Kuwait-based Asiya Investments has launched an Islamic trade finance fund with $20 million in seed capital, aiming to cater to small Asian manufacturers. Asiya, whose largest shareholder is sovereign wealth fund Kuwait Investment Authority, aims to fill a gap left by Western banks that are scaling back their trade finance business, making credit scarce for small and medium-sized firms.
"We engage those companies that are already banked but whose credit lines are limited - we are complementing their financing," said Sulaiman Alireza, executive director of Asiya's investment management arm in Hong Kong. Despite strong growth in Islamic finance globally over the last few years, the industry has neglected merchandise trade, leaving trade finance for conventional banks to dominate.
But conventional banks are retreating because of the world financial crisis and higher capital requirements under upcoming Basel III regulations, which could open up about 20 percent of the business to non-bank institutions, Alireza said. Established as the Kuwait China Investment Co in 2005, Asiya estimates that current annual intra-Asia trade of $5 trillion could reach $20 trillion by 2020.
Asiya's Cayman-domiciled fund, soft-launched in December, offers short-term financing through murabaha contracts, where the fund buys and sells merchandise on behalf of the company and shares a portion of the profits. "We use a murabaha structure with the underlying commodity serving as collateral. This is a standard, tried-and-tested murabaha structure," Alireza said.
Islamic institutions across the Gulf are working to diversify their money market transactions, so Asiya's product could appeal to some of them. It will have a higher yield than commodity murabaha contracts and better liquidity than sukuk, Alireza said.
"The value in between remains quite open." Asiya's fund aims for a net return to investors of above 5.0 percent and it has $55 million worth of assets in the pipeline, with capacity for approximately $400 million, said Brian Luck, director of Asiya's advisory office in Dubai.