Shura Council to decide on $80 million Al Dur water project loan transition and terms
Bahrain is moving to amend an $80 million loan agreement for the Al Dur water project, with the Shura Council set to vote on Sunday on a shift from the defunct LIBOR benchmark to the newer SOFR system.
The move follows the global shift away from LIBOR, which was phased out last year after long-running concerns about its reliability.
The Financial and Economic Affairs Committee, after reviewing the proposal, has confirmed that the change will not lead to extra costs for the government, which backs the loan, or for the Electricity and Water Authority, which is taking on the borrowing.
The Islamic Development Bank is providing the funds, and any difference in interest rates — calculated at 42.826 basis points — will be covered by the Electricity and Water Authority under terms set by the International Swaps and Derivatives Association.
The original financing agreement, approved in 2022, remains in place.
Shift in benchmarks
The shift in benchmarks will not alter the total project cost, repayment period, or loan terms.
No loan withdrawals have been made yet, so repayment schedules will only be set once the project is finished.
The Ministry of Electricity and Water Affairs has stated that LIBOR had become unreliable because it was based on estimated borrowing costs rather than actual transactions, leaving it open to manipulation.
Transparent standard
SOFR, on the other hand, is tied to secured lending backed by US Treasury bonds, making it a firmer and more transparent standard.
Regulators in the UK and US had for some time pushed for LIBOR's removal, with SOFR becoming the chosen alternative. Concerns that SOFR could cause unpredictable shifts in borrowing costs were addressed by the committee, which noted that rates would be averaged over time to iron out short-term swings.
Real transactions
Unlike LIBOR, which factored in subjective credit risk premiums, SOFR is pegged to real transactions, making it steadier.
The amendment agreement, made up of 12 sections and an annex, confirms that the switch will not bring new financial strain and that all necessary approvals have been secured.
Any disputes will be settled through arbitration in Dubai unless resolved within 30 days. The agreement follows Islamic financial rules, as laid out by the International Islamic Fiqh Academy in Jeddah and the Accounting and Auditing Organisation for Islamic Financial Institutions.
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