The Singapore branch of RHB Bank, one of the largest banking groups in Malaysia, has signed what it says is the world’s largest Islamic bilateral hotel financing deal with Royal Group of Companies, a Singapore-based property conglomerate, the bank announced in a statement on July 11.
The lender will provide an alternative finance package for a five-star luxury hotel valued at 300mn Singapore dollars ($219mn), the SO Sofitel Singapore Hotel, which is the underlying asset of the deal.
The hotel, located in the city state’s Central Business District on Robinson Road within an iconic historical building, opened its doors back in 2013 with 134 rooms and is geared towards attracting both business travellers and tourists.
The Islamic financing contract has been entered as a refinancing deal for the property and is also the first Islamic financing structure for Royal Group, according to its co-chairman Bobby Hiranandani.
“We are open to alternative financing, so long as the economics makes sense. This is our first Islamic financing facility,” he said.
The Shariah-compliance of the deal seemed a bit tricky at first. RHB Bank said the deal in fact had a “rarity value” as hospitality-related assets are normally not used for Islamic financing. They are usually considered haram because not all income from hospitality, particularly from selling alcohol and operating entertainment facilities such as nightclubs, is deemed to be Shariah-compliant.
In fact, Islamic real estate financing is uncommon in most urban financial centres because the tenants mostly comprise of (conventional) banks and hotels which are non-Shariah-compliant in nature.
“As such, Islamic funds are limited to buying office buildings that are occupied by large corporates or government entities,” the bank said.
Malaysia, though, is a special case. In the past, hotel businesses in Malaysia were considered Shariah-compliant if sales of alcohol, pork and other non-halal food and beverages, non-Shariah-compliant entertainment and other activities deemed non-compliant with Shariah did not exceed more than 20% of total revenue.
In April 2016, the Shariah Advisory Council of the Securities Commission Malaysia in a revision of its Shariah screening methodology even decided that the 20%-benchmark on hotel and resort operations under Shariah-compliant business activity benchmarks was no longer applicable “since the main purpose of hotel and resort operations is to provide accommodation.”
This also revised the stance towards other issues deemed un-Islamic, such as art depicting the human form in a hotel, non-segregated function rooms and wellness facilities for male and female guests and staff being non-predominantly Muslim.
That made the Islamic financing deal for the Sofitel eventually viable and will likely encourage more such deals.
“RHB Bank Singapore is focusing on a niche and targeted market for Islamic financing,” said RHB the lender’s head of Islamic banking, Nazmi Camalxaman.
“We see hospitality assets as one of the best performing real estate classes in Singapore and we will continue to remain aggressive in this sector from a financing perspective,” he added. Despite being one of the world’s largest financial centres, Singapore still has an underdeveloped Islamic finance industry with little activity in the sector apart from a few sukuk issuances now and then, a handful of banks offering Islamic banking windows and one Shariah-compliant real estate investment trust.
RHB Bank is one of the few banks with a dedicated Islamic finance unit in the city state. Singapore’s largest financial services group, DBS Bank, wound down its Islamic finance window in 2015.
A view of the SO Sofitel Singapore Hotel. The Singapore branch of RHB Bank will provide an alternative finance package valued at S$300mn ($219mn) to the SO Sofitel Singapore Hotel, under what the lender says is the world’s largest Islamic bilateral hotel financing deal.
