Financing for the $1.1 billion Thuraya mobile satellite telecommunications network will reach final closure by the end of this month. The project, described by its advisers as "one of the most significant transactions in the Middle East in years", has been put together using a mixture of equity, syndicated loan, and the largest tranche of Islamic financing yet assembled. All the more surprising, then, that it has been achieved against a background of uncertainty in the satellite telecoms market.

Thuraya is a regional mobile network reliant, at least for its first two years, upon a single satellite in stationary orbit over the Middle East and parts of Africa, Europe and South Asia. The satellite, due for launch from Sharjah in the UAE next May, was built by Hughes Electronics for around $1 billion. It will enter the market alongside new or planned networks from Teledesic, Globalstar, and the troubled ICO and Iridium.

The Thuraya consortium, including Emirates Telecommunications, Bahrain's Batelco and Deutsche Telekom's consulting affiliate Detecon, assembled in addition to its $500m of equity and a $500m syndicated loan, co-arranged by Societe Generale (SG) and ANZ, a $100m tranche of Islamic financing through Abu Dhabi Islamic bank (ADIB). ADIB will sell on part of the tranche and keep the rest on its books.

This is not the first time Islamic sources have been used in project finance, since they have contributed to both the Hub electrical and Equate Petrochemical ventures - but the size and complexity of this deal is unprecedented.

Islamic financing uses a number of instruments to avoid the straightforward payment of interest and therefore conform to Shariah law. One challenge for the consortium was the need to ensure that the borrowing structure was one with which both a shariah committee and the arrangers could feel comfortable. In the event of default, lenders had to be sure that the tranches were ranked pari passu. As Clive Tucker, from Thuraya's advisers Ashurst Morris Crisp puts it; "there's a perception [with Islamic Finance] that it might be difficult to share security". The courts in the UAE tend to be among the more flexible in this regard, since they are usually prepared to consider cases involving interest, he says.

Inter-creditor issues turn upon the alternative outlooks of partners in a project. Nasr-Eldin Ayoub-Bey, from the Institute of Islamic Banking and Insurance, stresses the divergence between the two cultures. "The majority of financiers will prioritise the commercial risk and viability of the investment and the Islamic financier will, of course, give precedence to Shariah considerations." These can most visibly affect questions of title and ownership.

With Thuraya, the Islamic tranche was secured against the satellite's ground station which, containing a great deal of high-value equipment and software, more than covered the $100 million in question. This was fortunate since the exact status of a geosynchronous satellite under UAE law is not explicit.

For Thuraya, the use of the Islamic tranche emerged in December last year. At that point an unnamed bank withdrew from the consortium, and ADIB was brought in to reduce enforcement risk - their structure was felt to be more suited to the project. As Guy du Parc Braham, arranger at SG explains; "the UAE has, as far as banks are concerned, a more difficult legal framework". Although ADIB's charge on the ground station was effectively structured as a lease, a series of inter-creditor agreements led to an exchange of security interests at the bank level.

The loan might be the first of several such facilities, especially where there is suitable interest from sponsors. Says Peter Pontidas from ANZ's London Project Finance team: "It offers a new source of finance to what traditional lenders can offer". Until now, government pressure has been a major factor behind the use of Islamic finance. It is possible that the high degree of intermingling between the political and financial worlds could explain this, but the efforts so far of the Islamic banks to look for projects may equally do so. Ayoub-Bey believes that "there is now a greater realisation than before of the need to more effectively develop and market the necessary mechanisms".

There have, for instance, been moves to make regulators in the UK more aware of the possibilities of Islamic Finance. The marriage between the two cultures could be a fruitful one since many of their concepts, including leasing, joint ventures, and turnkey contracts, are held in common. The mark-ups, for instance, in Islamic contracts tend to have coincidentally similar values to conventional basis point pricing.

Pressure for the use of Islamic finance usually comes from local sources. The implicit reasoning behind its use is that local arrangers and sponsors will have a clearer idea of a project's saleability to Islamic markets. ADIB believes that the network's novelty and targeting at Middle Eastern markets are expected to be its major selling points to local investors. For du Parc Braham, the attractiveness of the deal was that "it's focussed on a small number of markets that the shareholders already have interests in".

Attracting finance was helped by the names behind the project, which was, in Tucker's words, "backed by some extremely creditworthy equity holders". The broad spectrum of state telecommunications operators within the region that have taken stakes in Thuraya include those of Qatar, Egypt and Morocco. The loan does not become limited recourse until a certain cash flow level has been reached- which could be as high as $100 million per year.

The network's sponsors will also hope that it has learnt from the marketing mistakes that have brought Iridium low. Thuraya is highlighting its compatibility with GSM and roaming protocols and the fact that its handsets are fax and data compatible, as well as smaller than those of existing satellite networks. In October it concluded a contract with Alcatel for network and messaging services.

The consortium clearly believes that it can offer a more up-to-date package than the Iridium system, born in the telecoms environment of the 1980s and marketed as a luxury good. If the low cost of Thuraya calls (roughly $0.50 per minute, compared with Iridium's initial $9) can be combined profitably with the remote character of much of the satellite's footprint and the high personal incomes of the target market, Thuraya, a regional network, could well escape the difficulties faced by so many fledgling global networks.

Those predicting an eventual victory for land-based cable fibre-optic networks concede that their spread will not be rapid enough in the core region for Thuraya, especially within the initial 12-year life of the network's satellite.

It has also avoided the political difficulties surrounding Hughes' involvement with the Chinese-led Asia-Pacific Mobile Telecom project, which fell victim to regulatory problems. For the Thuraya project Hughes received the active backing of the US department of Commerce, since technology-sharing fears were not as pronounced for the UAE.

The growing confidence among local operators is evidenced not only by the efforts of global networks to find alliances in the region. It's also a factor in the proposed corporatization of ARABSAT, a shareholder in Thuraya. ARABSAT, originally an inter-government alliance, was one of the earliest satellite ventures outside of North America. Even INTELSAT, the most venerable of the global satellite operators, has cited increasing competition as part of its vote this month to privatise.

Confidence is, however, returning to the global satellite industry as well. Despite the protestations of the bankers involved that the entire industry has been adversely affected by the Iridium experience, operators are in a serious hurry to get their networks on stream as quickly as possible, aware of the looming threat from the field alongside them. Motorola, for instance, is involved with both Teledesic (marketed as "the internet-in-the-sky") and Iridium, and is too committed to see its projects fail.

Teledesic recently confirmed that it was looking at an early market entry strategy for its broadband low-earth-orbiting satellite network. It has given a fairly clear sign of where its ambitions lie by receiving a $121 million equity contribution arranged by the Abu Dhabi Investment Company- another Thuraya shareholder. This activity suggests that even if banks that are already exposed to satellite mishaps feel that they have had enough, other organisations ensure that they have a reasonable spread of investments on the assumption that at least one system will emerge triumphant.

Globalstar's network - launched at Telekom 99 in Geneva last month - will be rolled out gradually, although the Middle East is not one of its initial target areas. It currently has 44 satellites in orbit, and is engaged in a process of signing up local mobile operators similar to that undertaken by Thuraya. It provided ample proof of the risks inherent in satellite operations when twelve of its satellites were destroyed at launch last year.

Nevertheless, Iridium, with a network already running, is the mobile operator to watch. ICO, cheered by a recent refinancing plan from Teledesic, has yet to launch a satellite. Prior to its difficulties Iridium announced a subscriber base of just over 20,000: Thuraya anticipates a customer base of 1.8 million.