Shariah solutions

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With the region's ship owners searching for ways to finance their burgeoning fleets, Michael G. Alexiou, managing partner of Alexiou & Co, explains why Islamic finance can provide an ideal solution.

With its main base in Athens, Greece, and an associated office in Panama, Alexiou & Co may seem like an unusual source of expertise of the ins and outs of applying Islamic finance to the Middle East's shipping industry. But when it comes to this particular niche, the firm has a record of providing a top-level service to ship owners worldwide.

"Having been involved in some of the highest profile cases, we pride ourselves with the quality of legal advice provided by our experienced lawyers," says Michael G. Alexiou, managing partner at the firm. "We provide comprehensive legal advice to our clients in order to secure their maritime business ventures from all potential dangers and surprises."

The firm's clientele base in the Gulf has been steadily expanding and procedures for establishing a presence within the booming UAE, at the Dubai International Financial Centre (DIFC), are well underway.

"Thankfully, the firm is doing very well servicing a mêlée of clients in the shipping industry," Alexiou indicates, modestly.  His client list now includes an impressive range of ship managers and operators, owners, charterers, brokers and intermediaries, financial consultants, financial institutions, funds and banks to port operators, logistics companies, commodity traders and insurance brokerage houses.

Alongside the growth of the sea freight industry, and the consequent demand for more ships, Alexiou & Co has been witnessing a resurge of interest in Shariah-compliant finance.

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However, as Alexiou himself points out, institutions offering such services actually began to appear in the market in the 1960s, with Islamic banking and finance gaining momentum around 1975 following the establishment of the Islamic Development Bank in Jeddah and the Dubai Islamic Bank.

So why has Islamic finance been recapturing the attention of the region's shipping industry recently? "As the years progress and know-how in structuring Shariah-compliant financial products evolves, industries such as shipping have not gone unnoticed by Islamic financial institutions," suggests Alexiou.

He points to the boom of the industry following China's entry into the WTO and India's development plans as key factors towards making shipping one of the most attractive investment vehicles for Islamic financial institutions.

With the ‘credit crunch' affecting the Western financial markets and giving it an advantage over its conventional counterparts, Islamic finance has continued to thrive.

"A few years ago, mostly due to their inability to find attractive financing terms, some clients in the Middle East were cash buyers of vessels," he says. "Lately, the tide has turned and Islamic financial institutions are rushing to attract clients by offering what their Western counterparts cannot do any more."

Certainly from an ethical perspective, Alexiou agrees that Islamic finance has a lot to put on the table. "Justice and fair-play is the raison d'être of Islamic thought, and the finance and economic system is not an exception to this. This is hardly the case with Western economic systems," he emphasises. Shariah-compliant financial products also tie the ‘financier' and the ‘customer' together in the project at hand. "Both of them share the fruits of success and the vicissitudes of an unsuccessful commercial venture," Alexiou adds.

There have been several high-profile cases of Islamic finance being successfully implemented to fund the large-scale fleet investment being demanded by the Middle East region. One of the earliest such finance deals, the US$26 million ‘Al-Safeena' Ijara Sukuk for Saudi Arabian oil and petrochemical titan Aramco, was structured, arranged and co-underwritten by the London-based ABCIB Islamic Asset Management and combined Islamic equity with conventional debt for the same asset.

"It is true that following the Al Safeena Ijara sukuk, bond issuances for financing shipping projects have gained momentum," says Alexiou.  He also cites the Qatar Global Sukuk as being one of the most noteworthy sukuk to be issued, valued at a staggering $700 million.

"I am sure that many in the shipping industry may find this method an attractive form of financing in the years to come," he says.

However, there is still some way to go before Islamic financial institutions are in the position to compete equally with conventional banks. "Understandably, Islamic banking and finance is still at its infancy, striving to find attractive yet Shariah-compliant financial products," Alexiou admits.

Furthermore, many of the concepts underpinning Shariah-compliant finance, such as the prohibition of interest or Riba, can seem foreign to those companies used to dealing with conventional forms of lending. Whilst an Islamic financial institution will never charge interest to the amount lent, it is likely to charge a fee.

"The similarity in the amounts to be paid by the customer is that both banks usually benchmark their interest for the Western Bank and their fee for the Islamic Bank on LIBOR or EURIBOR plus some basis points above them," Alexiou explains. Another crucial difference existing between the two systems lies in the fact that a Western bank will never own the asset for which finance is sought.

Further hobbling the popularity of Islamic finance is the expectation that such an option may be more rigid and inflexible to the needs of the ship owner than more conventional methods. In commercial reality, however, Alexiou believes that the concept of Islamic finance obstructing the materialisation of deals is far from true.

"For example, an ‘Ijara wa iqtina' or a finance lease is not a lot different from a typical lease-purchase financing supported by a Barecon charterparty that some Western financial consultancies frequently offer nowadays. So, flexibility is not the issue," he stresses. One type of financial contract well suited to meet the needs of a shipbuilding project, for example, is the istisna contract.