Shariah solutions

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.
INTERVIEWS, Ports & Free Zones
HIGH WATER MARK: Islamic financial institutions have found a natural outlet in the growing regional shipbuilding market.
HIGH WATER MARK: Islamic financial institutions have found a natural outlet in the growing regional shipbuilding market.


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.

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.

Otherwise known as commission to manufacture, the buyer pays the price either in one or multiple instalments and a contractual liability is established on the seller to deliver the object of sale at some future date.

"We are currently advising a shipping company with its new building orders financed by a fund under istisna contractual structures. Understandably, parallel istisna contracts are also pertinent in this transaction in order to safeguard the parties involved," explains Alexiou.

In principle at least, Islamic finance for ship owners appears to have much to offer. However, as Alexiou points out, there are still some practical difficulties which need to be dealt with before the niche can take off.

"The ‘parasitical' costs associated with Islamic financing structures such as legal and accountancy fees still need to be tackled," he highlights. "For example, ‘ijara' and ‘istisna' contracts are highly complicated and often require the setting up of many SPVs (Special Purpose Vehicles) in order to materialise the deal at hand. These costs fall upon the entity seeking finance."

The role of the Shariah boards, which form an integral part of any Islamic Bank, can also be a shady area. The board monitors the transactions of the Islamic bank and, whenever a deal raises doubt from a Shariah standpoint, the board has the ultimate say as to whether a given transaction is compliant.

"What hampers the system is the fact that Shariah is open to interpretation and lacks a unified and codified system of law, giving rise to divergent views as to whether a financial product is compliant or not," Alexiou highlights.

The presence of these practical issues has not, however, appeared to have dampened the enthusiasm of many Western banks to provide shipping finance to Middle East players.

"Those initial fears were mostly centred on both the type of product they were to offer, i.e. Shariah-compliant or not, and on the shipping expertise of the client requesting the financing," Alexiou says.

He points to some of the major fleet owners in the region who were forced to jointly venture with known players by outsourcing the technical management of their fleets in order to initially alleviate fears of the financiers. This turnaround in the willingness to fund Middle East shipping companies has also led to many conventional banks to develop their own Shariah-compliant finance solutions in order to further attract Muslim clients.

"In the past it was Arab banks that were importing conventional financial products from either Europe or the US. Now conventional banks are keen on improvising Shariah-compliant products to please both existing Arab clients and, more significantly, the ever growing Muslim population evident in the European continent," says Alexiou. He cites London as an example of being at the forefront in providing Shariah-compliant financial products to its customers.

As Shariah-compliant finance continues to tempt the Middle East's shipping industry, outside the region, Alexiou believes that the ship finance market is large enough to accommodate both Islamic and conventional types of financing structures.

"Islamic finance has nothing to fear as against its conventional counterparts when it comes to the shipping industry, nor any other industry for that matter. It will continue to gain the momentum it deserves in the years to come," he states confidently.

In the meantime, Alexiou accepts that hard work still has to be put into the industry, especially when it comes to interpreting Shariah due to the lack of a unified codified system of law. "There needs to be an agreement between Shariah boards as to what is compliant and what is not and the attainment of such an agreement is far from being easy," he admits.

Nevertheless, with so much to offer to all industries, Alexiou & Co has already witnessed many successful examples of Shariah-compliant financing techniques for the shipping industry.

"Investors, businessmen and men of commerce need to be educated about the potential of Islamic finance. In the years to come, we may see conventional finance being the second choice when it comes to financing business ventures," he says.

Islamic finance terminology

For many in the shipping world and beyond, the terminology of Islamic finance can prove to be a stumbling block in understanding how the structure works in practice. Michael G. Alexiou, managing partner at Alexiou & Co, provides a clear explanation of some of the common terms used in Islamic finance.


Return on cash or a converted form of cash without bearing liability in terms of the result of the deployed capital is prohibited whilst profit from trade and business along with its liability is permitted. The prohibition of conventional interest does not denote that money provided under a Shariah-compliant financial product is costless but aims to encourage equity financing, reward entrepreneurial spirit that shares distribution of risk and discourage the imposition of interest as a reward for mere capital saving.


Otherwise known as ‘trading in risk'. When it comes to shipping transactions, or ship finance, agreements have to be bona fide and subject to full disclosure between the respective parties, as matters that are left unsaid, or subject to improbable contingencies may render an agreement void under Islamic law. Thus, any type of transaction where the subject matter, the price or both are not determined and fixed in advance may be viewed with suspicion under Shariah law.


Otherwise known as partnership financing, this refers to two parties in the deal both providing capital towards the financing of a given project. Both parties share profits on a pre-agreed ratio whilst any losses are borne by the respective party in accordance to its equity participation. The contract may make provision for remuneration of a managerial skill provided by either both or one of the two parties involved in the agreement.


Otherwise known as cost plus financing, this can be compared to a straightforward acquisition finance structure. It usually involves a contractual relationship between a bank and the customer for the sale of an identifiable product at an agreed price that includes a profit margin, the latter representing the bank's fee. The bank will purchase the goods and re-sell them to the client on a cost-plus-profit basis.


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