Metito's experience with islamic finance in Africa
Wafic Ghanem, Chief Financial Officer, Metito writes for Islamic Business & Finance about his experience in receiving Islamic financing in the African market for his firm’s private sector infrastructure projects.
Metito is a water and wastewater treatment company with presence across the water treatment value chain. Founded in 1958, Metito is the largest privately held water treatment company in the Middle East and the Group is also the largest foreign private investor in the water and waste-water treatment sector in China. Metito is an emerging market-focused group with a presence in 23 countries. The group has an operating capacity of 1.3 million cubic meters a day.
Metito’s African operations account for nearly about a third of its revenues and the current backlog is around $300 million. The Group has strong presence in North Africa spreading across Egypt, Libya, Tunisia, Algeria, and Morocco. The group also has recently expanded into Sub Saharan Africa and secured projects in Rwanda and Angola. Metito is actively pursuing projects in Sub Saharan Africa alongside its established presence in North Africa.
As part of its corporate finance strategy, Metito approached Islamic banks in early 2014 to tap on their resources to support the Group’s growth. As a result of this initiative, the Group tapped into Islamic financing in 2015 for the first time. As of today, a major of the long-term financing that the group has received in GCC region is comprised mostly of Shari'ah-compliant financing tools. Shari'ah-complaint working capital facilities have been also deployed to support short-term funding required for the EPC business unit. The total size of Islamic financing facilities currently in use stand at around $150 million and the share is expected to increase over the next 12 months. The Group has so far availed three types of Islamic finance financing tools, being Musharakah, Ijarah and Murabahah.
The Musharakah structure has been used to project finance an on-going project in the Gulf. The variable profit rates relating to this facility has been hedged using Shari'ah-compliant products. The Ijarah structure was used to avail a facility to fund capital injection in concession projects in the emerging markets in order to facilitate competitive tariff pricing for these projects. The Murabahah structure was used for both long-term and short-term financing requirements. This is an asset-based structured facility secured by a lien on land usufruct.
Despite contemplating the use of Sukuk, Metito ultimately used a combination of bilaterally negotiated Islamic funding tools as detailed earlier. During the assessment process, it became clear to our Group that it would not be possible, or difficult to say the least, to tap into Sukuk.
The first challenge was the tenor and the refinancing risk: shorter tenor of typical private sector Sukuk issuances is one of the key challenges in its deployment for infrastructure projects. While infrastructure projects require over 10 to 15 year tenor, what we have seen is typical Sukuk tenors range from five to eight years for private sector issues. As to the refinancing risk, since Sukuk financing is preferable in a strong economic environment, issuers are faced with the risk of having to refinance in a weak economic environment at potentially unfavourable terms to avoid default on outstanding Sukuk.
The second challenge we faced was the process cost and time: the structuring complexity of Sukuk renders it somewhat slightly more expensive than conventional bonds. The time and cost involved in both Sukuk and conventional bonds is higher than that of bilaterally negotiated facilities. Rating of the projects poses another challenge as well. Though unrated Sukuk issuance can expedite the process, it comes with the risk of under subscription of the issue and higher interest / profit rate; securing desired longer tenor is another challenge.
Similar to issuing conventional bonds, success of Sukuk issuance is largely dependent upon the economic environment and market sentiment. In addition, Sukuk issuance for refinancing presents a higher degree of uncertainty of subscription than Sukuk intended for funding new projects. Shari'ah interpretation varies across issuers resulting in structuring complexities.
Metito has not yet considered tapping into Sukuk issuance for its African business due to the following reasons. First, Africa has only seen sovereign Sukuk issuances up to this point; there has been no precedence of corporate / private sector Sukuk issuance given the infancy of Sukuk market in the continent. Given the country risk and typical project risks, we believe possibility of competitive pricing of corporate Sukuk is another key aspect of uncertainty for private sector. The project Sukuk market is yet to be developed to serve the financing requirement of Africa infrastructure projects.
Next, there is a need for expansion of the Sukuk investor base in Africa. African infrastructure development has been mainly financed by grants, soft funding and by multilateral agencies, such as the Development Finance Institutions (DFIs) and the World Bank and International Finance Corporation (IFC). However, African Sukuk issuances usually tend to attract investors from the Middle East, owing to familiarity with Shari'ah-compliant financing and African markets.
Lack of participation from DFIs and multilateral agencies to provide long-term funding for infrastructure projects makes Sukuk less suitable for private sector infrastructure projects.
Based on our Group’s recent experience with Islamic finance products including the issuance of Sukuk, I believe at least three factors need to be in place to support promotion and successful issuance of Sukuk. First, there is need for government sponsorship for infrastructure development through a strong legal and economic framework facilitating corporate /project Sukuk issuance. Second, one would need support from financial institutions and rating agencies to bridge the gap between demand for and supply of capital through sourcing funds from a broad long-term investor base. Last, there needs to be private sector initiatives to initiate sound business models that can provide infrastructure facilities at reasonable price.