A new take on ‘angel’ investing
Sugar refiner PT Angels gets a sweet deal thanks to Islamic trade finance
Imagine you’re running a business with tons of potential. You know that it could be profitable — as soon as you have your finished product, you’re able to sell it. The problem is that you don’t have enough capital to buy your raw materials. Now imagine that you have to accept unfavorable borrowing terms to buy those raw materials just to stay solvent.
That was life for the management at PT Angels, an Indonesian company based in Serang on the island of Java. PT Angels has processed raw sugar since 2002, but getting favorable terms to purchase sugar and sell the refined product to the food and beverage industry was never easy. Things changed, however, in 2009 when the firm signed an agreement to finance its raw inputs with $25 million from the International Islamic Trade Finance Corporation, or ITFC.
The ITFC is an autonomous entity within the Islamic Development Bank Group; it was created to advance trade to improve the economic condition and livelihood of people across the developing world. It does this by offering trade-related capacity building tools to help small and medium-sized businesses compete successfully in the global market. In the case of PT Angels, this means making capital available for sugar purchases on terms that are more favorable than elsewhere. It also means buying in quantities that are large enough to reduce costs and improve economies of scale.
How it works
The agreement between the ITFC and PT Angels is called murabaha. It’s a type of credit sale that differs from the interest-bearing loans common in trade finance. With the murabaha contract, the ITFC buys a sugar shipment from a third party vendor free and clear. It then sells the sugar to PT Angels, adding a small profit, or mark-up, that was agreed upon in advance. The resulting transaction means that PT Angels can leverage the ITFC’s stellar reputation and capital to secure goods at a price they most likely could not get otherwise.
Investing in trade finance
Through a process of syndication, the ITFC allows in other investors who want to help facilitate deals like the one with PT Angels. By participating in trade finance deals, investors are able to positively impact companies in the ITFC network through pledges of capital; they also share in any gains from the transaction.
From a risk/return perspective, murabaha trade finance deals are an attractive option for international fixed income investors; they can plan for an indicative return because pledged capital is drawn down orderly and incrementally, while also protecting themselves from the higher interest rate risk common with other credit instruments. According to Federated Investment Management Company, which invests in ITFC-syndicated deals, Islamic trade finance offers some of the best risk-adjusted returns in the space.
“You can earn superior yield with a quarter of the interest rate risk,” says Ihab Salib, portfolio manager of the Azzad Wise Capital Fund, which owns shares in the PT Angels trade finance deal. “There is much lower volatility because it’s secured by the ITFC.”
The Jeddah-based Islamic Development Bank (IDB), parent of the ITFC, is one of the few remaining AAA-rated institutions in the world. The ITFC has never had a default, which speaks to the creditworthiness of the transactions the IDB underwrites.
Making an impact
The story of PT Angels prior to its relationship with the ITFC is not unusual in parts of the world. For many small businesses, the cycle of debt, repayment, and more debt is so pervasive that many cannot imagine a way out.
Ethical trade finance has emerged as one of the most effective ways to directly help create jobs and grow businesses in an environment where access to capital is extremely limited. With the additional capital contributed by international investors, the prospects for development look even sweeter than a spoonful of PT Angels sugar.