SS 24 · Financing operations

SS 24: Syndicated Financing

What this standard is about

SS 24 covers syndicated financing. This is a large financing deal where several financial institutions join together to fund one borrower. One lender acts as the arranger or lead, brings the group together, and a facility agent handles cash flows between the borrower and the lenders.

Large projects need this structure. A single bank often cannot fund a power plant or a port alone, or would take too much risk in one borrower. A syndicate spreads the risk across many lenders.

In the Islamic version, the financing must use Shariah-compliant contracts. The structures most used are murabaha (cost-plus sale), tawarruq (commodity purchase for cash), mudaraba (trustee profit-sharing), musharaka (joint venture) and ijarah (leasing). The standard sets the rules that make the syndicate acceptable under Islamic law.

Why it exists

Conventional syndicated loans are built on interest-bearing debt, which is riba (interest) and forbidden in Islam. Islamic institutions needed their own standard so they could take part in large deals without breaking Shariah rules. The standard also settles who may lead, how exits work, and what guarantees are allowed.

The key rules, simply put

The financing contracts, the financed project and the modes of financing must all be Shariah-compliant. A conventional bank may act as lead arranger, but only if all these remain compliant.
The funded activity must be halal. The borrower may not be involved in alcohol, pork, tobacco, gambling or pornography.
The deal must be reviewed and certified by a Shariah board.
No partner may guarantee another partner's capital. Each participant bears its own risk and loss.
Agreeing in advance to exit at face value, or to guarantee a fixed profit, is forbidden. That amounts to riba.
No party may commit to protect another party against exchange-rate fluctuations, because that is a form of capital guarantee.
The parties may agree on a closed syndicate, where leaving early is not allowed. Such a condition is treated as a proper contractual term.
Profits and entitlements may be received in a currency different from the syndication's currency, converted at the exchange rate on the day of receipt.

An everyday example

Eight banks from four countries join to finance a gas facility worth US$1.4 billion. No single bank wants the full risk. They agree on a murabaha-based structure certified by a Shariah board: the investment agent buys the equipment and sells it to the project company at cost plus an agreed markup, paid in installments. Each bank takes a share of the markup and bears a share of the risk. None of them guarantees the others' capital.

Words to know

Syndicated financing — financing provided jointly by a group of lenders to one borrower
Lead arranger — the lender that organizes the syndicate and negotiates terms
Facility agent — the party that handles payments and communications between borrower and lenders
Riba — interest, or any guaranteed excess on a loan; forbidden in Islam
Murabaha — a cost-plus sale; the seller discloses cost and adds an agreed markup
Tawarruq — buying a commodity on deferred terms and selling it for cash to raise funds
Mudaraba — profit-sharing where one side provides capital and the other provides work
Musharaka — a joint venture where partners share capital, profit and loss
Ijarah — leasing; the transfer of the use of an asset for a set time at an agreed rent

Source

AAOIFI Shariah Standard No. 24 — https://islamicmarkets.com/publications/syndicated-financing-appendix-b-the-shariah-basis-for-the (Appendix B, the Shariah basis for the standard)
Shariyah Review Bureau, "Syndicated Financing: A granular look at Sharia compliance" (Feb 2023) — https://shariyah.net/wp-content/uploads/2023/02/Syndicate-Financing-Paper.pdf