing a conventional bank to lead the syndication is acceptable only if the contracts, projects, and modes of financing comply with Shariah principles. Effective oversight under the guidance of Shariah supervisory boards is recommended, with the formation of a joint committee to make binding decisions for all parties.
In summary, Islamic syndicated finance provides a Shariah-compliant alternative to conventional syndicated finance. It enables multiple financial institutions to participate in high-value transactions, saving borrowers time and money compared to Sukuk issuance. The choice between the Wakalah and Mudarabah structures offers flexibility to both parties, and it should be based on the specifics of the transaction. Ensuring adherence to Shariah principles and proper oversight is crucial.
As reported by Gulf News, the Islamic finance industry has grown substantially in recent years, with Islamic syndicated finance emerging as a viable alternative to conventional syndicated finance. Its emphasis on ethical and socially responsible practices positions it well to serve a broad range of financial institutions and borrowers amid a rapidly evolving economic landscape.
The author is the Managing Director & CEO of National Bank Limited. He is a fellow member of the Institute of Cost & Management Accountants of Bangladesh (ICMAB) and the first Certified Sustainability Reporting Assurer (CSRA) in Bangladesh. He is also a post-graduate diploma from the Institute of Islamic Banking & Insurance (IIBI), United Kingdom.
Messenger/Disha
