The worlds largest Islamic Bank, the Bank Islam in Malaysia - File photo.

SYNDICATED lending is a loan provided to a borrower jointly by two or more lenders in the form of a group. The syndicate has become a major feature of conventional financial system. It is an important way of raising large amounts of capital not possible otherwise.

Lenders are able to diversify their loan portfolios and minimise their risk exposure; these loans are less expensive and are more efficient to administer.

Generally, there are three parties involved in a syndicated loan the lead manager, the participants, and the borrower. The two main forms of syndicated lending are direct syndication and indirect syndication.

The concept of syndicated loans appeared in the 1960s as a result of efforts to internationalise banking operations. In 2007, the global syndicated loan market was estimated at over $4.5 trillion. Though the current financial crisis has resulted in a decline in syndicated deals, syndicated lending has strong growth potential in both the short and the long- term.

Due to the benefits of syndication for raising capital, it has found its way in Shari`a-compliant finance as well. Islamic experts derive the permissibility of syndicated financing from the concept of musharaka. However, due to the prohibition of riba, there are certain differences between Islamic syndicated financing and conventional syndicated lending.

According to the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), Islamic syndicated financing `refers to the participation of a group of institutions in a joint financing operation through one of the Shari`a-permitted modes of financing.` Just as the modes of finance must be Shari`a-permitted — like ijarah, istisna, mudaraba, murabaha, musharaka, sukuk, etc — the projects financed through syndication must also be Shari`a- compliant.

While it is preferred that syndication should take place among Shari`a-compliant financial institutions, there is no restriction on the participation of conventional financial institutions as long as the arrangement and utilisation of funds and the procedures are in conformity with Islamic principles. The reason is simple Islam does not prohibit a partnership between a Muslim and a non-Muslim if the activity does not violate the principles given in the Quran and the Sunnah.

Similarly, it is preferred that the syndicate should be led by a Shari`a-compliant financial institution. However, there is nothing against a conventional financial institution acting as the lead manager.

Also, it is not prohibited for Shari`a-compliant financial institutions to provide syndicated financing to certain parts of a venture that is receiving conventional financing for its other parts, provided that the accounts and the lead manager arrangements of the two types of financing are kept strictly separate.

Islamic syndicated financing is one of the sectors of Shari`a-compliant finance that have achieved tremendous growth rates. According to Islamic Finance Information Service (IFIS), the amount of financing showed a 32 per cent increase in 2008 from $19.6 bil lion in 2007 to $27.2 billion in 2008. However, looking at the financing arrangers and their performances in 2007 and 2008, it becomes obvious that the market does not have established leaders in Islamic syndicated financing. Consequently, there is a lot of room for competition.

Interestingly, Islamic syndication came to a halt in the fourth quarter of 2008 as credit markets all over the world experienced a standstill in that period. Still, the prospects of Islamic syndicated financing are bright. In the GCC countries, the huge infrastructure projects planned over the next ten years are enough to keep the industry going comfortably.

And if we add to this, the credit requirements of different corporations in the region along with Islamic syndication taking place outside the Middle East, the scenario looks quite promising.