When speaking about Islamic finance, four terms stand out among others: (1) Musharakah (partnership) is the enterprising spirit. It is about discovery, equity, risk and reward; (2) Murabahah (value-added resale) is the supply chain, moving goods to and from economic centers; (3) Mudarabah (commission) is at the heart of all business sales — connecting people and resources; and (4) Ijarah (leasing) is the foundation upon which all else is built. It funds and returns yields on infrastructure and assets.
Review of 2022
Sovereign and corporate Sukuk
Unsurprisingly, the biggest news on Ijarah in 2022 came from sovereign Ijarah-based Sukuk issuances for the funding of major roadworks and national infrastructure projects:
1. Pakistan launched a seven-year Ijarah-based Sukuk worth US$1billion, returning 7.95% annually
2. Nigeria joined in July with a fund worth US$500 million yielding 13% a year for 10 years
3. Bahrain is no stranger to the space with a US$1 billion fund paying 5.6% for seven years
4. Turkey was also oversubscribed, despite risks, for an annual 7.25% on US$3 billion for five years
5. Oman joined the club too with a US$385 million offering of 4.85% per annum
6. Bangladesh is aiming for the sky with a Tranche 1 of US$500 million and 4.65% annual yield
7. Senegal returned after a six-year gap, also with a US$500 million Sukuk offering, and
8. Saudi Arabia, always a heavy-hitter, added a US$2.6 billion offer for a 5.5% annual return.
The concentration of Ijarah products has moved away from Saudi Arabia, Iran and Malaysia. Iran’s participation has particularly dwindled, no doubt as a result of sanctions. Meanwhile, corporate Sukuk follow closely behind sovereign funds in size and maturity. The focus remains on construction, infrastructure and property development.
ZMI Holdings (UAE) worked closely with Goldman Sachs in its US$500 million Ijarah contract. ACCIONA (Saudi Arabia) is a property/construction with a climate-focus, raising US$480 million. IndoSat (Indonesia) went hybrid with 33% of US$15 billion in Sukuk Ijarah and the rest in bonds.
All the mentioned projects issued new offerings just this year. They are encouraged by past successes previously covered by IFN.
SME and retail impact
It is unclear whether smaller Ijarah investment opportunities exist or not. It is likely that the deals are close-knit and private, not gathering any media attention. Sukuk structures are of course expensive to bring together and reserved for very large projects. Still, Australia is making moves with a US$5 million fund by Ijarah Finance.
Beyond this, data remains patchy. The SME and retail space is mostly served by Islamic banks and there seems to be plenty of options in Muslim-majority nations.
However, the popularity of pure Ijarah seems to be waning with banks in Saudi Arabia and a similar experience can be expected in other nations.
Mudarabah and Tawarruq are preferred over Ijarah as they avoid ownership of the hard assets. Without debating the details, we can agree that consumers are frustrated when left with fewer options.
Nonetheless, there is a new pattern emerging, exemplified by Habib Metropolitan Bank. It is continuing with Ijarah and asset ownership, but resolving the frustration of dealing with lease operations, logistics and liabilities by partnering up with local specialists. This enables it to focus on the risk, capital and paperwork while outsourcing operations and relevant liabilities to partners. A similar model is employed by Vancouver car leasing and tokenization startup econommi.io.
Other North American companies offering Ijarah options worth mentioning are Ijarah CDC and Devon Islamic Finance.
Preview of 2023
Throughout 2022, we saw a rapid expansion in the adoption of Ijarah for sovereign and corporate infrastructure funding. This can be expected to continue into 2023 as more tranches are closed. A Morocco–Nigeria pipeline deal supported by the IsDB is worth keeping tabs on. Iraq is also making a comeback with a deal signed with Jordan’s ICSFS.
Opinions on Ijarah are shifting too as Sukuk show signs of being decent hedges against inflation. The underlying assets for active deals have experienced slower depreciation and even appreciated with worldwide inflation rates after many years of low interest rates, post-COVID-19 spending and supply chain hiccups. This has definitely buoyed their performance.
Conclusion
As Ijarah continues to mature, we can look forward to bigger opportunities for disruption by fintech. In many ways, an ecosystem parallel to conventional lending should form. With banks preferring the management of securities over hard assets, they will seek more vendors to partner with for capital deployment. These vendors will take on asset ownership as well as the origination, underwriting and servicing of Ijarah contracts.
More media coverage and academic papers on these partnerships and their economic impacts would be wonderful to see. Innovations such as ‘Service Ijarah for Travel’ or ‘Medical Ijarah’ will spark controversy and healthy discussion.
New structures with tokenization by Marhaba or REIFs [real estate investment funds] by Sohar International should be similarly lauded and thoughtfully scrutinized.
Hudhaifah Zahid is CEO of econommi. He can be contacted at hudhaifah@econommi.io.