Ask the expert: Jonathan Hill

Question: How popular has Sharia compliant financing become in the Middle East's shipping industry?

Expert: Jonathan Hill, Managing director of shipping funds, Tufton Oceanic

Tufton Oceanic's involvement in the shipping industry

Tufton Oceanic was originally formed in 1976 and has since evolved into a fund management company with a focus on the maritime and energy sectors. The organisation consists of 50 staff in total with offices in London, Isle of Man, Cyprus and Greece.

In addition, in 2006 we established our Middle East office, located in Dubai International Finance Centre, and have invested considerable time and money in the region. We currently have over US$2 billion worth of assets under management and I believe we're the largest manager of shipping and offshore services and related assets.

The funds that we manage range from equity hedge funds through to asset backed leasing funds and we expect to expand these in the future, particularly with our new Islamic leasing portfolio launched last month.

With our expertise, Tufton brings over two decades of international marine and offshore finance experience together with Sharia compliant financing solutions, a market which has proved very popular amongst private shipping companies in the region.

The movement from conventional finance to Islamic finance

The main financing options have traditionally been conducted from Europe or Singapore. However, the market is experiencing a period of change, with financial organisations understanding the benefits of moving closer to their customers in the Middle East, especially in Dubai.

Although privately owned Middle Eastern fleets have previously lagged behind their European and Asian counterparts, the growth in the local shipping industry has created opportunities to expand fleets through for shipping finance.

It has certainly been Tufton's experience that some shipping organisations actually prefer to deal with Islamic finance. Providing the cost is competitive, which it is, many companies we deal with want to operate under the Sharia model.

The growth in Islamic finance and shipping in the region

We all know that institutional interest in shipping has grown enormously; there are now 171 or so listed shipping companies with an overall market cap approaching US$300 billion. There has also been great growth in the number of institutions offering Islamic finance.

There are those that are established specifically as Islamic finance institutions, then there are the subsidiaries of international banks offering Islamic finance and not to mention those banks who have actually converted from conventional banks to Sharia based ones.

Private equity is actively investing in the shipping space, and hedge funds have been specifically created to focus on this sector. But it is real estate that continues to be the major activity investment in the region, not shipping.

That being said, Islamic institutions are looking for alternative assets, and Tufton is building on this aspect and have successfully harvested interest from Islamic institutions by providing a fixed income product out of the cash flows generated from the ship leases we have arranged.

Future obstacles for Islamic finance in the Middle East

When you look at this growth on a global scale, one of the obstacles is that the instruments of Islamic debt in funding shipping transactions are miniscule in comparison to conventional shipping banks.

Even at Tufton Oceanic, whilst we harness the Sharia compliant equity to provide capital for ship leases, when we actually leverage that equity with debt we resort to the conventional debt markets.

The reason for this is because, with some exceptions, Islamic banks do not yet have the indepth sector knowledge and specialisation, which makes it difficult for us to source Islamic debt from shipping valuations. At the end of the day, this is in fact not surprising considering the reasonably small shipping sector still here.

The future for Islamic finance in the shipping industry

I believe in the not too distant future that Islamic banks will successfully be able to deal with the entire process, but in order to achieve this they need to raise the bar internally in terms of processing and inside knowledge.

Consistency and predictability are also two major factors that they need to improve on. In conclusion, I would say that we at Tufton are very positive about Islamic finance in the region, and we look forward to growing our ship leasing funds under management here and enjoying another successful year.

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