Trends in Islamic Project and Infrastructure Finance in the Middle East: Re-Emergence of the Murabaha

Abstract

This paper notes the increasing use of the murabaha structure in a wide range of financing transactions, including project financing transactions in the Middle East, since the onset of the global financial crisis in 2007. The paper discusses the nature of the murabaha as a commodity sale structure and, in more recent times, as a financing structure. Essential elements of a valid murabaha are discussed. The use of commodities as vectors, and the use of murabaha and tawarruq transactions as loan substitutes, are discussed. A case study is presented (based upon a recent Middle Eastern transaction). That case study involves two murabaha agreements, one to effect a term financing and one to effect a revolving credit facility. Using that case study, the paper considers (a) enforceability issues pertaining to unconsummater murabaha transactions, (b) the use of variable rate structures, (c) structures to ensure the enforceability of commitment fees, profit participations and other accruing obligations, (d) the use of waivers, forgiveness and rebates of carried and accrued amounts, (e) conditions precedent to future murabaha transactions, including rollovers, (f) collateral security (rahn) matters, and (g) guarantees of murabaha obligations. Revised draft of November 17, 2012.