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Mon 6 Jun 2016 03:16 PM

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Italy export credit agency plans Islamic finance push

SACE insured $46.4bn of international risk at the end of last year, with the Middle East and North Africa accounting for 14%

Italy export credit agency plans Islamic finance push

Italy's export credit agency SACE plans to move into Islamic finance, becoming one of the first Western trade finance bodies to do so, in order to support expansion of its business in the Middle East and North Africa.

"We think we can reach more customers, small ones as well as large, in consumer goods industries and other areas," SACE chairman Giovanni Castellaneta said in an interview.

SACE insured 40.7 billion euros ($46.4 billion) of international risk at the end of last year, up 11.6 percent from a year earlier. The Middle East and North Africa accounted for 14 percent of the total, the largest fraction outside Italy.

Around a quarter of banking business in the six-nation Gulf Cooperation Council is sharia-compliant.

Italy is also keen to develop business with Iran, where the entire banking system is designated Islamic, after the lifting of international sanctions on that country last January.

SACE said in April that it would guarantee credit lines of 4 billion euros which Italian state-run lender Cassa Depositi e Prestiti would offer to companies building oil-and-gas and transport infrastructure in Iran.

Last year Britain's export credit agency guaranteed a $913 million Islamic bond issue by Emirates, the Dubai-based airline which is a major customer of Airbus. But the vast majority of deals by Western trade agencies in the region are still based on conventional finance.

Marco Ferioli, head of SACE's regional office in Dubai, which opened in February, said his organisation was talking with big international banks that operated Islamic windows to see how SACE's deals could comply with Islam's ban on interest payments.

"We are studying the more common Islamic structures for financing investment and export contracts in order to understand...amendments of our standard guarantees, to align and make them compliant with the requirements of an Islamic structure."

One of SACE's two basic conventional finance structures is a "supplier credit" scheme in which the Italian agency covers an exporter's risk of payments being deferred from a short maturity to the longer term.

"It seems that only a few amendments would be needed to make the conventional supplier credit scheme compliant with sharia principles," Ferioli said. "An international bank with Islamic window operations should easily discount the receivables insured by SACE."

The other conventional structure used by SACE is a "buyer credit" scheme, often employed to finance big equipment purchases and turn-key projects, in which the agency covers the risk of a term loan extended by a bank to a foreign buyer.

Ferioli said SACE was studying how this might be replaced by Islamic structures such as commodity murabaha, in which one party purchases an asset on credit from a second party on a deferred payment basis, and istisna, a form of sharia-compliant manufacturing contract.

"Conventional products are and will continue to represent the core of our business. Nevertheless, Islamic finance is growing across the region and we are increasingly receiving requests about that from some of our customers in markets like Saudi Arabia, Qatar, Turkey and Iran."

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