What is Conventional Syndicated Financing?
These are debts issued by a group of lenders to a single borrower. It is the practice of providing a loan by a group of lenders – known as the syndicate – to fund an individual borrower.
Under a syndicated loan, lenders are typically big banks, though financial institutions such as mutual funds and insurance companies sometimes also fill these roles. There is a single lender appointed as the lead, and they are responsible for arranging the syndicate group. They also have further duties beyond funding a portion of the loan, such as facilitation and allocation of the cash flows to the other lenders. The syndicate manager also works with the borrower to arrive at interest rates, payment terms, and other details described in a term sheet.
Syndicated financing has several parties involved, such:
- Arranger/lead bank
- Facility agent
- Security trustee
- Participating banks
- Underwriting bank
The primary objective of a syndicated loan is to spread the risk that would ordinarily be present with a single borrower. Since the value of these types of investments far exceeds regular loans, the risk is that default by the borrower could have a catastrophically crippling effect on a single lender.
From a Sharia perspective, conventional syndicate financing is not Sharia compliant. It is Riba-based financing, which is categorically prohibited in Sharia.
The second issue with conventional syndicate financing is the existence of prohibited debt trading. The trading of debt is referred to as Bay’ al-Dayn. It is a sale of payable right or receivable debt either to the debtor himself, or to any third party and it could be paid immediately or for deferred payment. There are divergent rulings among the classical Fuqaha and jurists relating to the permissibility of the sale of debt. In the context of syndicate financing, the arranger can sell the debt to investors on discount. This results in Riba and the sale of debt.
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