A consortium of two Brisbane solar companies, SGI-Mitabu, has announced it will finance its entire Indonesian solar power project using a form of Islamic financing.
A senior executive of the consortium said sharia-compliant financing, starting in July with an offshore-domiciled sukuk, or Islamic bond, would be used.
SGI-Mitabu, a venture between The Solar Guys International and Mitabu Australia, is developing a 250 megawatt (MW) solar power project under an agreement with Indonesia’s Ministry of Energy.
The first 50MW of the project will be financed through the issuance of a seven-year $100 million sukuk, said Rusydi Mitabu, director of Mitabu Australia.
The entire project would require up to $550 million in financing, with all funding to be structured using Islamic principles, which follow religious guidelines such as a ban on interest and gambling.
This will be followed by two more tranches, which will be structured as either sukuk or Islamic syndicated loans.
The initial sukuk will be domiciled in Labuan, Malaysia’s offshore financial centre, and was expected to be placed almost entirely with Malaysian investors, he added.
“The demand for the Australian dollar and for non-United States dollar denominated sukuk is growing very strongly.”
“We found the process to be straightforward and approached Labuan, as our consortium partner saw the appeal of the offshore centre”.
Reuters Newsagency says in the past, a major problem for Australian companies considering Islamic finance has been taxation.
Despite tax officials releasing a discussion paper in 2010, there has been no further progress on the issue.
The sukuk would seek to pay between 6.5 per cent and 7.5 per cent returns, part of a hybrid-funding plan incorporating several Islamic contracts.
During the construction phase of the project, the sukuk would follow an istisna, a manufacturing contract where a price is paid for goods that are subsequently manufactured and delivered on a stipulated date.
This gives solar panel projects an advantage due to their quick installation phase, helping income streams start in just a few months, Mr Mitabu said.
Once the plant is completed, a special purpose vehicle would be formed directing cash flow to sukuk holders using an ijara structure, a type of sharia-compliant rental agreement.
After 20 years the project would then follow a musharaka structure, where returns are distributed between the issuer and investors according to a profit-sharing ratio.