The way ships are financed has changed considerably over the past ten years and the market has continued to evolve throughout 2019. The declining performance of the shipping industry in recent years has made banks cautious in their financing
strategy. However, for ship owners, this means that securing the finances necessary for survival, or even to expand their business, can be challenging. In the years following the global financial crisis new ship finance structures have been developed and new sources of finance have become available to the industry.
Islamic finance has become increasingly prominent as a viable funding option in the transportation sector. While the aviation sector is already open to Islamic funding, the shipping sector has struggled with access to finance as banks have become reluctant to finance to a highly capital-intensive industry which has been weathering turbulent waters for decades, even more so after the global financial crisis in 2008.
Conventional ship financing deals with traditional banks have now become few and far between. The latest Dealogic statistics show that only $8.25 billion was raised through marine-finance syndicated finance in the first quarter of 2019, the third-lowest quarterly tally in the past decade.
In contrast, many smaller and medium-sized ship owners have reportedly been locked out of the mainstream banking market altogether, and forced to seek debt from so-called alternative-finance providers that charge steep rates in the high single and low double digits.
However, the international shipping finance market is still substantial. It represents the veins and arteries of the global economic engine with an estimated annual economic impact exceeding $430 billion and providing for over 13 million jobs. The UAE has some of the largest ports in the world, while maritime and shipping, supported by new flows of trade, are expected to contribute to the UAE economy for years to come.
As other forms of finance remain scarce for shipping companies and port operators, Islamic finance could come to the rescue given the global growth of sukuk as a form of asset-backed finance in long-term structures. These fit well in the shipping industry, particularly through straightforward financing vehicles such as Murahaba or Ijara.
The key advantage of Islamic finance for the shipping industry are higher liquidity, encouraged by asset-backed transactions that provide banks with better risk management options than non-asset backed conventional finance transactions.
Abu Dhabi Islamic Bank (ADIB) has the only dedicated shipping finance desk in the GCC region and has built a strong reputation for itself in the sector. In December 2019, ADIB signed an agreement to provide a US$80 million Shariah-compliant Ijara facility to Oman Shipping Company SAOC (OSC) for the financing of two VLCC (Very Large Crude Carriers) tankers within the OSC group.
The transaction represents OSC's first Sharia’a-compliant asset finance deal and demonstrates ADIB's ongoing commitment and ability to finance significant assets in the maritime and shipping sectors.