gif World Islamic Finance Review
Project. Under the terms of Phase agree- ment, the Sohar Aluminium Project company (the company) undertakes to develop the Is- lamic financed assets (including certain gas turbines, generators and electrical trans- mission equipment) on behalf of a special purpose company (SPC) owned for and on behalf of the Islamic participants by the Is- lamic facility agent.
The Company undertook to develop the Is- lamic financed assets in accordance with the specifications of the EPC and EPCM construction contracts (the company was permitted to subcontract such obligations to another person) and to arrange for delivery of such assets on or before a specified com- pletion date. When the Islamic financed as- sets are delivered to the company in accord- ance with the foregoing requirements, title to (and possession of) such assets passes to the SPC (Islamic Finance News).
At the same time as entering into the Isti- snah agreement, the company entered into a lease agreement (Ijarah fi lZimma) with the SPC for the operational phase of the project (the period following delivery of the Islamic financed assets to the SPC pursu- ant to the Istisnah agreement until a date equivalent to the final maturity date under the commercial bank tranche). Under the lease agreement, the company leases the Islamic financed assets from the SPC in re- turn for lease payments (comprising of a fixed and a variable element).
The lease payments under the lease agree- ment are broadly equivalent to the princi- pal and interest payments under the com- mercial bank tranche and are made at the same times as the equivalent payments under the commercial bank tranche( Is- lamic Finance News).
The table above shows the Islamic financial system that was utilised and implemented in the Sohar Aluminium Smelter Project Is- lamic Finance Facility. Rental payments are made to the Islamic SPC who then gives the lease of assets to the company and the title to assets reverts at the end of the lease. The project was a huge success in the development of utilising Islamic financial methods such as Ijara and Istitnah for an un- precedented project which showed Oman’s scope for further diversification of the Islam- ic financial industry.
The Market Appetite for Islamic Fi-
nance in Oman Although there has been a recent move- ment in enthusiasm for Islamic Finance in Oman the previous standstill in Islamic finance in the country has delayed the country in becoming a potential Islamic
62 Global Islamic Finance October 2010
725 750 775 800
700 675
2006 2007 2008e 2009f 2010f
financial hub. However there is still scope to make the Sultanate of Oman a thriving Islamic financial hub as interest is rapidly approaching and many financial institutions are tapping into Shariah compliant markets. Khalid Ahmed Alhosni, Managing Director & CEO, InfoMart (Commercial Information Market LLC), Muscat, feels the market appe- tite has always been there. “Call it Islamic fi- nance or traditional funding, corporates need funds. Many companies in Oman would like to avail themselves of Islamic Finance, “says Khalid (OER Online). Rajeev Singh, Partner at Ernst & Young in Oman said in a state- ment that, Has IF arrived in Oman? “I think it has definitely arrived,” argues Rajeev. “It
120% 150%
60% 90%
30% 0%
Below 100% Source: DNB Country Risk Above 100% 129% 129% 113% 103% 93% 80%
has been a force in the region for some time. Oman government has been very pragmatic in consciously trying to avoid linking reli- gion with business. We understand that the regulator doesn’t have a problem if you have these (IF) products without specifically mar- keting it under that tag. IF transaction and lending has been taking place in Oman for the past few years, but quietly, and without a lot of publicity. But businessmen continue to use that. It’s now a way of life in the Mid- dle East.
”(OER Online). Mr Singh further highlighted that a big development for Islamic banks is that while in the past it was confined to re- tail business, and later corporate, the recent times have seen the arrival of the Islamic component for project finance. “You now see sizeable Islamic Finance components form- ing part of project finance tranches. Anything between 20 per cent and 35 per cent of project finance transactions now comprise of Islamic tranches,” he informs.
Rental Payments
Islamic SPC
Lease of Assets- Ijara
Company
The above graph shows the scope for Is- lamic retail banking which is set to see a significant rise by 2012 to over $500 bil- lion dollars. Although Oman did not make active measures to tap into the market or amend regulations which would allow Is- lamic retail banking products and services the scope has only seen a significant dra- matic rise in recent years and there is still time to unearth the Islamic financial sector in Oman. Many of Oman’s industries such as crude oil could utilise Islamic financial investment methods as the market is set to increase.
Title to assets reverts at end of lease
Countries
Number of Islamic Finance Deals
Oman Kuwait Qatar UAE
2
15 24 41
Saudi Arabia 46
Value of Deals US$ Million
345
5148 4088
15,655 28,537
Source : Islamic Finance Information Service in 2008
The graph below shows the increase in the industry of crude oil in Oman which could utilise Islamic financial methods to further diversify the sector and help to accommo- date growing industries in Oman such as oil.
The Sultanate of Oman over the years have emphasised the fact that they rather not mix religion with business and therefore try avoid market branding of Shariah compli- ant products as Islamic although there may be some financial institutions in Oman who wish to adopt Islamic methods of financing. The marketing of Islamic financial products in Oman bears a problem in terms of liquidity as the primary market is low. Khalid CEO fur- ther highlights the example of Sukuk (Islam- ic leasing bonds), which has done extremely well in the primary market. In the second- ary market, Sukuk has the attractive- ness but not the liquidity. Khalid further outlines the prospect of Islamic Finance in Oman looks bright in the short-term. Petrodollars have made the market more attractive. “But only when the secondary market sees transactions taking place,
Penetration(% of Population
United Arab Emirates
Qatar Bahrain
Kuwait Saudi Arabia
Oman
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88