By Muhammad Ali Shaikh
Abstract:
Conventionally project finance (PF) is limited recourse finance (LRF) based on non recourse to the sponsors and relies mainly on the project cash flows which closely resembles Modaraba. There are many things common such as project’s viability as investment criteria, monitoring by banks, non recourse to sponsors and management control. Key issues such as risk of loss have many similar dimensions.
Modaraba option has some benefits which make it a better alternative. For example if project fails, the bank as owner can quickly liquidate the assets to improve recovery. In case of mismanagement and violation of contract, the bank can assume control and fix responsibility on the Modarib for losses. Besides losing remuneration for his work, his reputation is also at stake. Therefore delegation of managerial authority to Modarib is not a blank cheque. Capital gain in successful projects accrues to the bank where as in a loan situation it goes to the project. Collateral is a fallback position in LRF but is not needed in Modaraba.
The limited exposure of IBs in PF business needs enhancement for which a market niche exists, particularly in Pakistan where the field is open without significant competition after the closure of DFIs.
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