Within the realm of Islamic finance, syndicated loans can take a variety of forms and may be a form of Musharaka financing but because of the prohibitions in Islamic finance concerning riba there are significant differences between an Islamic syndicated loan and a conventional syndicated loan.
Islamic syndicated financing 'refers to the participation of a group of institutions in a joint financing operation through one of the Shariah permitted modes of financing' according to Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions.
In addition to Musharaka financing, such loan syndications are also often structured around the Tawarruq (Murabaha) concept and this occurs when an underlying asset such as a commodity is sold to the obligor on deferred payment terms. This means that conventional and Islamic finance houses can work together on the same Islamic syndicated loan as long as all the tenets of Shariah are complied with.
Syndicated financing provides a means for Islamic banks essentially to combine their balance sheets to provide financing for higher value transactions than they would otherwise be capable of. Another significant advantage is that such syndications allow banks to mitigate some of their risk at the same time.
When the mandated lead arranger (Wakeel or agent) in the syndicate is selling down the loan to be syndicated it should do so at par without either marking it up or down but can instead, if it wishes to do so, charge a management or administration fee to cover the cost of the extra work that it has to undertake. The other banks involved in the transaction (Muwakkils or principals) should be party to an investment agency agreement.
The market for Islamic syndicated loans
According to statistics gathered by IFIS, the Islamic finance portal from Euromoney, the Islamic syndicated lending market expanded from $19.6bn in 2007 to $27.2bn in 2008, which represents growth of 32%. The bulk of this lending was in the GCC where volumes rose from $17bn in 2007 to $22bn in 2008.
As we might expect, in reality this growth was achieved over the first three quarters of 2008 since Islamic syndicated lending all but froze in the last quarter of the year. To give these statistics some context and scale, it is worth noting that in 2007 the global conventional syndicated loan market was estimated at over $4,500bn which shows either how underdeveloped the Islamic syndicated loans market is, or that there is much more potential in this sector and that the volumes we see at present are only scratching the surface of what can be achieved when the industry is fully grown.
The market for Islamic syndicated lending stalled between 2006 and 2007 and experienced significant growth in 2008 before that growth was stymied by the onset of the financial crisis and subsequent recession.
There has been a significant pick-up in deals since the start of 2009, with a total of 36 deals announced or closed worth a cumulative total of $9.5bn. If the rest of the year continues as it started it would suggest that total Islamic syndicated loans for 2009 will end in the region of $21bn, which would be broadly in line with 2007 levels.
What is interesting is that $3.8bn of these deals are from the UAE which indicates both how committed the emirates are to Islamic finance as well as the need that the nation has to refinance debt this year.