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The Saudi British Bank (SABB) has completed its first sharia-compliant supply chain finance (SCF) transaction, as it works to boost support for clients sourcing goods both domestically and internationally.

As part of a deal signed in September, which the bank says is the first sharia-compliant SCF agreement to be signed in Saudi Arabia, SABB will provide payables financing to domestic suppliers of Almunajem, one of the largest food companies in the kingdom.

Almunajem’s suppliers will be able to access early payment financing that complies with Islamic financing laws through SABB’s pre-existing SCF platform.

The bank has previously offered payables financing through the platform, which was developed by working capital solutions provider Demica and launched in 2019, but a sizeable portion of the Saudi Arabian domestic market had been left unable to use the product as it was not sharia compliant.

One of the main principles of Islamic finance is that charging or paying interest – or riba – is prohibited on all transactions.

In order to comply with this restriction, the bank will forward sell a metals commodity to its client’s supplier in exchange for their invoices, enabling the bank to gain a profit and for the suppliers to receive early payment in a way that is sharia compliant.

David Leslie, general manager for global trade and receivables finance at SABB explains: “SABB engages with multiple brokers for buying and selling commodities on a regular basis to facilitate the funding requirements of the client. For any funded transaction, there are always two legs.”

As part of the first leg, SABB will sell the commodity to the client on spot or deferred payment basis. Secondly, acting as the client’s agent, the bank will then also sell the same commodity in the market.

The difference in the price between the two legs generates the profit for the bank and funds the supplier’s invoices, Leslie says.

Speaking about the need for the product in the kingdom, Leslie tells GTR that a large portion of Saudi Arabian suppliers have historically been excluded from the emerging SCF market.

“The conventional SCF product was running very well for our large multinational buyer customers, but we spotted an opportunity in the market as around 60 to 70% of our customers’ domestic suppliers do not want any programmes involving riba.”

While the product has initially been deployed domestically, Leslie says the bank’s buyer clients could look to offer the solution to international suppliers, for instance in countries where demand for Islamic finance is strong, such as the UAE, Malaysia or Pakistan.

The Saudi Arabian government has moved to support the roll-out of sharia-compliant SCF, with the Saudi Industrial Development Fund partnering with SABB to implement a similar solution and agreeing to guarantee a certain number of transactions signed under the new product.

According to a World Bank report, the size of the Islamic trade finance sector globally stands at US$186bn, while the industry is “growing both in scale and in relevance as Islamic finance plays a larger role in OIC [Organisation of Islamic Cooperation] countries”.

But the report notes that there are challenges to this expansion. Malaysia is a major hub for Islamic trade finance, yet the World Bank says banks’ clients perceive there to be an absence of key products, such as supply chain finance.