Kazakhstan is among the world’s top 10 exporters of wheat which is by far the country’s most important agricultural commodity, well-known for its modernization of harvesting techniques. The high quality of production has enabled Kazakh wheat to meet standards set by the European Union and the World Trade Organization.
Capitalizing on the opportunities offered by the Kazakhstani Grain Law, ITFC managed to integrate an Islamic Structured deal, first of its kind in Central Asia, that serves as a model for future agricultural and supply chain transactions, in which its feature allowed in the substantial reduction of the total pricing, charged to the beneficiary and rendered the financing structure more competitive.
ITFC championed Shariah-compliant trade financing by this US$40 million operation. This Wheat Export Deal is specifically designed to capitalize on the advantages of the unique grain legislation in Kazakhstan enacted in 2001 through which grain warehouse receipts system was introduced.
The Financier- in this case ITFC- created a committed finance structure that is more fully described as Structured Murabaha Financing. This Financing was utilized by the Beneficiary- AIC Invest - to purchase Wheat from the Local Sellers for its onward trading activities for export sales. Hence, this particular deal does not only support the private sector development, but also strongly impact the prospects for growth and development in the form of rural well-being, contribution to GDP and food security.
The Structured Deal in a Nut-shell
ITFC put in place a solid risk mitigation structure throughout the complete phases of the transactions.
AIC Invest identified the potential buyers/off-takers and reached an agreement with the off-takers clarifying inter-alia the total volumes required to fulfill the export contracts. An important feature of the signed export contracts was that AIC Invest would release the commodity on a pre-payment basis. The Beneficiary calculated the monthly required volumes to be purchased locally and conveys the same to ITFC.
After obtaining the purchase approval from ITFC on the total purchase volume and a preliminary monthly off-take time table, AIC Invest negotiated and concluded the Purchase Contract(s) with the Supplier(s) (local farmers). AIC Invest was responsible for checking their quality, quantity, specifications and all other matters relating thereto. Next, they pledged to ITFC the warehouse receipt certifying quantity and quality of an additional 25% of grain of the same quality of the financed grain by the ITFC as a security margin, resulting in 133% coverage.
AIC Invest made sure that the goods are insured by “All Risk Coverage” insurance whilst in the Storage Facilities with the ITFC being assigned as Loss Payee. For this purpose ITFC notified the AIC Invest of its choice of insurance company.
At the next stage, AIC Invest presented to the ITFC the invoices and warehouse receipts certifying quantity and quality, and purchase undertaking. After having obtained 133% coverage and upon the presentation of the required documentation, ITFC paid 100% of the Purchase Price to Supplier.
In the course of the project implementation, as the Beneficiary received the pre-payment under the export contracts, it was lodging a release request to ITFC for a required wheat volume. After receiving a releasing request from AIC-Invest, ITFC then sent an invoice to the company.
Subsequently, AIC-Invest prepaid the required amount confirmed by the appointed agent bank, where ITFC then endorsed the warehouse receipt of the required portion to the company (ExWorks basis). AIC-Invest presented the endorsed warehouse receipt to warehouse operator that released the indicated amount of grain.
Capitalizing on the opportunities offered by the Kazakhstani Grain Law, ITFC managed to structure the deal without using the services of collateral manager which significantly decreased its operating expenses. This feature allowed reducing substantially the total pricing charged to the beneficiary and rendered the financing structure more attractive. All contracts that entered into the Murabaha Financing Agreements were drafted or approved by the Financier’s Legal counsel.
What makes this Deal Stand-Out?
- This is the first Islamic Structured Export Financing deal in the Central Asia.
- The success of the case based, first of all, on the ITFC’s capability to deliver the tailor made financing structure and the genuine spirit of cooperation between the financier and the beneficiary.
- This operation was designed to benefit from the unique Grain Law enacted in Kazakhstan in 2001. The Grain Law envisages for a grain warehouse receipts system facilitated through the state registered silos/elevators.
- ITFC was able to contribute to the development of the rural areas, as the agriculture sector represents about 47% of the Kazakh population.
- ITFC had overcome the language barrier of this deal, where all official documentation including warehouse receipts are in Russian language.
- Since the demand for wheat is rising, ITFC had promoted regional cooperation, by contributing to the food (grain) security.
Schematic flow of the Transaction
The main distinguishing features benefiting the Beneficiary of the trade finance structure put in place by the ITFC can be summarized as follows:
- The deal structure permitted the beneficiary to pledge its idle inventory as a collateral margin instead of traditionally used cash payment which positively affected the beneficiary’s cash conversion cycle.
- ITFC’s financing allowed the beneficiary to build up its inventory which enabled it to conduct more aggressive export marketing knowing that it enjoys access to the required volumes.
- The beneficiary managed to fix the cost of wheat at a time when wheat prices started to soar up internationally. At the same time, by buying in bulk the beneficiary managed to obtain the price discount which further improved inventory cost management crucial for the business.
- ITFC set no limit for a single sale which gave to the beneficiary further flexibility in negotiating the export contracts.
- According to the deal structure, the ITFC’s sale price to the beneficiary is calculated on the basis of the volume of each delivery and a pre-agreed mark up.