Two structures, one asset
Most substantial Gulf financings now carry both conventional debt and a Shariah-compliant tranche. The reason is straightforward: the regional liquidity pool includes institutions that cannot hold conventional interest-bearing debt, and excluding them narrows the book at exactly the moment a sponsor wants it widened.
What follows is not a comparison of instruments. Murabaha, ijara, wakala, and sukuk are well documented. The difficulty in practice sits in the space between the tranches — in security, intercreditor arrangements, and the events that move one structure but not the other.
Where the structures meet
A conventional lender takes security over the asset and the revenues it produces. An ijara-based structure requires the financier to hold an ownership interest in the asset it leases to the obligor. Both can be accommodated, but not by assuming the conventional security package and adding the Islamic tranche afterwards.
Three questions decide the shape:
Who owns what, and what is pledged to whom. Where an Islamic tranche requires asset ownership, the structure usually separates legal and beneficial ownership so the conventional security package survives. That separation has tax and transfer consequences that need checking in the jurisdiction where the asset sits, which in the Gulf may be an onshore regime or a financial free zone with a different property law.
How enforcement is sequenced. Conventional intercreditor arrangements assume pro rata sharing and a single enforcement path. An Islamic tranche whose recourse runs through owned assets does not naturally sit in that waterfall. The intercreditor agreement has to state what each party may do, in what order, and what the Islamic financiers' consent is required for.
What happens on a profit-rate mismatch. Conventional debt prices off a floating benchmark; a murabaha's profit rate is fixed at the outset for its term. Over a long tenor the two diverge. Whether that divergence is hedged, and by whom, is an economic question that should be settled before documentation rather than discovered in it.
The board and the committee
A conventional credit committee and a Shariah board evaluate different things, and neither will accept a structure justified only to the other. In practice the sequencing matters: obtaining Shariah approval in principle early, before the conventional documentation hardens, avoids the position where a structure is credit-approved and then found non-compliant in a detail that requires reopening the intercreditor.
The reverse also happens. A structure blessed by a Shariah board but never tested against credit metrics can produce a capital stack in which the Islamic tranche is subordinated in economic substance while ranking pari passu on paper — which a rating agency or a lender's credit team will eventually notice.
What to settle before drafting
- Whether the Islamic tranche requires asset ownership, and if so which asset and in which entity it sits
- How security is shared, and whether the conventional package is intact once ownership is separated
- The enforcement sequence, in the intercreditor agreement rather than by later negotiation
- Who carries the profit-rate versus floating-rate mismatch over the tenor
- Which board approves, at what point, and what they have approved in principle before documentation
Why it is worth the work
A financing that can accept both pools of capital prices better than one that cannot, and closes with a wider book. The cost is a more complicated intercreditor negotiation and a longer approval path. That cost is predictable and can be planned for; the alternative — discovering the incompatibility after credit approval — is neither.
