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Home / SPECIAL REPORTS / Non-traditional forms of project finance are gaining traction in the GCC

Non-traditional forms of project finance are gaining traction in the GCC

by Fatima De La Cerna on Sep 24, 2017


Companies in the region are becoming creative in their efforts to secure project funding, states Mathew.
Companies in the region are becoming creative in their efforts to secure project funding, states Mathew.

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In Q1 2019, banks around the world will implement Basel III, an international reform framework developed by the Basel Committee on Banking Supervision that is aimed at boosting the regulation and risk management of the banking sector.

Speaking to Construction Week in March this year, Karim Nassif, associate director of infrastructure finance at S&P Global Ratings, noted that Basel III will make it harder for banks to offer long-term project financing support, likely placing further pressure on the region’s construction industry.

He elaborated: “The construction sector is feeling the strain in terms of its operational ability to deliver the GCC’s vast infrastructure pipeline. According to S&P Global Ratings’ estimates, the GCC has a funding gap of roughly $270bn. If the region is going to deliver this infrastructure pipeline in spite of the funding gap, stakeholders are going to need to secure project finance [from other areas].” 

Like Nassif, Shimmy Mathew recognises the need to pursue non-traditional forms of financing. But rather than propose it as a possible course of action for the industry, he says that it’s a practice that is already being adopted in the Middle East. 

The chief financial officer of KBW Investments tells Construction Week that in the past couple of years, a dearth of liquidity in local and international banking systems has been the biggest challenge facing the construction sector. 

“Regionally, this has been a direct result of the price of oil, which is still the primary driver for economic growth in many countries across the Middle East,” he explains. “A slowdown in government spending means that bank deposits drop and lending tends to dry up, as lenders think more selectively about granting loans. Meanwhile, the cost of lending rises at the same time. 

“This has been compounded by new international regulatory standards, such as Basel III, which have made some banks more reluctant to allocate long-term loans.”

 In an effort to weather this challenging financing climate, construction companies are reportedly becoming creative in their efforts to obtain funding for their projects. 

“Against this backdrop, construction industry stakeholders have generally had to become a little more creative when it comes to securing financing,” explains Mathew. “As well as more traditional forms of financing, companies are now looking at a variety of options, including private equity players, specialist infrastructure funds, and capital markets – through bonds and/or sukuk – to make up the shortfall.”

He clarifies, however, that the extent of the impact of low liquidity differs from country to country. “This has affected the banking sectors of some countries more than others; in the UAE, the Central Bank’s Credit Sentiment Survey for the second quarter of this year suggested that demand for credit appeared to have stabilised following a recovery registered in the previous quarter.”



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