The Asian Development Bank (ADB) has participated in its
first shariah-compliant project financing for two wind
farms in Sindh province, Pakistan. But the use of Islamic
financial instruments was not ADB’s first
Though ADB has previously provided conventional debt
alongside Islamic finance, this is the first time that all
aspects have been shariah-compliant. ADB granted two partial
credit guarantees worth up to $66 million to the Islamic
Development Bank (IsDB), which then financed the project under
ijarah structure. A
consortium of Pakistani banks provided the remainder via a
a term of 12 years.
TheFauji Foundation, which owns majority stakes in both
projects, required all financing be obtained in compliance with
shariah principles. Both projects were financed simultaneously
with similar structures and documentation but with slightly
As multilateral development banks, ADB and IsDB operate
according to operational parameters set out in their charters.
In the case of IsDB, everything must be shariah compliant and
certified by its Shariah Board.
But reconciling the two development banks’
charters was challenging.
Ashraf Mohammed, assistant general counsel and practice leader
of Islamic finance at ADB, told IFLR that the ADB had
originally looked to a conventional loan structure through a
special purpose vehicle (SPV).
The SPV would be set up between the international financiers
and the project company, whereby ADB would provide a
conventional loan to the SPV, IsDB would provide equity
financing and the SPV would then provide shariah financing to
the project company. However, the structure was not compliant
with IsDB’s shariah guidelines.
Ultimately ADB and IsDB resorted to an innovative Islamic
financing structure. IsDB provided the full amount of financing
via an ijarah that was fully shariah-compliant. The ijarah was
divided into a two-tranche structure in which ADB provided a 50
percent credit risk guarantee for one tranche so that IsDB and
ADB equally share commercial and credit risk.
Shearman & Sterling partner Bill McCormack, who advised
ADB and IsDB, said that the transaction required bespoke
drafting of documentation for the guarantee and a
counterindemnity by the company. Structuring intercreditor
agreements related to decision-making and security sharing was
also especially tricky, as they needed to ensure that voting
rights and other entitlements reflected the banks’
"The structure possibly points to analogous opportunities
whereby commercial banks with funding issues could provide
commercial guarantees or similar risk support to the likes of
IsDB and ADB," said McCormack.
As to whether ADB will utilise Islamic instruments in the
future, Mohammed said that it would look at what clients need
and respond accordingly. "It’s becoming a viable
alternative to conventional finance, not just for conviction
reasons but as an alternative asset class to conventional
financial instruments," he said.