Making waves

16 December 2005
In late November, the board of UK port and ferry operator P&O announced unanimous recommendation of a $5,500 million takeover bid by Dubai's DP World. The move itself is audacious enough. But should the deal go ahead, it will also be a landmark in terms of financing. A hefty $2,800 million chunk of the funding will come from a planned issue of the Islamically structured sukuk instrument - making it the world's largest ever.

Islamic banking is one of the fastest growing areas of the global financial services sector. Demand and supply have happily combined and fed off one another, with the GCC and South East Asia as the twin and increasingly closely linked hubs. Fuelled by soaring oil revenues, the economies of the Middle East's oil-rich states are booming. Most of the business in the banking and financial services sectors remains conventional. Indeed, regulation of sharia-compliant financial services is still in its infancy throughout most of the region. But the combination of thriving economies and predominantly Muslim populations is helping to drive the increasing size and sophistication of the Islamic banking universe.

The DP World transaction is a case in point and also illustrates the supply side of the equation. The sukuk is being arranged by Dubai Islamic Bank (DIB) and Barclays Capital. DIB is one of the world's oldest Islamic banks, celebrating its 30th birthday this year, and has a close relationship with the Dubai government. Nevertheless, for a local bank to arrange a multi-billion-dollar international transaction, Islamically structured and of such magnitude, is groundbreaking. Most of all, it points to the growing sophistication of the GCC's banking industry - conventional and Islamic - as it rises to the challenge and opportunity of the economic boom. The presence of Barclays is also a sign of the times. A relative newcomer to Islamic investment banking, the bank's mandate signals the accelerating interest of the global heavyweights in the industry.

The interest of the international giants is helping to drive the sector's development, evident in capital markets transactions such as DP World's and in previous deals such as Qatar's $700 million sovereign sukuk in 2003. Alone, regional banks lack the placement capacity for such hefty issues. And investors looking at triple A-rated paper arranged by the likes of HSBC are unlikely to be concerned as to whether it is called a bond or a sukuk, as long as the price is right. Subscription to recent issues has been spread broadly between Islamic and conventional investors, and from within and outside the region. The split points to the growing appeal of Islamic finance in general: conventional investors and customers are becoming increasingly comfortable with the names and structures, while a new pool of participants is opened up.

The trend can also be seen in project finance. Islamic tranches in deals are increasingly common. Both the recent debt packages for the Shuaibah independent water and power project (IWPP) and Rabigh refining and petrochemicals scheme in Saudi Arabia contained Islamic components, as did the financing for the Sohar aluminium smelter in Oman, where the use of sharia-compliant funding is the first for the sultanate - the only Gulf state without indigenous Islamic banks. The structures allow the region's wealthy Islamic institutions to lend to the huge number of projects planned in the region. On the Shuaibah deal, for example, Al-Rajhi Banking & Investment Corporation underwrote the entire $225 million Islamic tranche, while the kingdom's $500 million Al-Waha petrochemicals project is being financed entirely Islamically.

At the same time, the main international lenders to the region have not been deterred by the trend towards Islamic financing. On the contrary, margins on recent Gulf deals have been so tight that regional institutions - Islamic and conventional - have b

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.