Red Sea Gateway Terminal Company Limited (RSGT), which is implementing the development of the third container terminal project at the Jeddah Islamic Port on a build-operate-transfer basis, signed Islamic financing agreements worth SAR1.7 billion (US$454 million) with Al Rajhi Bank last December. Al Rajhi Bank and The Standard Bank Group of South Africa jointly provided the financial advice for the Islamic financing for the project and acted as mandated lead arrangers. Al Rajhi structured the Ijarah facility on a forward lease structure known as Ijarah Mawsufah Fi Al Dhimmah.
The container terminal to be built at an estimated cost of about SAR1.7 billion is to be funded in a debt-to-equity ratio of 69:31. The equity for RSGT would be provided by the project’s founding shareholders, including SISCO, Xenel Industries, Tusdeer and City Island Holdings Limited, a subsidiary of the Malaysian company MMC International.
The SAR1.7 billion Islamic financing facilities for RSGT have been fully underwritten by Al Rajhi, and include a SAR1.27 billion (US$339 million) Ijarah facility to cover most of the equipment- and construction-related costs to be incurred during the three-year construction period. Al Rajhi will provide SAR900 million (US$240.3 million) out of the SAR1.27 billion Ijarah facility. The balance of SAR425 million (US$113.48 million) in Islamic facilities being provided by Al Rajhi for RSGT would include a stand-by facility, a working capital facility and a letter of credit for equipment supply.
The Ijarah facility has been structured as a forward lease known as “Ijarah Mawsufah Fi Al-Dhimmah”. Under this structure, the Islamic banks would appoint RSGT (the project company) as their agent (wakeel) during the construction period of three years for procurement of the Ijarah assets, and provide the Ijarah financing for procurement of these Ijarah assets. After construction, the banks would own the Ijarah assets and lease these assets to RSGT. Hence the term forward or specified lease (so named due to the lease of specified asset).
The banks are entitled to receive fixed advance rentals during the construction period and lease rentals linked to benchmark indices like SAIBOR or LIBOR during the lease period.
The Ijarah Mawsufah Fi Al-Dhimmah structure uses the following five principal documents: (i) asset participation agreement; (ii) agency agreement; (iii) specified lease agreement; (iv) wakalah agreement and (v) service agency agreement.
(i) Asset participation (Musharakah) agreement
Under the asset participation agreement, the participating banks (in RSGT’s case, Al Rajhi and another bank) agree to participate in the procurement, financing, owning and leasing of specified assets to RSGT. The percentage of participation of each bank is recorded and agreed by both banks.
(ii) Agency agreement
Under the agency agreement, one of the participating banks is appointed as the facility agent to deal with the procurement, financing, owning and leasing specified assets to RSGT, on behalf of the participating banks.
(iii) Specified lease agreement
On behalf of the participating banks, the facility agent (as lessee), enters into the “specified lease agreement” to lease the specified assets to RSGT (the lessor) for a 16-year lease known as specified lease period. This specified lease period starts from an agreed future date, known as the specified lease commencement date (which is 36 months from the date of the specified lease agreement) and terminates at the end of this 16-year period. The specifications and description of these assets required by RSGT for its operations are agreed upon by either party and documented in this agreement.
During the specified lease period, the lessee would pay the lessor at the end of every six months — the specified lease rental period — lease rentals known as the specified Lease rentals. The specified lease rentals comprise two elements — the specified lease fixed element and the specified lease variable element. The specified lease fixed element represents the principal amount and the specified lease variable element represents the profit amount calculated on the basis of outstanding principal and linked to a benchmark index such as LIBOR or SAIBOR. In order to minimize any uncertainty, the benchmark index is subject to a floor and a cap and the specified lease rentals are agreed between the lessee and the lessor at the beginning of each specified lease rental period.
During the 36-month procurement period, where the lessee would make phase payments for procurement of these specified assets, the lessee is entitled to receive periodic advance rental payments. These advance rentals are to be fixed and agreed by both the lessee and the lessor at the time of executing the specified lease agreement. The payment of advance rentals has been allowed on the basis that, in case the lessee is unable to lease the specified assets to the lessor, the lessor is entitled to full refund of the advance rental payments made.
At the end of the specified lease period or on full pre-payment of the specified lease fixed elements any time before the expiry of the specified lease period, the title to these specified assets is transferred to RSGT.
(iv) Wakalah agreement
Under the Wakalah agreement, the facility agent, on behalf of the participating banks, appoints RSGT (the project company) as its wakeel to arrange for procurement of the specified assets, which would include arranging for preparation of designs, appointing contractors for construction, appointing consultants for supervision of the works and so on.
RSGT, acting as the wakeel of the participating banks, would be liable for losses only in cases where gross negligence and willful misconduct lead to such losses. The wakeel is entitled to a fee for the services rendered to the facility agent.
(iv) Service agency agreement
As per Shariah principles, the facility agent who owns the specified assets (on behalf of the participating banks) is obliged to maintain and insure these assets. However, these obligations can be passed to a service agent. The facility agent (as lessee) appoints RSGT as its service agent to undertake maintenance and insurance of these assets, under the service agency agreement.
As RSGT will enter into long-term maintenance contracts and procure insurance for the operations period, the cost of maintenance and insurance is usually known. This estimated cost of maintenance and insurance to be paid periodically by the facility agent to RSGT is agreed and documented in this agreement.
Since the facility agent incurs additional cost of maintenance and insurance of these assets, the facility agent is entitled for additional lease rentals. For this purpose, the specified lease fixed element is increased by an amount equal to maintenance and insurance charges paid by the facility agent to RSGT. This increased specified lease fixed element can be offset against the maintenance and insurance charges paid by the facility agent to RSGT.
The Ijarah Mawsufah Fi Al Dhimmah structure has been used by Al Rajhi in several project financing transactions and it has been accepted by several banks that have co-participated with Al Rajhi in these transactions. This unique structure is an alternative to the Istisna structure for financing long-term capital intensive projects.
Hidayathullah Baig, head of project finance, has been with Al Rajhi Bank for over three years, structuring and executing several project financing transactions in the Kingdom of Saudi Arabia. He worked closely with Al Rajhi’s Shariah Board in developing this structure. He can be contacted via email at
Red Sea Gateway Terminal