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London-based credit asset manager Channel Capital Advisors has launched a sharia-compliant trade finance fund.

It will finance low-risk trade businesses, aiming for “mid-single-digit returns”, according to Paul Wilson, Channel’s chief investment officer. The assets of the fund will be short-dated, self-liquidating and facilitate the supply of goods or services.

The asset manager has not disclosed the size of the fund, but speaking to GTR, Wilson says the vehicle will finance deals sized between US$5mn and US$20mn.

Having launched with its first investor, Channel will now look to market the offering more broadly.

“We are already in touch with several other investors with a view for them to invest,” Wilson says. “Sharia investors in particular tend to be in three locations: the Middle East, Southeast Asia and the UK. We believe that these investors are not currently invested in trade finance, or if they are, they would like more but haven’t been able to access it. Instead they are invested in things like cash, money market funds or sukuk bonds, but not trade finance. So we really think there is a strong demand for a sharia-compliant trade finance fund.”

Simply put, sharia-compliant financial products comply with Islamic law, which prohibits earning interest on loans and is based on the principles of risk and profit-sharing. As such, it requires specific structuring for Islamic investors to be able to invest in trade finance assets.

“Being sharia-compliant essentially means that there’s an extra level of complexity in terms of the documentation, and we typically have to educate the borrowers. It’s one extra thing they have to sign, but economically it’s exactly the same as conventional trade finance,” Wilson says.

Channel Capital Advisors was founded in 2006 as a credit derivative investment company, and has been focusing specifically on trade finance since 2013. The new fund is the third pillar of the company’s offerings.

The first pillar is Channel’s debt products business, which provides working capital facilities, including trade receivables, inventory and supply chain finance, for large companies, sold to investors in the form of securities.

The second pillar, which went live two years ago, is an invoice factoring platform called Togather Finance. Initially focused on the Netherlands, but having subsequently expanded to other EU countries, the platform finances working capital requirements of small and medium-sized enterprises.

Wilson says Channel will leverage its existing debt products business to accelerate origination of trade finance assets for the new fund.

“We’ve had investors question if we can originate enough assets to populate the fund and we strongly believe we can because we have a great pipeline of new deals happening all the time in our debt products business that we can take a piece of and put into the new fund. It helps feed an origination channel for our fund,” he says.

The fund’s portfolio will be managed by Ken Owen, who has been with Channel since 2014.

 

Growth of Islamic trade finance

Channel’s new venture comes amid growing interest in Islamic trade finance. In late-2016, Barak Fund Management launched a sharia-compliant fund together with Bahraini investment bank Ibdar Bank. At the time, Barak said it had created the fund to meet the growing demand for both sharia-compliant investment vehicles and for the alternative asset class of trade finance.

In October 2018, trade finance marketplace LiquidX opened its platform to sharia-compliant transactions, having developed a structure together with the Bank of London and the Middle East (BLME), a UK-based Islamic bank.

Other recent initiatives have been focusing on standardisation within Islamic trade finance. Last year, FCI, the global body representing factoring and receivables finance companies, amended its ruleset to support sharia-compliant factoring. The amendments were prepared by International Islamic Trade Finance Corporation (ITFC) together with Noor Bank and Tawreeq Holding, a provider of sharia-compliant working capital programmes in the Mena region. FCI has since created a new Islamic factoring chapter within its network.

Meanwhile, in January, the Bankers Association for Finance and Trade (Baft) and International Islamic Financial Market (IIFM) released an Islamic master participation agreement – a global industry standard document for buying and selling Islamic trade-related risk.