LONDON, 18 December 2006 - One consequence of the massive real estate market boom in the Middle East and beyond is the regional banks increased accessing of debt facilities to finance their expansion and general corporate activities. Financial institutions, especially Islamic banks, cannot rely forever on equity or shareholders to finance this expansion.

And Islamic banks in particular have a huge exposure to investment and financing in the real estate market, according to a report earlier this year by Standard & Poor's international rating agency.

As such, the $300 million 3-year standby commodity Murabaha facility announced in London last Wednesday by Bahrain-based Islamic investment bank Gulf Finance House (GFH) - an affiliate of Kuwait-based Gulf International House (GIH) - is no exception. However, judging by the demand for subscription to the facility, which according to GFH Chief Executive Officer Essam Janahi, was increased from the original $90 million to $300 million (because it was oversubscribed almost three times), international, regional and Islamic banks are hungry for and increasingly at comfort with such risk.

Not surprisingly, David Testa, executive director of the London branch of German bank WestLB AG, one of the two mandated lead arrangers (MLA) and bookrunners, described the facility as "spectacularly successful." Robert Denks, head of financial institutions at the other MLA and bookrunner, Raiffeisen Zentralbank Osterreich Aktiengesellschaft (RZA) bank of Austria, stressed that "we have deep respect for the Islamic financial institutions and the way in which they conduct their business in the interests of their stakeholders and their local economies. We are confident that the involvement of conventional banks in Islamic banking would lead to further growth of the industry and to higher ethical and compliance standards."

Bankers agree that the internationally-accepted Murabaha will remain a most-favored source of financing for banks, corporates and even utilities, in tandem with the emerging Sukuk (Islamic bond), which has gained increasing prominence over the last year or so.

The GFH standby Murabaha attracted the participation of a record 33 banks and investors, of which some 20 percent are from Europe, 60 percent from the GCC, 13 percent from the MENA region and 7 percent from Asia. Of the total, some 30 percent were placed with Islamic investors and 70 percent with conventional investors.

First time participants in Islamic finance include Bank of Overseas Chinese; Tunis International Bank; LRP Landesbank Rheinland-Platz; HSH Nordbank AG (Luxembourg); Attijariwafa Bank (Europe); The Bank of East Asia (Labuan); and Banque BIA.

"The proceeds from the standby facility, which is available for use anytime," stresses Janahi, "will be used to finance the strategic geographic expansion of Gulf Finance House and existing activities in Europe, India, Southeast Asia and China. It will also be used to finance the set-up of the bank's new asset management and private equity business."

This expansion, especially into Asia, is ambitious. GFH, since its incorporation in Manama in October 1999, has successfully launched projects and investments with an aggregate value of over $12 billion. It has exited successfully from several portfolios including its two European real estate ones, GAREC UK and GAREC France with a yield of between 10 to 15 percent to investors. Projects which have been launched and are held by GFH last year or currently, include the Bahrain Financial Harbor, which is halfway completed; the Al-Areen Development in Bahrain; Legends in Dubailand; Royal Metropolis and Jordan Gate in Amman; Aqaba Development in Jordan; Prince Abdul Aziz Bin Mousaed Economic City in Saudi Arabia; Gateway to Morocco; Energy City in Doha, Qatar; a transport portfolio in Egypt; and Energy City India in Mumbai, which would be India's first integrated energy business district.

According to GFH sources, the bank has also taken a 10 percent stake in Arab Finance House, the Islamic bank in Malaysia promoted by Rusd Investment Bank; Qatar Islamic Bank; and Global Investment House of Kuwait. GFH is also looking at other projects in Malaysia, Singapore and further afield in mainland China.

The Murabaha is fully underwritten by RFZ and WestLB, which is also acting as the facility agent. A unique feature of the Murabaha is that it is a standby facility with a three-year maturity which can be accessed anytime on a revolving basis. According to Testa, this is the first ever Murabaha syndication with a standby feature. The facility, which was approved by GFH's Shariah Board, is based on commodity contracts (metal contracts) purchased on the London Metal Exchange (LME) at any given time as and when required under the standby nature of the facility, using the agency agreement with WestLB. The commodity supplier is London-based Dawnay, Day & Co. Limited, whose Murabaha book business is in excess of $3 billion.

The facility is priced at 3 or 6 months LIBOR (London Interbank Offered Rate) plus 105 basis points, which is very competitive especially for GFH. The pricing, according to bankers, was impacted by the debut BBB- investment grade credit rating assigned to GFH by Standard & Poor's last August. This rating, although not at the top end of the spectrum, gave investors extra comfort with regard to GFH's financial stability and soundness. GFH is one of the few Islamic banks to receive such a rating from a major international rating agency.

GFH, capitalized at $212 million, is cross-listed on the stock exchanges in Bahrain, Kuwait and Dubai. In Dubai, it also has a wholly-owned subsidiary investment bank called Injazat Bank, incorporated in the DIFC (Dubai International Financial Center), and the Injazat Technology Fund, the only Shariah-compliant funds of its kind focusing on private equity investment aimed at investing in technology companies in the GCC and MENA countries.

One area in which GFH has been conspicuously absent is the Sukuk market, although it did arrange a limited Sukuk as part of a mixed financing package for the Bahrain Financial Harbor project.

At end-September this year, GFH, which also has a commercial bank in Bahrain, had total assets of $1.297 billion and a net profit of $176 million. Revenues and net income for 2005 totaled $227 million and $140 million respectively.