This paper discusses station 2008 recognition crunch financing developments in the Middle East power and H2O market. With so much occurrence in the part finance is a cardinal linkage in this relationship, and this is touchable in many ways particularly post 2008 recognition crunch doing commercial debt publishing Bankss hold back from puting in such brave undertakings taking to more engagement of local sharia law compliant Islamic Bankss which are less structured, less capital intensifier and have their ain assorted drawbacks.
While non seeking to supply a full reply, the purpose of this paper is to analyze to what extent the type and handiness of finance be able to get by with lifting demand ; hence, an obvious inquiry for GCC power sectors appears to be whether these local Islamic Bankss which are easy and steadily acquiring their clasp into undertaking financing these monolithic undertakings with the sort of financess available at present along with their short approachs which will be discussed in item in the undermentioned chapters be able to run into the lifting demand.
1.1 What are Independent Water and Power Producers/Projects ( IWPPs ) ?
IWPPs are nonutility power-generating entities that typically sell the end product which is H2O and power to electric public-service corporations and H2O storage installations or big users at sweeping monetary values ( Safwat 2007 ) . IWPPs are improbable to be franchised to administer electricity or to have transmittal lines for conveying their generated power ( Safwat 2007 ) . The IWPPs normally sell their green goods under a power and H2O purchase understanding ( PWPA ) with the incumbent public-service corporation which is normally the authorities bureau, the individual buyer, or big clients ( Safwat 2007 ) . It is common to see the take the signifier of build own/operate transportation ( BOT/BOOT ) , which permits an investor to “ construct, ” “ ain, ” and “ operate ” the coevals installations and so “ transportation ” them to the host buyer upon the expiration of the contract ( Safwat 2007 ) . In to the full restructured markets, IWPPs may besides run on a strictly commercial footing in which generators can offer their production in the day-to-day sweeping energy markets. In either instance, there is a silent premise that the IWPPs are assured entree to the transmittal system on a nondiscriminatory footing ( Safwat 2007 ) .
Historically in the United States, public-service corporations have operated under a regulated environment ( Safwat 2007 ) . Under this government, a municipal, concerted, or in private owned company had a monopoly on the supply of electricity to all clients in a specific part or country ( Safwat 2007 ) . Customers paid duties set by regulative organic structures that used reappraisal processes that basically allowed the public-service corporations to gain set returns above their sensible costs ( Safwat 2007 ) . As a consequence of deregulating in several industries in the 1980s electricity ordinance was criticized, and claims of big inefficiencies in the electricity industry were voiced ( Safwat 2007 ) . Assorted moves to encourage/introduce inducements for the untraditional coevals started to come approximately. For case, in cogeneration workss where a manufacturer in an industrial/ agricultural scene could bring forth electricity, the public-service corporation functioning the country where the manufacturer built the works would be obliged to purchase the excess electricity that the manufacturer generated under set regulations ( Safwat 2007 ) . The tendency expanded, and the little cogeneration workss got bigger and distribute across the state, accompanied by alterations in province Torahs. These led to the debut of Independent Power Producers or IPPs that would chiefly bring forth electricity for sale as their chief concern ( Safwat 2007 ) .
Outside the United States, the liberalisation of the economic systems of assorted states led to a tendency of switching electric public-service corporations from public ( authorities ) ownership to a private or assorted ( government-private ) ownership construction.
In the GCC part, because of the deficiency of H2O, the outgrowth of independent H2O and power manufacturers ( IWPPs ) is noted. The IWPPs have grown to megaprojects affecting large-capacity “ power and saltwater desalinization. “ IWPPs are a comparatively new phenomenon in the GCC. Up until the mid-1990s, power workss in the part were entirely financed and developed by authoritiess and government-backed corporations ( Booz & A ; carbon monoxide, 2010 ) . Then, in 1996, the 270-megawatt Al-Manah power works in Batinah, Oman, became the first power works to be financed, built, and operated by the private sector ( Booz & A ; carbon monoxide, 2010 ) . Six old ages subsequently, the part ‘s first operating IWPP, the 710-megawatt Taweelah A2, opened in Abu Dhabi ( Booz & A ; carbon monoxide, 2010 ) .
Since those initial raids, IPPs and IWPPs have proliferated across the part, spread outing to Qatar, Bahrain, Saudi Arabia, and late Kuwait and Dubai. Across the GCC, more than two twelve IPPs and IWPPs are now in operation, with a combined installed capacity of 20 gigawatts, in add-on to the many confined power workss dedicated to functioning specific industrial users ( Booz & A ; carbon monoxide, 2010 ) . Current enlargement programs will more than double the part ‘s IPP and IWPP capacity over the following five old ages, conveying the in private developed portion of aggregative electricity coevals to about 34 per centum ( Booz & A ; carbon monoxide, 2010 ) .
It is noted that electricity service involves three basic elements: coevals, transmittal, and distribution. This subdivision is concerned chiefly with coevals ( i.e. , the IWPP is portion of electricity coevals ) . An IWPP physiques and operates a coevals plus, and the electricity generated flows through other transmission/distribution systems owned/operated by others to make the terminal consumers: majority users such as big industries, industrial/commercial users, and families. To understand this better it is of import to cognize the cause of birth of IWPP construct and its hereafter in the GCC part.
1.2 Future Tendencies
It is of import to observe what hereafter holds for IWPPs in the part in order to develop the funding techniques. After Second Oil Boom, Gulf Cooperation Council ( GCC ) states consisting of the United Arab Emirates, Qatar, Saudi Arabia, Oman, Bahrain, and Kuwait have achieved an norm sustained growing of about 6 per centum yearly, therefore doing the part one of the healthiest economic part in the universe ( The Electricity Journal, 2009 ) . In May 1981 with purpose to spread out and beef up the political, economical, and societal ties with in the part, the GCC states initiated programs for energy-intensive industries such as petrochemicals, steel, aluminum, and cement, along with heavy investing in existent estate and touristry sectors ( The Electricity Journal, 2009 ) .
Harmonizing to Water Industry Segment Report, 2011, monolithic variegation program from oil and gas production to other industrial apparatus has created an excess demand of power and H2O installations, it is estimated the power sector in GCC has a demand that is turning at 5-7 % yearly. To run into the increasing demand ; new power workss with increased efficiency, improved transmittal systems and new energy beginnings are required. GCC provinces have 146 GW of installed electrical capacity, a farther 120GW of new capacity and 30 GW of replacing capacity will be required from 2005-2020 ( Water Industry Segment study, 2011 ) .
The part besides depends to a great extent on H2O for agribusiness which comprises 85 % of its H2O usage so battling the continued drying of the land mass will be a precedence ( Water Industry Segment study, 2011 ) . The clime will go desiccant and hotter with less rainfall and increased drouths. Water deficits will be experienced by 80-100 million people before 2025 ( Water Industry Segment study, 2011 ) . This puts H2O supply on top of the docket for the part ‘s leaders. Due to recent substructure investings, H2O supply has increased to let 75 % of the part ‘s population entree to clean H2O and improved sanitation ( Water Industry Segment study, 2011 ) . GCC already leads the universe in desalinization engineering. The part will necessitate 6 % per twelvemonth H2O supply addition from desalinization workss ( Water Industry Segment study, 2011 ) . Electricity sector in the part has been meeting exponential growing therefore necessitating about $ 100 billion worth of investings to run into growing projected over the following 15 old ages ( The Electricity Journal, 2009 ) . The current demand for electrical power in the GCC states is about 70,000 MW and is expected to treble over the following 25 old ages ( The Electricity Journal, 2009 ) .
In recent old ages, the power and H2O sector is sing an unprecedented growing and big investings due to the increasing demand for electricity and drinkable H2O throughout the part and the desire of GCC authoritiess to spread out their economic systems and diversify from oil ( Loren et al, 2000 ) . This demand for electricity and H2O has fueled the thrust towards denationalization and the growing of independent H2O and power undertakings ( or “ IWPPs ” ) .
1.3 Fiscal Development
The denationalization plans that are being developed and implemented in the GCC provinces by and large possess similar schemes. These policies are characterized by a gradual, regulated passage of state-owned coevals and distribution activities to private ownership ( Loren et al, 2000 ) . The development of new, green field independent H2O and power undertakings is normally the first measure in the denationalization of the power sector ( Loren et al, 2000 ) . Often, authoritiess faced with serious H2O and power deficits turn to IWPPs foremost because they are the simplest and most efficient method for making new electricity and drinkable H2O supply ( Loren et al, 2000 ) .
IWPPs are booming in the Middle East as a consequence of electricity and H2O sector restructuring attempts, betterments in foreign investing Torahs, and the development of investor-friendly legal and regulative governments.
As the IWPP market continues to turn and develop, financing constructions for these undertakings are besides germinating. In the past twelvemonth, elegant and aggressive constructions more typical of Western European fundings were used and the parts have been really successful in implementing it in order to accomplish their mark ( Loren et al, 2000 ) . Reports published by Natural Gas and Electricity Journal, 2009, states that in recent twelvemonth this success has been underwritten in big portion by international commercial Bankss non eager to impart to the sector. The go oning recognition crunch has changed this state of affairs drastically, and the decreased handiness of commercial debt is endangering the part ‘s ambitious power enlargement programs and the development of future undertakings. As a consequence of the decreased handiness of commercial bank debt for power undertakings in the part, the overall cost of undertaking debt has increased and tenors, i.e. , the length of clip over which the loans are repaid, have shortened, motivating patrons to finance undertakings on less favourable footings and to seek auxiliary beginnings of funding, such as export recognition bureaus ( ECAs ) and regional Islamic Bankss. These sophisticated funding constructions are likely to distribute to other states in the part as investors gain more comfort and exposure to the part as a whole.
Chapter 2: Literature Reappraisal
2.1 Overview of Project finance and Islamic finance
Large scale industrial substructure or existent estate undertakings present alone funding challenges. It requires mobilising necessary resources through equity investors which is frequently the patrons of the undertaking and the handiness of debt funding normally on non-recourse or limited recourse footing ( G. VINTER, 1998 ) . The non-recourse party or the loaner will merely look to the hard currency flow of the undertaking for the refund of their loan. This type of funding is highly rare. Limited resort funding, is normally the general regulation, the loaners considers the net income grosss, borrower ‘s portions in the undertaking company and the assets of the undertaking in order to refund their loans if the borrower fails to follow with its fiscal duties to the loaners ( G. VINTER, 1998 ) .
Brigham, 2005 defines Project finance as the funding of long-run substructure and industrial undertakings based upon a complex fiscal construction where undertaking debt and equity are used to finance the undertaking. Normally, a undertaking funding construction involves a figure of equity investors every bit good as a mob of Bankss that provide loans to the operation. The loans are most commonly non-recourse loans, which are secured by the undertaking assets and paid wholly from undertaking hard currency flow. The funding is typically secured by all of the undertaking assets, including the revenue-producing contracts. Undertaking loaners are given a lien on all of these assets and are able to presume control of a undertaking if the undertaking company has troubles following with the loan footings.
By and large, a particular purpose entity is created for each undertaking, thereby screening other assets owned by a undertaking patron from the damaging effects of a undertaking failure. As a particular purpose entity, the undertaking company has no assets other than the undertaking. Capital part committednesss by the proprietors of the undertaking company are sometimes necessary to guarantee that the undertaking is financially sound.
The construction of a undertaking funding is frequently rendered instead complex due to the engagement of a battalion of local and international parties such as investors, undertaking companies, loaners, building and operating companies, users, legal advisers, insurance companies, and sometimes authoritiess in BOT constructions. The complexness of funding constructions and the multiplicity of participants are a beginning of a battalion of hazard factors that requires a organic structure of assorted understandings and paperss in order to place these hazards and to apportion them between the concerned spouses in the undertaking. Regardless the common desire of all these participants to maximise predictability, stableness and success of the undertaking, the nature of their involvement is different, sometimes contradictory. Mc Millen is of the position that “ each party will take part in the undertaking financing dealing bound by their existing institutional perceptual experiences and patterns with regard to such affairs as hazard allotment, hazard coverage, subventioning standards and accounting intervention ” ( MC MILLEN, 2007, Handbook of Islamic Banking, p 202 ) . Everyone in his forte and after his position point examines the undertaking and seeks to observe the slightest hazard to non accept and back up without holding decently assessed ( TOLEDO et al, 2002 ) .
Many of the mega undertakings that incorporate Islamic funding usage it in the manner of tranches. A tranche is a piece, part or piece of a trade or structured funding. It is a term frequently used to depict a specific category of bonds within an offering wherein each tranche offers changing grades of hazard to the investor.28 The major benefit of tranches is that they allow the ability to make one or more categories of securities whose evaluation is higher than mean evaluation of underlying indirect plus pool. This is accomplished through the usage of recognition support specified within the dealing construction to make securities with different risk-return profiles. Tranching can besides be helpful for investors who invest in extremely rated securities as they ‘re able to derive exposure to plus categories, such as leveraged loans, whose public presentation across the concern rhythm may differ from that of other eligible assets. So basically, it allows them to foster diversify their portfolio.
Islamic funding is plus backed, which is why undertaking finance lends itself good to integrating Islamic finance constructions. And therefore, it is going progressively common today to include Islamic tranches in funding constructions where Islamic Bankss come alongside conventional Bankss, multi-national development Bankss and export recognition bureaus. Typically, 70 per cent of the cost of an plus or a undertaking would be met with conventional bank funding, while 30 per cent of the financess would come from an Islamic tranche.
Surely, the success of undertaking funding is based on the interweaving of the accomplishments of undertaking participants, their teamwork and a planetary contemplation on the construction of funding, the costs of the undertaking and hazards to be taken by the assorted undertaking participants.
Co-financing including Islamic tranche, as opposed to to the full funded undertakings on a Sharia compliant footing, is the most often encountered constructions capable to accommodate different fiscal attacks. These constructions will let both investors, Islamic and conventional, to run within a context of predictability, stableness and certainty that is acceptable to all parties.
It is of import to understand the basic implicit in construct of Muslim finance:
2.2 Principles of Islamic Finance
Before discoursing the activity of Islamic funding in undertakings, a brief reappraisal of
Islamic fiscal principals would be helpful.
The Islamic economic system is based upon the Shari’a. It is the traditional Islamic jurisprudence that is derived from the instructions of the Quran and the Sunna ( the pattern of the prophesier Mohammed ) . The intent of Shari’a is to steer all facets of a Muslim ‘s life. Like many spiritual civilizations, Islam did non separate between spiritual and secular life. Hence Shari’a covers spiritual rites and besides many facets of political, societal, domestic and private life. Following is a brief description of the most of import, non all, rules in Islamic finance.
2.1.1 Cardinal constructs of Islam
Harmonizing to Islamic Shari’a, there are five necessities that guarantee single and societal public assistance in this life and the afterlife. The Shari’a protects these five necessities in two ways: foremost by guaranting their constitution and so by continuing them. The wealth and the enterprises of adult male are to be utilised positively in fulfilment of his duties to Allah to continue the Maqasid Al Shari’a as explained by Imam Shatibi as follows
Preservation of faith: the responsibility to esteem the Godhead beginning of truth to steer human idea and action, the acknowledgment and credence of Allah and the duty of using the dogmas of the Holy Quran in all facets of human life.
To guarantee the constitution of faith, Allah has made belief and worship obligatory. To guarantee its saving, the opinions associating to the duty of acquisition and conveying the faith were legislated. This responsibility provides the foundation for the undermentioned five duties. Funding undertakings in an Muslim manner therefore becomes imperative for Muslims, so that they abide by the regulations and bounds set by Allah and His courier and act consequently.
Life: includes regard for life, Haq al haya. To guarantee the saving of human life, God Most high legislated for matrimony, healthy feeding and life, and forbid the pickings of life and laid down penalties for making so. The prosperity and good being of a state is therefore determined by the undertakings that are being undertaken for a better and economically sound life for all.
Mind: God has permitted that sound intellect and cognition be promoted, and forbidden that which corrupts or weakens it, such as intoxicant and drugs. He has besides imposed preventive penalties in order that people stay off from them, because a sound mind is the footing of the moral duty that worlds were given. Highly educated and skilled Moslems have ever played an of import portion in the economic system of many states. It is critical for them to work and endeavor for the improvement of the whole state and therefore work on undertakings that benefit the people and besides in a halal manner.
Wealth: the responsibility to esteem the rights of private belongings in the agencies of production which requires establishments to broaden entree to capital ownership as a cosmopolitan human right and as an indispensable agencies to prolong regard for the human individual and human community i.e. right to prosecute economic involvements. By funding undertakings in an Islamic manner non merely helps the society as a whole but it besides helps to maintain the wealth of Muslims within the part ( inject money locally ) for both development of the states and their economic systems.
2.1.2 Concept of Riba ( involvement )
Riba literally means addition. Technically, riba al-nasiyyah refers to the extra fixed sum, which a debitor pays to his creditor in consideration of the clip he was given to utilize the creditor ‘s money or because of neglecting to pay the debt on clip in return for a hold in payment. It is a fixed charge collectible by the borrower to the loaner irrespective of what the loan money produces. The extra sum is determined in relation to the sum of debt and the job of the loan. Riba is clearly prohibited in the Holy Quran.
2.1.3 Net income and Loss Sharing
To wholly avoid involvement as its cardinal allotment tool, the Islamic economic system is based on the net income and loss sharing ( PLS ) rules. PLS manners are to avoid debt-financing and utilize partnership and equity-financing, similar to venture capitalist economy.
“ Net income Loss Sharing dominates the theoretical literature on Islamic finance. Broadly, it is a contractual agreement between two or more transacting parties, which allows them to pool their resources to put in a undertaking to portion in net income and loss as justified in Al Mujalla ‘s Article 8514. Most Muslim economic experts contend that net income and loss sharing is based on two major manners of funding, viz. Mudaraba and Musharaka, is desirable in an Islamic context wherein reward-sharing is related to risk-sharing between transacting parties.
“ The most of import characteristic of Islamic banking is that it promotes risk-sharing between the supplier of financess ( investor ) and the user of financess ( enterpriser ) . By contrast, under conventional banking, the investor is assured a preset rate of involvement. Since the nature of this universe is unsure, the consequences of any undertaking are non known with any certainty ex ante, and so there is ever some hazard involved.
In conventional banking, all this hazard is borne by the enterpriser. Whether the undertaking succeeds and produces a net income or fails and produces a loss, the proprietor of capital gets off with a preset return. In Islam, this sort of unfair distribution is non allowed. In Islamic banking both the investor and enterpriser portion the consequences of the undertaking in an just manner. In the instance of net income, both portion this in pre-agreed proportions. In the instance of loss, all fiscal loss is borne by the capitalist and the enterpriser loses his labour. “ 16 This net income and loss sharing is extremely good and of import in undertaking funding which really much relies on hazard direction. Risk direction is the designation, appraisal, and prioritization of hazards followed by co-ordinated and economical application of resources to minimise, proctor, and command the chance and/or impact of unfortunate events or to maximise the realisation of chances. Thus hazards, which can originate from uncertainness in undertaking failures, can be minimized through the PLS system.
2.2 Characteristic of Islamic Financial Instruments
As stated earlier, Islamic fiscal rules are chiefly based on net income and loss sharing and equity engagement. These rules have helped give rise to a figure of contracts that are widely accepted by Muslim bookmans. The features of Islamic fiscal instruments include:
A more just distribution of the hazard involved in the undertaken venture, since some of the hazard is shifted to the provider of capital in return for a greater interest in the result of the venture.
A more efficient linkage of debt service with the ability of the borrower to refund the debt. This linkage is provided by a set of contractual understandings which allow the provider of capital to take part – either as equity holder or net income and loss sharing.
A greater engagement of fiscal mediators in the fiscal public presentation of the borrower. As a consequence, when the refund of debt depends on the result of the undertaking, a better choice of extremely productive ventures will take topographic point.
The attraction of new fiscal instruments to rescuers who have spiritual concerns about interest-bearing assets.
Islamic fiscal instruments that can be used in funding undertakings are discussed in more item in the undermentioned subdivision.
2.3 Islamic Financial Instruments
With the planetary recognition crunch and planetary recession, the universe is now come ining a period of existent alteration and uncertainness. Increasing attending is now being focused on Islamic undertaking finance solutions ( Shari’a compliant ) as a accelerator for regenerating growing in assorted sectors. There are a figure of grounds why substructure undertakings lend themselves to Islamic funding:
They require big sums of support ;
They are asset-based and normally limited or nonrecourse ;
They are typically long-run and non-speculative undertakings ; and
They frequently entail some socio-economic benefit.
Islamic funding establishments have therefore developed a broad scope of techniques which allow them to continue the spiritual and legal rules whilst enabling them to offer feasible fiscal merchandises. There are a figure of chief techniques that have evolved through uninterrupted transactional polish, every bit good as fluctuations on their subjects. It may besides be possible for other “ conventional ” installations ( eg, warrant installations ) to be offered, provided these do non stand in isolation but are linked to an implicit in Islamic construction qualifying the understanding.
2.3.1 Musharaka ( Equity funding ) : The Islamic fiscal establishment and the client provide funding for a specified undertaking in in agreement proportions. All parties have the right to take part in the undertaking but the parties besides have the right to relinquish such rights. Some of the salient characteristics of Musharaka, as enunciated by Usmani, are:
The investing comes from all the spouses
All spouses can take part in direction of the concern and can work for it
All spouses portion the loss to the extent of the ratio of their investing
The liability of the spouses is usually limitless, hence, if the liabilities of the concern exceed its assets and the concern goes in settlement, all the transcending liabilities shall be borne pro rata by all the spouses. However, if all the spouses have agreed that no spouse shall incur any debt during the class of concern, so the transcending liabilities shall be borne by that spouse entirely who has incurred a debt on the concern in misdemeanor of the aforementioned status.
Equally shortly as the spouses mix up their capital in a joint pool, all the assets of the Musharaka go jointly owned by all of them harmonizing to the proportion of their several investing. Therefore, each one of them can profit from the grasp in the value of the assets, even if net income has non accrued through gross revenues.
2.3.2 Mudarabah ( engagement or trust funding )
This agreement involves two parties, the pull offing legal guardian ( Mudarib ) and the
Capital proprietor ( Rab ul Maal ) . The Islamic fiscal establishment may both set up all the financess itself and undertake duty for puting them, or instead it can supply financess to the client who so acts as Mudarib. The financess so provided will normally be those of its investors instead than the Islamic fiscal establishment, with the Islamic fiscal establishment moving as legal guardian for those investors and thereby presuming fiducial duties. The borrower retains a fixed per centum of the net incomes, the Islamic fiscal establishment ‘s wages is a fixed portion in the balance of the gross generated by the investings and the balance goes to the investors. There is no warrant that the Islamic fiscal establishment ‘s investing will be returned or that a net income will be generated.
The point that the enterpriser has full discretion over the assets and operation, but does n’t bear the hazard of fiscal losingss is deserving observing. Usmani, a taking Shariah expert enunciates that in Mudarabah:
Investing is the exclusive duty of the rabb-ul-mal ( the funding spouse )
The rabb-ul-mal has no right to take part in the direction which is carried out by the Mudarib ( enterpriser ) merely
The loss, if any, is suffered by the rabb-ul-mal merely, because the Mudarib does non put anything. His loss is restricted to the fact that his labour has gone in vain and his work has non brought any fruit to him.
2.3.3 Murabaha ( cost-plus funding )
The Koranic poetry “ Allah has allowed trading and out riba ” ( 2:275 ) is a basis of Islamic finance. Therefore it is non surprising that a big bulk of the minutess undertaken by Islamic fiscal establishments are sale-based. Murabaha is the best known sale-based instrument. It is a cost plus contract in which a client wishing to buy any type of good asks the bank to buy the point and sell it to him at the cost plus a declared net income. Traditional murabaha was a spot dealing. The invention of modern Islamic finance is apparent in the add-on of an component of funding, since the bank will buy the needed goods straight from a provider and sell them to the “ borrower ” for future payment. This enables the reproduction in economic though non spiritual, legal or regulative footings of conventional loans.
Murabaha and comparable sale-based contracts have grown significantly and today constitute the majority of Islamic bank activity.
The Murabaha technique is used extensively to ease the trade finance activities of Islamic fiscal establishments. The Islamic fiscal establishment purchases and takes rubric to the necessary equipment or goods from a 3rd party.
Depending on the accounting intervention desired, it will make so either straight or through an agent and may utilize its ain financess or those of its investors. The Islamic fiscal establishment so sells on the equipment or goods to its client at cost plus a sensible net income. All of the above contracts are undertaken at the petition of the client. Deferred payment footings may be agreed and the agreement may be secured. Such agreements are non considered to be contrary to Shari’a jurisprudence as, by taking rubric to the equipment or goods, the bank is presuming a hazard which entitles it to some net income. As the monetary value of the equipment or goods is fixed, the client is non affected by fluctuations in the base loaning rate. This simplifies hard currency direction for the client. Siddiqi, one of the taking advocates and experts of Islamic economic sciences and banking explains Murabaha:
“ Murabaha, which is the dominant method of investing of financess in Islamic banking, is a virtually riskless manner of investing supplying the bank with a preset return on its capital. As the Council of Islamic Ideology Report recognizes, in Murabaha there is ‘the possibility of some net income for the Bankss without the hazard of holding to portion in the possible losingss, except in the instance of bankruptcy or default on the portion of the purchaser. ”
2.3.4 Ijarah ( Lease )
a. Ijarah ( Operating Lease ) :
This encompasses the leasing of machinery, equipment, edifices and other capital assets. The Islamic fiscal establishment ( or a subordinate ) will buy the plus in inquiry and rent it to the ultimate client for an agreed lease which may be fixed in progress or capable to occasional reappraisal by a reciprocally acceptable 3rd party, such as an international house of comptrollers. Attitudes of Islamic fiscal establishments towards insurance of the plus vary, as some Shari’a commissions may experience that enforcing an duty on the leaseholder to see the plus is non allowable.
Premiums are likely to be paid by the Islamic fiscal establishment, even if they are recovered through leases or otherwise.
b. Ijarah Washington iqtina ( Financing Lease ) :
This is a leasing construction coupled with a right available to the leaseholder to buy the plus at the terminal of the rental period ( Bay ‘ al-Wafa ) . The leaseholder will hold to do payments into an Islamic investing history ( with any net incomes being for the benefit of the leaseholder ) to be used in or towards financing the ultimate purchase of the plus in inquiry. These instruments have been used in a assortment of crossborder applications for an increasing scope of plus categories including ships, aircraft, telecommunications equipment and power station turbines.
2.3.5 Istisnaa ‘ ( building funding )
A fluctuation of the Murabaha is Istisnaa ‘ . Originally used to finance the sale of green fruit and other groceries, in present twenty-four hours applications it has been used for the progress support of major industrial undertakings or big points of equipment such as turbines for power workss, ships or aircraft. The Islamic fiscal establishment financess the maker during the building of the plus, acquires rubric to that plus on completion and either instantly passes rubric to the developer on agreed deferred payment footings or, perchance, leases the plus to the developer under an Ijarah Washington Iqtinaa.
2.3.6 Bai Salam ( Advance Payment for Future Delivery )
Bai Salam in its simplest signifier is the beforehand payment in full of the purchase monetary value by the buyer for specified assets which the marketer undertakes to provide to the buyer at a ulterior day of the month. Islamic schools of law vary as to their positions on whether the assets should be available in the market at the clip of the contract or whether it suffices that the assets will be available at the day of the month set in the contract for bringing. They differ besides as to the minimal period of clip there should be between the day of the month of contract and bringing of the assets. As a signifier of funding, the buyer is able to get the assets by beforehand payment at a discounted monetary value and later sells the assets upon bringing, either back to the marketer or to a 3rd party for a net income.
2.3.7 Arbun ( pre-purchase of right to get plus )
The usage of the rule of Arbun in modern twenty-four hours funding has met with changing degrees of blessing amongst the schools of Islamic law. In basic footings, an Arbun contract provides for the buyer to do a sedimentation ( which forms portion of the purchase monetary value ) for the purchase of peculiar assets at a ulterior day of the month on the apprehension that, should the sale of the assets non continue ( for case if the buyer elects non to continue ) , the marketer will be permitted to retain the sedimentation. The Arbun contract has been likened to an option.
2.3.8 Sukuk ( Islamic option to bond )
Sukuk are certifications of equal value stand foring undivided portions in ownership of touchable assets, usufruct and services or ( in the ownership of ) the assets of peculiar undertakings or particular investing activity, nevertheless, this is true after the reception of the value of the Sukuk, the shutting of the subscription and employment of financess received for the intent for which the Sukuk were issued. Typically, a particular purpose company will buy the plus in inquiry and rent it to the ultimate buyer under dorsum to endorse agreements and will publish Sukuk certifications under a note issue installation entitling the holders of the Sukuk to a pro rata ownership of the plus and a right to have a proportion of the rental payments. The Sukuk may be issued in a tradable signifier.
2.4 Common characteristics between Conventional and Islamic undertaking finance
Surely, there are profound differences between Islamic finance and conventional finance from the point of position of beginning, architectural and legal and financial environment. But in pattern, peculiarly in the field of undertaking finance there are several points of convergence. Historically, we can observe striking similarities between undertaking funding and some classical Islamic funding techniques used in the yesteryear. These similarities are non coinciding ; they arise out of the very nature and conceptual footing of undertaking finance itself8. While Moslem bargainers in the Ottoman Empire financed their nautical undertakings utilizing the net income sharing instrument of Mudaraba, the Crown of England, in the 13th century, was associated with Italian bankers Frescobaldi through a production payment loan a quasi-equity installation as a construction to finance the Ag mines in the country of Devon. Italian bankers exploited the mines for a period of two old ages and were repaid their loans by the consequences of excavation.
In add-on, political, economic and cultural ties and exchange between the Muslim universe and the West throughout history have meant that the fiscal constructions put in topographic point can be rather similar. One can besides mention the reforming attempts of the Islamic philosophy in the field of finance in order to carry through the modern-day fiscal demands while esteeming the demands of Islamic jurisprudence.
2.4.1 Conceptual analogues
Islamic finance, which is an of import constituent of Islamic economic sciences, is loosely based on some prohibitions and encouragements. The construction of Islamic finance revolves around the prohibition of any involvement or any antique ante return derived on a loan/debt ( Riba ) .
Gharar is besides prohibited, it involves hazard, uncertainness, deficiency of equal value-relevant information ( jahl ) and guess. Kimar and maysir ( chancing and games of opportunity ) are besides prohibited. Any trade in haram prohibited good is non accepted in Islam. In add-on to these major prohibitions, Sharia has enunciated a set of rules that provide a basic model for the economic activities in general, and for the fiscal and commercial contracts in peculiar. These rules are the Net income and Loss Sharing ( PLS ) and plus backed concern and minutess. Furthermore, Islam portions with the Western societies a common moral/behavioral criterions such as justness, just dealing, certification and transparence, paying liabilities, common cooperation and free selling.
Undertaking finance is conceptually an country conducive to Islamic finance and stopping point to the economic doctrine of Islam, it configures itself as an ideal solution, capable of run intoing the economic and fiscal demands of undertakings supported by large capital and of import economic returns in the medium or long term. “ By its really nature, the wage of Islamic loaner is non based on the oversight of clip but based on grosss ( cash-flow ) generated by the undertaking. He will move as an active spouse in the undertaking and non as a conventional creditor, hence he will take a commercial hazard, which tends to resemble the doctrine of undertaking funding.
Undertaking finance uses a assortment of contractual and fiscal agreements in order to fund specific undertakings of different sectors in different environments. Undertaking finance must affect a existent, utile and good plus. This seems wholly relevant to the chief plus backup in Islamic jurisprudence. Finance constructions are used to finance industrial sector ( power coevals, fabrication ) , development of natural resources ( oil Fieldss, gas or excavation ) and building and substructure development ( ports, main roads, tele communications ) . Similarly, Islamic finance contemplates the support of any islamically acceptable undertaking by agencies of contracts which are in conformity with the Sharia20.
2.4.2 Structural analogues
Islamic funding is by and large structured by contracts of partnership based on the net income and loss sharing ( musharaka, mudaraba ) , by contracts of sale of an bing trade good based on cost-plus-profit sale ( murabaha ) , by contracts of industry or plus building contracts of installations or goods to be built or manufactured for future bringing ( salam, istisna ) , and by renting contracts ( Ijara ) . These techniques seems to be compatible with the conventional manners of undertaking funding, they can be structured as a bundle and may happen interesting applications in planing complex undertaking finance theoretical accounts.
From a structural point of position, puting up of an “ ad hoc ” undertaking company, known as particular purpose vehicle ” ( SPV ) is a major key in any operation of undertaking funding. This separate legal entity is created for a period of clip, to insulate the assets financed from other assets of the boosters. It is capitalized through equity and debt support which is used to cover undertaking capital outgo, to secure the design and building of the undertaking, and finally to run the undertaking in order to bring forth the necessary hard currency flow to refund the investing. The debt is normally provided by a mob of limited figure of commercial Bankss, many-sided bureaus as the group of the World Bank or the European Investment Bank ( EIB ) , export recognition establishments, pension financess, insurance companies and participants in international capital markets, while equity is held by two types of investors ( patrons ) in the undertaking company. The first type are long-run investors who will frequently take small function in the direction of the undertaking company, they are more interested in the investing itself. The 2nd type is project active patrons whose engagement in the undertaking is non restricted to their function as investor, such as a building company that intends to set about or take part in the building of the undertaking, an operating company meaning to run the completed undertaking and a bank supplying debt for the undertaking.
The undertaking company is responsible of reasoning different contracts for the undertaking such as: understandings with authoritiess entities under grant theoretical account or a BOT/BOOT and PPP/PFI, building and operation contracts with contractors and operators and all assorted funding understandings. Indeed, the independent position of the undertaking company allows the parturiency of the undertaking ‘s fiscal hazard and simplify contractual relationships with assorted undertaking spouses. Debt can by and large be deconsolidated, and hence does non increase the patrons ‘ on-balance sheet purchase or cost of funding. From the position of the patrons, non-recourse debt can besides cut down the potency for hazard taint. In fact, even if the undertaking were non productive, this would non endanger the fiscal unity of the patrons ‘ chief concerns.
Meanwhile, the creative activity of an ad hoc construction is used every bit good in Islamic undertaking funding. Indeed, this corporate construction is established to transport out operations related to Islamic fiscal constructions, and to continue the contractual dealingss with other entities of the undertakings. Major undertakings co-financed by conventional Bankss and Islamic Bankss, frequently require the creative activity of an intermediary company that manages operations related to mounting Islamic confines of the specific hazards attached to Islamic funding and do the connexion between Islamic loaners and the undertaking company.
The Islamic construct of the proportionality between hazard and net income adapts absolutely to the logic of the undertaking finance. It seeks to set up cooperation and justness between spouses and helps accomplishing economic success of the undertaking. Mohammad Ayub confirms that “ the premise of concern hazard is a stipulation for entitlement to any net income over the principal ” he adds that “ The of import Sharia axiom: “ Al Kharj bi-al-Daman ” or “ Al Ghunum bil Ghurm ” is the standard of legality of any return on capital, intending that one has to bear loss, if any, if he wants to acquire any net income over his investing. Net income has to be earned by sharing hazard and wages of ownership through the pricing of goods, services or usufruct of goods ” . Similarly, conventional undertaking funding encourages investing and substructure development particularly in emerging states, leting the different undertaking histrions to take part actively, and doing certain that all hazards related to the undertaking were identified, allocated among the participants and decently mitigated.
2.5 Risk allotment and direction
Note that major substructure undertakings, whatever its funding mode -conventional or Islamic, are characterized by large hazards related to building and operation of the undertaking.
Hazard extenuation and direction steps in both fiscal constructions will non needfully be the same. In add-on to these hazards, there are other hazard factors that arise because of the specific contractual mechanisms used in Islamic finance. These two indispensable types of hazards and their allotment and direction will be analyzed below.
2.5.1 Risks inherent to Project Finance
We can state that in undertaking finance, as in Islamic finance, the hazard analysis and hazard allotment between the different undertaking ‘s participants are indispensable elements. It seems really complex to show the hazards borne by each participant in a cosmopolitan categorization. Because these hazards, assessed and managed otherwise depending on the party and the sector of his intercession and on the nature and degree of hazards during life rhythm of the undertaking. They are frequently intertwined and their direction techniques are mutualist. A successful funding construction entails a balanced allotment of these hazards among the assorted involved parties. The followers is by no agencies an thorough list of project finance-related hazards:
18.104.22.168 Structuring-related hazards
It must be recognized that the complexness of the contractual construction and the multiplicity of participants in the fiscal constructions can raise some considerable struggles between the assorted involvements of participants who perform multiple functions. For illustration, in the instance of some BOT theoretical accounts, chief contractors appointed for the building of the undertaking can take part in the capital of the undertaking company and play the function of a bulk stockholder.
The job here, is that contactors are interested in obtaining payments from the undertaking every bit early as possible and on a periodic or staged footing. Meanwhile, in their capacity as stockholders ( long-run investors ) in the undertaking company, who merely obtain payments dividends even after the completion of the undertaking and during its operating stage, would wish to restrict the payments to builders to a lower sensible degree in order to command the overall development cost of the undertaking which they finance through injection of financess into the undertaking company.
Similarly, runing spouses who act as stockholders would take advantage of their quality of stockholders to hold as favourable understanding and conditions as possible.
When it comes to Bankss, playing the function of loaners and undertaking patrons at the same clip, the chance to do struggles of involvements and raise moral and ethical jobs is really high. Banks in their capacity of loaners would enforce their anterior blessing before administering any dividends to stockholders and would besides necessitate the precedence in the refunds of the installments of the debt to any other fiscal battles of the undertaking ( dividends, building and operating costs etc. ) . Banks may besides be a undertaking patron, in such state of affairs, there is a struggle of involvements, they would necessitate as much divided as possible to be paid out at every bit earlier as possible.
The above hazard of struggle of involvements require more profound probe and must be minimized through appropriate judicial admissions in the stockholders ‘ understanding which regulates the relationship between the participants in the undertaking company.
22.214.171.124 Construction-related hazards
In the building stage of the undertaking, the hazards encountered are the hazards of cost overproductions, missed deadlines and defaults in building of the installation or its non-conformity to the coveted specifications. It is clear that these hazards may non merely significantly affect the profitableness of the operation but degrade the image of the installation or the service to possible clients.
These hazards frequently come from the undermentioned different factors:
Any alterations or alterations in the features of the installation, during the building stage, by the undertaking decision maker or by the public spouse in BOT constructions.
Poor estimations of costs or building holds.
Technical or fiscal failure of the builders.
Application and soaking up of a new engineering ensuing in building and operational defects.
Environmental harm and force majeure events. ( the find of sedimentations of pollutants or archeological sites ) .
The building stage is the most hazardous in an substructure undertaking. Different operators are outsourcing these hazards through turnkey building contracts, with fixed monetary value and a fixed day of the month of bringing. By and large, makers bear the hazards associated with building. Indeed, the patrons of the undertaking company seek to reassign the hazard of hold or hapless public presentation to contractors and incorporate in the building contract, punishment clauses for hold and amendss and involvements clauses for any hold or hapless public presentation. As loaners, they can apportion a part of the hazards related to the building jointly with the patrons by set uping a line of recognition with major extra support to cover the extra costs or holds encountered during the building stage.
It is recalled that the building hazards originating from political and regulative factors are supported by the public spouse in BOT construction and covered by insurance companies.
2.6 Functionality of Islamic Project Finance:
In the Islamic undertaking finance contractual constructions, the building stage of undertaking may be financed through istisna ( plus building contract ) or ijara ( plus renting contract ) . It is interesting to analyze hazard allotment among the different parties under these Sharia compliant constructions.
Istisna is a type of contract in which a client mustasne ‘ necessitating the fabrication or building of an plus, orders from a maker or builder sane ‘ an plus masnou ‘ meeting certain specifications and to be delivered within a specified period of clip. Normally istisna takes a two-tier signifiers that requires two contracts: first contract is between the Islamic bank as the marketer and his client ( the undertaking company ) as a purchaser of the concluding installation or the merchandise. In order to fulfill the demand of his client, the bank will come in into another contract as a purchaser with the maker or builder to buy the installation or the merchandise which is the topic of the first contract. A inquiry arises here as to whether these two contracts are adhering or simply a promise. In other words, the issue is to cognize whether the client ( project company ) is contractually bound every bit shortly as he has ordered the merchandise or if he merely makes a non binding promise to purchase it one time it has been completed. Harmonizing to classical Islamic legal experts, istisna contract is revokable by either party at any clip.
Fortunately, in order to avoid this hazard, the modern Islamic bookmans view in this respect, was that the istisna contract is adhering on both parties get downing from the minute the contract is concluded by offer and credence.
Increasingly, executives in charge of substructure undertakings in Islamic states want to finance them in conformity with the Shari’a. Furthermore, because of the increasing influence of Islamic finance, Islamic investors are looking for long-run investings that are sacredly acceptable. The challenge is to develop undertaking finance constructions that are non merely consistent with Shari’a rules but are besides attractive to international capital suppliers.
Co-financing is one popular solution. In a cofinanced trade, the patrons combine conventional “ Western ” finance with “ Islamic ” finance. Because Shari’a prohibits interest-based funding, investors must utilize net income based constructions that involve plus ownership. Although there are advantages to utilizing Islamic finance, the plus ownership demand generates several possible complications in trade structuring and undertaking direction. For illustration, the demand that Islamic moneymans retain rubric to portion of the undertaking ‘s assets could increase the undertaking ‘s peril from the position of the Western loaners because it hinders the loaner ‘s resort in the event of a undertaking default due to a decrease in the collateral endorsing their loans.
Before analysing the specifics of The Equate Project, it is worthwhile to depict briefly how an Islamic finance tranche is typically structured in a undertaking finance dealing. The most often used constructions in the undertaking finance sector in the Islamic universe are the Istisnaa-Ijara construction and the Wakala-Ijara construction.
2.6.1 Istisnaa – Ijara:
An istisnaa-ijara construction incorporates an istisnaa contract that applies to the building stage of a undertaking, and an ijara contract for the operations stage. The borrower undertakes ( to avoid the Islamic loaners being exposed to important building, recognition and public presentation hazard of contractors ) an istisnaa contract to secure the industry, bringing and building of the relevant works and equipment from the maker. The borrower at the same time enters into a building contract with the building contractor integrating a base on balls through of the footings and conditions of the istisnaa contract.
The Islamic moneymans make phased payments to the borrower, akin to pull under any conventional finance installation during the building stage of a undertaking whereby capital is raised from moneymans in blocks or separate expenses based on building mileposts reached and on a preset agenda. The ijara contract typically comes into consequence upon undertaking completion. In order to be shari’a compliant, an ijara contract must be crystalline, elaborate and have set footings anterior to executing.
The lease giver under an ijara must keep legal and good ownership of the plus and bear duty for hazards associated with plus ownership, intending there must be a nexus between an Islamic loaner ‘s ability to gain net incomes and the premise of hazard.
The ijara contract besides typically includes a promise from the Islamic loaners as lease givers to reassign the ownership of the leased plus to the borrower, as leaseholder, either at the terminal of the lease period or in phases during the term of the ijara.
This signifier of ijara is the Islamic equivalent of a conventional equipment rental contract. Ownership of the assets is delivered to the Islamic moneymans upon undertaking completion pursuant to the istisnaa contract. Thereafter the Islamic loaners lease the assets to the borrower in consideration for rental payments that are sized to cover the capital cost of the equipment plus a net income border.
Duties that would typically fall on the Islamic loaners such as attention and care of the assets and duty for insurance are usually performed by the borrower on the Islamic loaner ‘s behalf.
Wakala – Ijara:
The Wakala – Ijara construction is an alternate but similar method normally used in Islamic undertaking finance. Under this construction, the borrower is employed as the Islamic loaner ‘s agent or “ Wakil ” in conformity with the footings of an bureau understanding known as a wakala understanding.
The wakala understanding more or less fulfills the same map as the istisnaa understanding. The lone difference is that in this case the contractual relationship between the Islamic fiscal establishments and the borrower differs. The borrower procures the design, technology, building, proving, commissioning and bringing of the assets identified in the wakala understanding as the agent for the Islamic loaners.
Chapter 3: Methodology
Islamic finance techniques can be modeled in combination to offer assorted bundles in undertaking finance. In the followers, M.Khan 1997, proposed how these different contractual techniques can be put to utilize in order to take part in a undertaking finance theoretical account for an independent H2O and power works ( IWPP ) .
This figure illustrates the application of four different Islamic contracts: mudaraba, istisna, salam, and wakala ( bureau ) . In this theoretical account, there will be four chief participants: 1 ) the mob of loaners led by the agent, 2 ) the SPV set up by the agent, 3 ) the power manufacturer and 4 ) the power buyer ( the public-service corporation ) .
If we study this theoretical account, we will observe that the agent taking the mob of loaners will come in into a recognition understanding with the SPV, this dealing can be based on the Islamic contract mudarabah, where the loaners will move like kiping investors rab el mal intrusting money to another party called mudarib or director ( the SPV in this theoretical account ) who is to merchandise with the money in an in agreement mode and so return to the investors the principals and the pr-agreed portion of the net incomes, maintaining for himself what remains of the profits55.
The SPV as a director will so come in into a production payment contract with the manufacturer whereby the SPV will finance the undertaking by doing an advanced payment to the manufacturer against a promise under an in agreement agenda to the future bringing of electricity. This dealing can be structured by Bay Salam technique which is defined as the sale of an article which will be delivered to the buyer on a hereafter day of the month fixed in advanced56
The manufacturer will come in with the public-service corporation into a power purchase understanding to buy the electricity from him. This dealing can be accommodated under the istisna contract which is giving an order to fabricate a definite article with understanding to pay a definite monetary value for that article when it is completed. The difference between istisna and salam that under Salam, the monetary value must be paid in progress, in Istisna, payment is flexible, it is to be paid merely when the article is ready for bringing.
It is of import to observe that a valid istisna contract should be defined in inside informations ; hence, the power purchase understanding should be really comprehensive including the description of the physical substructure, specifications of the needed electricity, a description of the fuel and all other proficient quantitative and qualitative inside informations of the undertaking. This papers should besides include hazard allotment, the difference declaration mechanism, and the fiscal and operational duties of the manufacturer and the utility57.
The SPV will mandate the manufacturer through an bureau contract wakala to sell two portions of electricity to the public-service corporation. The first portion is the production payment electricity which will be sold on behalf of and for the history of the SPV while the 2nd portion will be the topic electricity which represents the portion of the manufacturer to be sold to the public-service corporation on the same footing of the first portion. All the gross from the sale of production payment electricity from the public-service corporation will be transferred to the SPV after the tax write-off of the manufacturer ‘s fixed O & A ; M costs, fixed fuel costs, insurance costs and return on equity investings.
3.2 CASE STUDY
Islamic finance techniques can be modeled in combination to offer assorted bundles in undertaking finance. In the followers, instance survey of Al Dur Independent Water and Power Plant will be used to analyze how these different contractual techniques can be put to utilize in order to take part in a undertaking finance theoretical account for an independent H2O and power works ( IWPP ) .
In 2009 a pool consisting GDF Suez of France and Gulf Investment Corporation of Kuwait won the contract to develop the 218 000 m3/day H2O desalinization and 1234 MW power undertaking in Bahrain. The building cost of the undertaking is estimated at $ 2.1 billion. Operation of the first unit is expected to get down in July 2010, full operations in July 2011.
The PWPA tenor is 25 old ages. Support is from debt and equity in a ratio of 75:25. The $ 1700 million funding for the undertaking had multiple funding beginnings, including export recognition bureaus, commercial funding and Islamic funding. This is the first IWPP dealing with multiple Islamic tranches. The Islamic funding of $ 300 million comprised Istisna-Ijara Mawsufah Fi Al Dhimmah and Wakala- Ijara Mawsufah Fi Al Dhimmah.
The undertaking successfully achieved fiscal near in July 2009 in an inauspicious market. As long-run liquidness had vanished, the undertaking had to settle with tenors of eight old ages, with a balloon of 80 per cent for the commercial and Muslim tranches. This funding construction has been termed “ mini-perm ” .
The cardinal paperss for the Istisna-Ijara Mawsufah Fi Al Dhimmah tranche are the Istisna understanding, the forward rental understanding and the service bureau understanding.
For the Wakala-Ijara Mawsufah Fi Al Dhimmah tranche these are the Wakala understanding, the forward rental understanding and the service bureau understanding.
Under the forward rental understanding, the existent rental begins merely from the day of the month of bringing of the assets and the passing of the rubric of the assets to the Islamic Bankss.
Once constructed, the IFIs lease the use of the Islamic assets to the undertaking company by manner of an Ijarah pursuant to the rental understanding. The Ijarah, in pattern, has become the mechanism by which the principal and the net income border are returned to the IFIs during the post-construction period of a undertaking funding, as rental consideration. Rental consideration comprises the purchase monetary value of the Islamic assets every bit good as a fixed and/or natation net income border which, in a conventional undertaking funding, would be tantamount to the debt service collectible by the undertaking company. The net income border can be structured as variable leases which are adjusted harmonizing to hold footings so that the rate of return can be benchmarked against LIBOR, for illustration, but in each instance, the footing for finding and accommodation must be disclosed to the leaseholder prior to the executing of the rental understanding.
Benchmarking the variable lease against LIBOR has the advantage that the
Ijarah tenor can be longer, as the rate of return takes into history market conditions which a fixed return would non contemplate. Most Sharia’a bookmans agree that benchmarking against LIBOR is acceptable, since although typically LIBOR is used to cipher involvement, here LIBOR is being utilized as a benchmark entirely and no riba is present in the rental understanding itself, as the lease giver is taking hazard in the ownership of the plus, and hence entitled to a net income. Certain bookmans have held that benchmarking the variable lease against LIBOR can ascribe gharar, since any fluctuations in LIBOR are non fore