Islamic financing in construction

Iqbal Khanyari, head of wholesale Islamic, Mashreq

Mashreq’s sharia-compliant products address the needs of construction contractors

How does Islamic banking cater to the funding needs of construction firms?

Islamic banking offers are range of sharia-compliant options to meet the funding needs of construction companies. Contract financing operates on a project basis, secured by project-specific cash flows with self-liquidating structure.

Key products include:

  • Kafalas such as bid bonds, mobilisation, performance, retention, and warranty kafalas.
  • Letters of credit using wakala for services or murabaha for goods
  • Wakala or Commodity Murabaha for financing backed by contract receivables, based on progress payment certificates, to address cash-flow mismatches.
  • Contingent financing using Mudaraba or Musharaka

Long-term contracts may require capital expenditure or equipment financing, provided under equipment ijarah, where the bank owns and then leases the assets to the client. Surplus liquidity can be placed in fixed term or call deposits through Wakala.

How do these financing options differ from conventional banking products?

Islamic financing is interest-free, focusing on markup and profit-sharing mechanisms based on ethical practices. These products are cash flow and asset-backed, reducing speculation for the bank and the client. Financing is allocated upon ethical screening, which could help avoid investments in prohibited sectors.

How does Mashreq ensure compliance with Islamic banking principles?

With oversight form a dedicated Sharia Board, Mashreq Al Islami ensures its products, services, transactions, and operations are aligned with Islamic principles. Adhering to standards outlined by the UAE Central Bank’s Higher Sharia Authority and the Accounting & Auditing Organisation for Islamic Financial Institutions has helped to maintain the higher standards of sharia compliance.

Our products conform to these guidelines, and contracts are meticulously drafted for transparency including follow-up regular verifications through audits. We also believe in sharing risks with clients, promoting fairness through profit-sharing and loss-bearing mechanisms. Additionally, educating clients and staff, and ensuring accurate reporting of financial information are central to Islamic finance.

How does Islamic banking promote sustainable construction practices?

Mashreq has a clear focus on promotion green and sustainable projects like renewable & solar energy, waste management, pollution control etc. We have been successfully growing the sustainability-linked finance with specific environment, social and governance focused key performance indicators. With emphasis on social impact, Mashreq funds affordable housing, infrastructure, and essential services, benefiting wider communities.

Our Islamic banking segment integrates financial sustainability with environmental and social responsibility, influencing funding options for construction companies.

How does Islamic banking approach risk management in the funding of large-scale construction projects?

Mashreq’s Global Contract Finance Division ensures that the project cash flows are ring-fenced, thus any financing deployed is self-liquidating in nature. Strategies to manage risk in large-scale construction projects while adhering to sharia principles involve conducting Technical Capability assessment on our clients and Project Analysis on each project or contract. Our team of in-house engineers undertakes periodic Project Progress evaluation and site visits to monitor milestone achievements and validates project cash flows. Additionally, mechanisms are in place to ensure regular monitoring of usage of funds.

30 May, 2024 | .By Mrudvi Bakshi