Saudi Arabia-based investment bank Sidra Capital is changing its Islamic trade finance fund, initially established as closed-ended, to an open-ended format as it sees growing appetite from regional investors in the Gulf, its chief executive said.
The Luxembourg-registered fund provides working capital to small businesses focusing on agricultural commodities, energy and metals, a segment often neglected by Islamic lenders, across emerging markets outside Saudi Arabia.
Assets under management in its structured trade investment fund, co-managed by Sidra Capital and Swiss-based INOKS Capital, are now SAR250 million ($67 million) after a recent inflow from Gulf-based investors.
“The first tranche of the GCC (Gulf Cooperation Council) investors came with $50 million and we think there will be more and more of this to come through,” Hani Baothman, chief executive of Sidra Capital, told Reuters in a telephone interview.
The fund, launched in 2012 with an initial $15 million in assets, has received approval from the Luxembourg regulator to become open-ended and it expects the Saudi regulator’s approval as early as April, Baothman said.
He said the fund supported the supply chain of companies, unlike other murabaha-based funds which buy and sell metals on the London Metal Exchange.
In murabaha contracts, a firm buys and sells merchandise on behalf of a third party and shares a portion of the profits. But such financing is rarely seen in direct merchandise trade.
“We don’t buy secondary transactions, we don’t securitise. We are focusing basically on commodities like cocoa, rice, cotton, maize, soft commodities, even some metals…real commodities, real murabaha, real transactions.”
The fund helps smaller companies grow their businesses to the point where they obtain access to bank finance, said Baothman, adding that the fund made an annual return of nine per cent last year.
“What happens is that for many of these companies supported by the fund, their value increases dramatically within three years, and eventually they become mature medium-sized companies and open a wider financing world for them.”
Asked whether the firm planned to introduce this strategy into Saudi Arabia, Baothman said it was being considered but not in the near term.
“The whole purpose of investing in this strategy is to ultimately bring this know-how to the GCC region, where trade finance is widely used by banks but not in a similar manner as our fund.
“Currently the fund can support the supply chain of regional companies, but we eventually want to establish a local vehicle that can support local SMEs (small and medium-sized enterprises).”
The fund is currently studying possible transactions in sub-Saharan Africa, Malaysia and eastern Europe, Baothman said.