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July 2008 | ifr special report | 11 MIDDLE EAST LOANS ROUNDTABLE

that their financing is on a Shariah compliant basis and the bank market has accommodated this pretty well. There are lead banks that can structure and distribute this paper and there are now plenty of investors that can buy Shariah compliant paper too.

Grainne Molloy : Islamic structures were originally introduced to the project finance market as an important additional pool of liquidity. As the con- ventional banks became more active in the Islamic market generally, the pure Islamic institutions found themselves at a disadvantage in terms of tenor and pricing. However, as a result of the credit crunch, conventional banks have increased their pricing and reduced tenor, leading to a narrowing of the gap with Islamic institutions. This convergence will lead to further growth in this market. In addition, in certain ju- risdictions, a Shariah compliant product is what the borrowers require.

Gilles Franck : I think Islamic banks will continue to play a particularly important role in regional transactions or sectors that conventional banks or rather inter- national banks are either full on or more uncomfortable with. Real estate is one of those as is the second tier corporate market.

Raouf Jundi : The Saudi market is probably the most important, because there are im- plications for publicly quoted companies in terms of their share price, support, et cetera.

IFR: Is there a maximum deal size in the Shariah compliant market?

Rizwan Shaikh : Deal size is not a real constraint as most Shariah compliant deals have conventional banks participating also so the deal sizes are constrained by the overall market capacity for a particular issuer. In a sizeable deal, say US$2bn+, pure Islamic content may be 25 percent of that.

Declan McGrath : If you were looking for a guide as to how you might get larger percentages in Islamic and Shariah compliant financing, what they don't have at the moment is a kind of regulatory body at the top that decides what is Shariah compliant. There are so many degrees of difference in Shariah compliance depending on which jurisdic-

tion you are in - whether you are in Saudi Arabia or whether you are in Qatar - and they have individual scholars and these individual scholars have different opinions and one may agree and one may not agree.

There is talk that there are attempts to formalise or standardise an opinion set of various scholars so that they can get an overall regulatory position. Now whether that happens or not, I don't know. If they did it I think that would be good and that it would certainly help in the evolution of the market.

IFR: Are there any clients who would say, "We don't want the money if it isn't Shariah compliant"?

Rizwan Shaikh : There are definitely issuers who have a preference, or in certain cases, requirement to have all or a portion of their borrowing Sharia compliant. That has really driven the growth in this market. It is estimated that Islamic assets today are about $500bn, which is a growth of about 30 percent over last year. So it is a pretty rapidly growing market.

Peter Bulbrook : The product certainly sits well in acquisition finance structures, where we have seen Islamic loan structures and conventional structures that work well together. We've seen it before and that's going to be increasingly important as financing asks continue to grow.

Gilles Franck : There's hardly any situation where you lose some liquidity by adding an Islamic tranche. So you can only gain from it by getting the additional dollar.

IFR: But how much now is actually taken up by Islamic banks rather than European or international banks?

Gilles Franck : I think it is very dependent on whether it is a 50bps priced deal or a 150bps priced deal.

Declan McGrath : There are still significant question marks around the product. Whereas some people may be passing judgment in terms of scholars as to whether or not it is Shariah compliant, there are others who say, "Actually, it is not Shariah compliant". The degree of requirement from those Islamic banks dictates whether or not they will do the transaction. With some of them it has to be really the way they want it, otherwise they won't play.

IFR: What pricing levels do Islamic investors now require?

Declan McGrath : It depends on the tenors as well.

Gilles Franck : They don't like to go long.

Grainne Molloy : It is probably pretty similar to where conventional banks are now.

Raouf Jundi : I think the conventional lending price has gone up to where it now satisfies the Islamic lenders.

Rizwan Shaikh : Unless it is a really tight relationship-driven club situation, pricing generally across the board is now pretty much aligned for conventional and Islamic investors.

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