| April 27
April 27 Pakistan is stepping up its use of
sharia-compliant financing to fund infrastructure deals, which
could help to promote the use of longer-term transactions in
Islamic deals are backed by specific assets, which makes
them convenient for infrastructure projects. But traditionally,
Islamic bonds and loans have shorter tenors - often around five
years - than their conventional equivalents.
This is partly because Islamic markets are generally not as
deep and liquid, and products are not as standardised. Also,
Islamic banks mostly hold short-term deposits on their books.
This month, however, Pakistani banks arranged 100 billion
rupees ($955 million) worth of 10-year Islamic bonds (sukuk) for
a hydropower plant, the largest infrastructure deal to use
Islamic financing in the country.
Opportunities for similar deals are growing with $45 billion
worth of domestic infrastructure projects planned by Pakistan's
government under an initiative dubbed the China-Pakistan
Economic Corridor (CPEC), agreed between the states in 2014.
Islamic banks have become increasingly willing to manage any
mismatch between their short-term deposit bases and such
long-term projects, said Abdullah Ghaffar, head of investment
banking at Al Baraka Bank Pakistan.
"Excess liquidity with Islamic banks is pushing them towards
each and every opportunity emanating from the CPEC," Ghaffar
The government is providing encouragement; in November,
Finance Minister Ishaq Dar said predominantly Muslim Pakistan
wanted to make sharia-compliant financing its first choice for
infrastructure and long-term financing needs.
The government plans to shift between 20 and 40 percent of
its debt financing to Islamic sources from conventional ones,
Dar said without specifying a timeframe.
Islamic finance is being used in deals involving foreign
lenders, including large Chinese banks keen to revive ancient
"Silk Road" trade links with Pakistan through CPEC projects.
The first CPEC transaction, a $1.95 billion loan syndication
signed off in January to finance a coal mining project and
associated power plant in Sindh province, was financed mostly by
large Chinese banks. But the deal featured two sharia-compliant
tranches worth a combined 16 billion rupees extended by Faysal
Bank, Meezan Bank and Habib Bank.
"Given the diversity of the Silk Road I think we will see
more structures like this," said Andrew Compton, Hong Kong-based
counsel at law firm Linklaters, which advised on the deal.
The transaction used a lease-based structure known as ijara,
a common sharia-compliant contract. "This model is now out
there, so this process could be replicated with some success."
The law firm said it was working on other infrastructure
transactions across Asia, including a hydropower plant and a
wind farm in Pakistan and a coal power plant in Indonesia.
(Editing by Andrew Torchia and Raissa Kasolowsky)