Turning point for Takaful in Europe?

Enticed by the business opportunities Muslims could bring, European insurers are actively targeting the Muslim community but these insurance giants are skipping Muslims in their European home markets and instead, concentrating their expansion drive in the Middle East and Asia. Our cover story this week asks: What does this say about the Takaful and Islamic finance landscape in Europe and could the trend change in the near future?

Following on from our cover story last week in which we explored Iraq’s Islamic finance potential, we bring you an update on the latest developments in the market which has generated significant interest from our readers. We also take a look at initiatives by the UK government to close gender disparity in the financial services in our Women in Islamic Finance segment, dive deep into the Djiboutian market as well as the marine and aviation financing segment and break down Ekovest’s largest Sukuk transaction to date in our case study. Our IFN Correspondents bring you updates from the ground in Nigeria, the Maldives, Malta, Canada and Singapore while IFN Columnist Kavilash Chawla shares his thoughts on experiential learning for Islamic finance students. We also have an aviation financing feature from Walkers.

As usual, we wish our readers an insightful and informative read.

Sovereign Sukuk: Pakistan’s re-emergence

As the markets move closer toward the end of the third quarter, there is still a healthy amount of activities lined up in the sovereign Sukuk pipeline, with Pakistan being the latest to potentially issue its third US dollar Sukuk sometime soon. DANIAL IDRAKI brings you the latest updates.

Pakistan is looking to end a 21-month drought in the international sovereign Sukuk market. In a request for expression of interest viewed by IFN, the Pakistani government revealed that it intends to print an Islamic sovereign paper in the international capital markets, and the proposed Sukuk would be the government of Pakistan’s third US dollar issuance. It last issued in November 2014 with a five-year US$1 billion issuance priced at 6.75%. The South Asian nation also issued in the domestic rupee, such as the PKR80.4 billion (US$762.07 million) Sukuk Ijarah sold in the first quarter of 2016.

Over in Indonesia, the government received total incoming bids of IDR15.27 trillion (US$1.15 billion) from the sale of five sovereign Sukuk securities via the auction system of Bank Indonesia, and awarded IDR4.37 trillion (US$330.37 million), according to an announcement on the Ministry of Finance’s website.

Meanwhile, in Malaysia, sovereign wealth fund Khazanah Nasional is mulling the issuance of as much as US$500 million of exchangeable Sukuk and is currently choosing banks for the potential offering, according to Bloomberg quoting unnamed sources. The notes will be exchangeable into shares of companies controlled by Khazanah. The state-owned firm has been reducing stakes in listed Malaysian companies through Islamic debt offerings that can be converted into shares.

Upcoming sovereign Sukuk



Expected date

Ivory Coast

XOF150 billion

31st Aug 2016


US$2 billion



IRR60 trillion




First quarter of 2017


JOD175 million



PKR79.1 billion











South Africa






Hong Kong

US$500 million to US$1 billion


Ningxia Hui Autonomous Region

US$1.5 billion



XOF150 billion






US$500 million





Shandong Province

CNY30 billion


Sindh Province

US$200 million



KWD5 billion

Sept 2016




Sri Lanka

US$1 billion



US$1 billion


Company Focus: Coris Bank International turns to Islamic funding for SME expansion

As the SME sector picks up pace in Africa, an increasing number of corporations and financial institutions are turning to Islamic finance to accelerate its growth and development. Coris Bank International, a commercial bank in Burkina Faso, recently secured a credit line from the Islamic Corporation for the Development of the Private Sector (ICD) to the tune of EUR17 million (US$19.03 million), that will allow it to increase the funding capacity for its SME business. DANIAL IDRAKI writes.

The SME sector in Africa has always struggled with access to capital, and it is estimated that there is approximately US$368 billion in credit gap across the region currently. This predicament, however, provides an opportunity for investors to fill the vacuum. Coris Bank, which became the first bank in Burkina Faso to operate a dedicated Islamic window since April 2015 (known as CBI BARAKA), looks set on taking advantage of the present opening in the West African market. “Islamic finance generally focuses on all sectors of activity but particularly on SMEs — our main target and driver of the economy in Burkina Faso,” the company told IFN. Coris Bank currently offers an array of Islamic finance services in the form of Wadiah, Murabahah, Mudarabah and Ijarah

While the funding from the ICD may propel its SME initiative in the country in the near term, Coris Bank already has plans in the pipeline to expand its footprint beyond its borders. Aiming to become a leading bank in the West African Economic and Monetary Union by 2020, it is eyeing expansion to Senegal and Benin by the end of this year. 

“The expansion to these two countries is in line with our international development strategy, which began with the opening of the Ivory Coast subsidiary in 2013. The products and services to be offered will initially cover conventional finance needs and will address all segments of the economy (individual, institutional, SME and large enterprises), while the products and services of Islamic finance will be introduced later, replicating the example of Burkina Faso,” the company explained.
While the Islamic capital markets witnessed back-to-back sovereign issuances by Senegal, Ivory Coast and Togo in recent weeks, Coris Bank noted that Burkina Faso — with approximately 60% of its 18 million people professing the Islamic faith — is also considering charting a similar path. “Islamic finance has good prospects in West Africa, and Burkina Faso in particular,” Coris Bank added. Burkina Faso had a GDP per capita of US$613 in 2015, and the IMF expects growth to increase moderately from 4% in 2014-15 to 5.2% in 2016.

Update: Iraq continues to grow in opportunities

Last week, we featured a cover story outlining the exciting new opportunities in Iraq for international firms since the improvement in security and the government’s commitment to financial reform. The report generated significant interest from our readers, and LAUREN MCAUGHTRY follows up with a brief update on the latest developments. 

Though Iraq has witnessed a slowdown since mid-2016 due to increase security concerns and more recently, lower oil prices, its economy is starting to recover. “We have noted a renewed interest to invest and further develop Iraq over the past couple of months,” noted Dana Abduljaleel, a senior associate with law firm Al Tamimi, speaking to IFN this week. “In particular, there seems to be groundwork to commence a number of governmental projects, including electricity generation, as well as certain infrastructure projects and telecom facilities. We have further witnessed interest from foreign investors, including in particular, the Asian markets.”

All this looks promising — so what concrete developments can we expect in the upcoming months? It looks as if it is no longer a matter of potential, but of material progress. “Relevant to the banking sector, these new initiatives mean that we can expect new project finance undertakings and L/C issuances toward the end of 2016 and beginning of 2017,” confirmed Dana. 

Although Islamic finance products are still relatively new to the Iraqi market, there also seems to be a clear preference toward Shariah compliant structures that bodes well for the future development of the market. “Large family-owned business and certain governmental project companies do seem to favor and consider Shariah compliant financings, and it is expected that this market would continue to grow as Iraq’s political and security situation stabilizes,” said Dana. 

To further support the development of Iraq’s banking sector, the Iraqi parliament recently approved a federal law regulating Islamic banks, namely the Islamic Banks Law No. 43 of 2015, which came into force at the beginning of 2016. The introduction of the new law was aimed at regulating Islamic banks, and should be a significant step forward for the progression and growth of the Islamic finance sector in Iraq. For example, a major new advantage is the provision of tax waivers for all sale and purchase transactions involving real estate, lands and vehicles concluded by Islamic banks in Iraq, allowing them far greater flexibility to structure their products — and thus, ultimately, making prices more competitive. 

The introduction of the new framework has already increased the demand for Islamic financing, and with further regulations expected later this year, the industry should grow from strength to strength. Now could be the time to strike — while the iron is hot, and before the rest of the world recognizes the renewed opportunity.

India pushes for non-interest banking despite potential backlash

India is brimming with Islamic finance opportunities — it is after all the home to one of the world’s largest Muslim population but religious sensitivity and politics have made it difficult for the country to completely embrace the Shariah compliant financial proposition. There are however progress toward that direction as VINEETA TAN reports.

Without making any reference to Islamic banking, the Reserve Bank of India (RBI) is making a push to introduce a defining feature of Shariah compliant banking in the Indian Republic weeks before Governor Raghuram Rajan — an ardent Islamic finance advocate — steps down in September; a move that has previously received political and religious backlash from certain segments of the Hindu-majority nation.

“It is observed that some sections of the Indian society have remained financially excluded for religious reasons that preclude them from using banking products with an element of interest. Toward mainstreaming these excluded sections, it is proposed to explore the modalities of introducing interest-free banking products in India in consultation with the government,” the RBI said in its latest annual report viewed by IFN.
Prime Minister Narendra Modi has been assertive in building stronger relations with the Muslim world, particularly the GCC, and this proposal could be seen as another measure by the Modi government to facilitate ties with the Islamic world. This, of course, also runs parallel to the government’s financial inclusivity efforts to enhance financial access of its 172-million strong Muslim population — one of the largest in the world and a point of attraction for many foreign Islamic financial institutions which have so far met with regulatory and political challenges in setting up shop in the South Asian nation. 

Despite so, the IDB earlier this year signed an agreement with the Export-Import Bank of India to open its first branch in India, which if it materializes, would be an important milestone in developing Islamic banking and investments in India. The IDB’s move however, is not without adverse reaction as Hindu groups have opposed the potential establishment of an Islamic bank in the secular country.

Financial inclusion is high on India’s agenda. The central bank established a dedicated committee to spearhead initiatives to improve financial services accessibility of its 1.3 billion people, out of which 233 million remain unbanked. While the number of unbanked individuals is high, this is about half of what it was in 2011 (557 million), according to a PwC report, an improvement thanks to Modi’s reforms.

The RBI’s financial inclusion committee recognizes the massive improvement but is continuing to set a much wider vision of financial inclusion, describing it as ‘convenient’ access to a basket of basic formal financial products and services that should include savings, remittances, credit, government-supported insurance and pension products to small and marginal farmers and low-income households at reasonable costs with adequate protection progressively supplemented by social cash transfers. 

And of the recommendations made to reach that goal, it has called for “an open specialized interest-free window with simple products like demand deposits, agency and participation securities, offering products based on cost-plus financing, deferred payment and deferred delivery contracts.”

Marine and aviation financing in Islamic finance

The marine and aviation sectors have seen a growing pivot toward the utilization of Shariah compliant financing over the last few years for the acquisition, leasing and financing of related projects. DANIAL IDRAKI takes a look at some of the recent developments of logistics companies that have moved deeper across the Islamic finance market over the last 12 months.

Meethaq Islamic Banking, the Islamic arm of Bank Muscat, and Oman Shipping Company signed an agreement for long-term financing facilities of OMR78 million (US$201.89 million) to refinance the latter’s large crude carriers — Marbat, Manah and Mazyonah — in November 2015. In March, Abu Dhabi Islamic Bank acted as the exclusive sell side advisor to Egon Oldendorff, which is part of the Oldendorff Group, on the full sale of its subsidiary Emirates Ship Investment Company (Eships) to UAE-based Tristar Transport, a subsidiary of Agility Public Warehousing Company. 

Toward the end of 2015, Gulf Marine Services secured a new US$620 million syndicated debt facility comprising Islamic and conventional financing. The six-year term facility, which extends the maturity of its debt profile with improvement in the borrowing margins, comprises a US$375 million term loan, a US$175 million committed capex facility and US$70 million for general working capital purposes, while a further US$300 million uncommitted facility was also agreed upon. Abu Dhabi Islamic Bank acted as the initial mandated lead arranger, global coordinator and sole bookrunner of the deal.

The National Shipping Company of Saudi Arabia (Bahri) announced in August that its unit, National Chemical Carriers Company (NCC), entered into a Murabahah financing facility agreement worth SAR181.7 million (US$48.42 million) with Arab Petroleum Investments Corporation. The 10-year facility will be used to finance 85% of the purchase value of two chemical vessels: NCC QAMAR and NCC MAHA, and will be paid over biannual equal installments. The firm had earlier announced that NCC secured a 10-year Murabahah financing facility worth US$133.2 million from Arab Petroleum Investments Corporation and BNP Paribas to purchase five chemical tankers. 

Bahri had in June this year signed a Murabahah financing facility worth SAR472.5 million (US$125.94 million) with the Bank of Tokyo-Mitsubishi UFJ for the former to purchase two second-hand crude carriers, and the facility will be repaid over 10 years by equal quarterly installments. In May, Bahri inked an agreement with Alinma Bank for a 10-year Islamic credit facility worth SAR700 million (US$186.59 million) for the purchase of three crude oil carriers. 

Over in Malaysia, Jasa Merin (Labuan), wholly-owned by Silk Holdings, secured RM55.27 million (US$13.81 million)-worth of Islamic financing facilities from Affin Islamic Bank to part-finance up to 70% of the acquisition of three oil/chemical tankers from BHIC Marine Carriers, BHIC Marine Ventures and BHIC Marine Transport in May this year. 

Saudi Arabian Airlines has received a A330-300 Regional from Airbus this month, which will be leased in a Shariah compliant manner from the International Air Finance Corporation (IAFC), becoming Airbus’s launch customer and operator of the A330-300 Regional. It was revealed in June 2015 at the Paris Airshow that the airline will take delivery of 50 Airbus aircraft through the IAFC on a Shariah compliant basis.

Shariah compliant Qatar First Bank (QFB) made an investment in the global aircraft leasing industry in June this year, in partnership with Dubai-based Novus Aviation Capital (NAC), through the indirect acquisition and lease of two 2011 vintage Boeing 737-900ER single-aisle aircraft to Indonesia’s Lion Air. QFB was exclusively involved in the Islamic financing part of the transaction whereas NAC acted as the sole arranger for both the financing and leasing elements of the deal.

In May, the UK’s Investec Bank closed an aviation financing facility worth US$1 billion which saw the delivery, sale and leaseback of four jumbo Airbus A380-800s to Emirates Airline. The facility also saw participation from banks and institutional investors across the Middle East, Europe and Asia. Investec, which acted as the sole arranger for the financing and leasing elements of the transaction, also put in place Islamic financing on two of the deliveries. 

Last November, Oman witnessed its first Shariah compliant aviation finance transaction when a US$127 million facility was extended by Meethaq Islamic Banking to Oman Air for the latter to acquire its second Boeing 787 Dreamliner aircraft. The facility employed an innovative structure comprising two stages of underlying transactions: the Waad-forward Ijarah and the conversion of forward Ijarah to Ijarah Muayyinah (to overcome certain restrictions of forward Ijarah).

According to a recent market report by Boeing Capital, it is anticipated that the aviation industry in 2016 will provide funding for approximately US$127 billion in new commercial aircraft deliveries, with the capital markets and commercial banks accounting for approximately two-thirds of that total. 

Furthermore, the commercial aviation industry over the next five years is projected to require higher levels of aircraft financing due to healthy industry fundamentals and strong demand for new, fuel-efficient aircraft. In 2015, airlines and lessors took delivery of new aircraft worth approximately US$122 billion, and that total is expected to increase steadily to US$172 billion by 2020. 

With the financing parameters and asset value characteristics of commercial aircraft and marine logistics in accordance with Shariah principles, the Islamic capital markets can expect a healthy pipeline of activities in the near term.


Djibouti: Eyes on Islamic finance

Djibouti may be a small nation of some 900,000 (according to United Nations Department of Economic and Social Affairs) with limited resources, but the Horn of Africa nation is leveraging its strength as a Red Sea transit point to develop its Islamic finance capabilities in the name of financial inclusivity. VINEETA TAN provides an overview of the Djiboutian Islamic finance landscape.

Economic overview
The scarcity of natural resources has made Djibouti heavily reliant on the service sector, imports and foreign aid. However, the Republic’s strategic location as a Red Sea transit point in close approximation with the world’s busiest shipping lanes naturally positions it as a burgeoning commercial center. The African nation serves as a major refueling and transhipment hub as well as a site of various foreign military bases.

Regulatory environment
Heavily influenced by the French, Djibouti’s legal system is a combination of Shariah law, customary law and civil law inherited by the French Napoleon Code. The African country practices a dual banking system — it introduced an Islamic banking law in 2011. 

Banking and finance 
With a predominantly Muslim population, the take-up for Islamic banking products has been steadily growing. Out of 11 banks in the country, four are Islamic: Saba Islamic Bank, Salaam African, Dahabshill Bank International and Shoura Bank, accounting for 14% of total banking market share at a combined value exceeding DJF50 billion (US$279.63 million) in late 2015, according to the Central Bank of Djibouti. Egypt’s Shoura Bank, however, has reportedly ceased operations in 2016. Djiboutian lender Banque pour le Commerce et L’Industrie Mer Rouge on the other hand has begun work to establish an Islamic banking branch.

Table 1: Profile of Islamic banks in Djibouti


Date of establishment

Capital (in DJF)

Saba Islamic Bank

June 2006

300 million

Salaam African

December 2007

600 million

Dahabshill Bank International

October 2009

3.16 billion

Shoura Bank

June 2010

300 million

Source: Central Bank of Djibouti

In 2015, Djibouti also joined the General Council for Islamic Banks and Financial Institutions as a member; signifying the Republic’s commitment to Islamic finance. In fact, developing its Shariah finance industry is part of the Central Bank’s banking reforms to enhance the country’s financial system. Ahmed Osman, the governor of the Central Bank, explained to the Oxford Business Group earlier in 2016 that the planned national payment system would link industry operators through a secure connection, replacing the costly and time-consuming current method of processing payments manually.

The authorities are currently also working on establishing a National Shariah Council to oversee Islamic banking and ensure it meets the required standards and this will be a key step forward for Djibouti in its efforts to develop a subregional Islamic finance base. 

The IDB through the International Islamic Trade Financing Corporation (ITFC) is also active in the country, more so in 2016 — the ITFC in May signed two Murabahah agreements worth US$55 million with Djibouti to secure petroleum products.

Djibouti in October 2013 adopted an executive decree of Islamic insurance law as part of the government’s strategy to further enhance the country’s Islamic financial industry. And while there has yet to be a dedicated Takaful operator in the market, Kenya’s Takaful Insurance of Africa — the first Islamic insurer in East and Central Africa — has expressed keen interest in creating a Djiboutian presence.

Challenges and prospects
Limited resources and a heavy dependence on foreign aid make Djibouti particularly vulnerable to external shocks; in terms of Islamic finance, a large majority of the African nation population is unaware of Shariah compliant financial products and services. 

However, the government and industry stakeholders are taking measures to develop and integrate the Islamic finance segment into its mainstream financial system — the Central Bank for example, which has organized an Islamic finance conference, is planning to do so again at the end of 2016 while the University of Djibouti, has begun offering Islamic finance courses. 

The country’s efforts to boost financial inclusivity and develop its infrastructure coupled with its strategic location and ties with the Middle East bode well for Islamic finance in Djibouti.

Women in Islamic Finance: Learning from the UK

In the UK, the picture for women working has never looked so good – women participation in the economy is at a record high and the gender pay gap at a record low. However, the picture is not as rosy for the financial sector where women only make up a minority (14%) of executive committees despite more women than men being employed in the sector. VINEETA TAN writes that the country, which is the world’s largest exporter of financial services and the Islamic finance hub of the west, is nonetheless taking a proactive approach to close this gap.

The economic case for gender equality is a strong one: merely by advancing women equality, the world’s GDP could grow by a staggering US$12 trillion in less than a decade, according to McKinsey, while in the UK alone, some US$600 billion could be added to its economy if women’s productivity and employment levels could be raised to the same level of men’s, noted the Government Equalities Office which also said that equalizing participation rates could add 10% to the size of the UK economy by 2030. From a business perspective, McKinsey found that firms with a top quartile representation of women in executive committees generally outperform companies without any female representation at the top, with some estimates putting it at a 47% average return on equity.

Yet women only comprise 26% of FTSE 100 board members and 14% of executive committees in the financial sector, according to a report by Virgin Money. “More women than men are employed in the financial services but many do not progress beyond middle management levels, leaving almost all of the top jobs in the hands of the men,” said Jayne-Anne Gadhia, CEO of Virgin Money, who led a comprehensive review into the representation of women in senior managerial roles in the UK’s financial services this year. “This outcome has, arguably, contributed not only to the financial crisis, but also to an imbalance in a society [in] which banks and financial services firms provide the lifeblood for economic progress,” noted Gadhia.

Gadhia’s research found that many women do not progress beyond the mid-tier level or are leaving the sector altogether – and it is not just because of childcare, but also because the “culture isn’t right”. The findings of the review has led the UK government to establish the Women in Finance Charter – a pledge, primarily aimed at but not limited to companies with over 250 employees, for gender balance across financial services. The charter requires signatories to commit to a set of gender equality measures including setting internal targets and appointing a senior executive to lead the initiative (See side bar).

As at July, 72 financial services firm have signed the charter (none of them from the Islamic financial services sector) and they are expected to publish their targets by the 30th September 2017. The charter builds upon the government’s nationwide initiative to tackle gender inequality in the workplace which also includes new regulations making it mandatory for firms with over 250 employees to publish the difference in average pay between their male and female employees. Although fully-fledged Islamic financial services firms are not part of the charter (yet), the UK’s seminal step toward gender equality in the financial sector is a lesson other Islamic financial markets should take heed. The pledge is indeed a tall order, but in the quest to achieve greater inclusion for all, bold moves are needed. 

Thinking big

By Kavilash Chawla, a partner at boutique management consulting firm Bâton Global and a visiting scholar at Drake University.

By the time you read this, university students will be getting ready to start classes, either just beginning their adventure in higher learning, or preparing for their final year before life in the ‘real world’. In preparation of welcoming our returning and new students, I have been ‘thinking big’ about experiential learning. What is experiential learning? 

Successful experiential learning exists with two key components – immersion and reflection. Learners are immersed in an activity, and then go through a guided approach in reflecting on their experience in the activity. The learner plays a critical role in the process, as it leads to new skills, attitudes and ways of thinking and doing. The most transformative activities in which to immerse learners are activities where the learner is emotionally engaged in the activity, and where the learner has an opportunity to be fully immersed in the activity, rather than just tangentially.

In turning to the Islamic finance industry, I would like to focus this column on ‘thinking big’ about the experiential learning opportunities we offer students. 

As I and many other thought leaders in our industry have written, talent is one of the key drivers of long-term success for any organization, and the competition for talent in Islamic finance is very fierce, and only getting fiercer. Experiential learning programs can enhance corporate talent efforts in Islamic finance institutions in many ways, the primary one being in recruitment.

Even in OIC countries, the exposure of university students to Islamic finance is very limited, both as a topic of study and as an opportunity for a potential career. This not only makes it increasingly difficult to recruit talent, it also increases the amount of time, effort and financial investment required to train-up incoming talent for the industry. 

For industry players, a proactive strategy of working with universities and institutions of higher learning to develop internship programs, student consulting projects and integrating one’s business into a project, case study or other experience-based university course can play a significant role in an organization’s ability (and cost) to recruit the right talent. Specifically, it can provide privileged access to students, an opportunity to see how they perform in real-world situations and a low-cost opportunity for the students to learn about the industry, acquire critical skills and knowledge, and assess their own interest and whether they fit the industry and a specific firm. These strategies are commonplace in the conventional finance world and have been part of the core recruitment strategy for all the major firms since the 1990s, especially in the top MBA programs. 

My own career path in finance developed through one of these such experiences, where our class was divided into student teams, each sponsored by a few different firms. Our student team was sponsored by a leading European investment bank, and we were asked to do a country risk assessment on a potential new market the bank was interested in expanding into. I ended up getting to know the firm, their business, their strategy and their leaders, and I ended up taking a job there when I graduated. I was more productive than my peers because of this experience. It allowed me to be better prepared.

In turning back to today’s Islamic finance industry, one of the key areas of complaint among firms is the need for Shariah scholar talent. Specifically, talent that not only understands Shariah, but also understands finance and the operating culture of modern financial institutions. If there ever was a segment of talent (from the perspective of both the learner and the industry) that could benefit from an experiential learning partnership, it would be around Shariah scholarship. ‘Think big’ about your Shariah department, and ‘think big’ about how you can engage institutions of higher learning around training more and better qualified scholars and bankers who can effectively engage together to support Islamic finance. On our part, we have focused on student research partnerships as a way to engage with our future talent. ‘Think big’ about how you can do the same.

Recent trends in Islamic aircraft financing

Despite an uncertain prevailing world economic climate, the demand for air travel has continued to grow steadily in recent years. The International Air Transport Association’s global passenger traffic results reflected a 6.5% increase in demand in 2015 as compared with 2014, largely driven by the performance of emerging markets such as Asia, Africa and, in particular, the Middle East in respect of both passenger and freight air traffic. TOM COCHRANE and TERRY-ANN ARCH write.

Some of the fastest-growing airlines in the world include the Middle Eastern airlines Etihad, Emirates and Qatar Airways. These airlines, along with other Middle Eastern carriers, such as Saudi Arabian Airlines, flydubai and Kuwait Airways, are looking to access both debt and equity markets to accelerate the growth of their fleets, and are increasingly seeking to raise capital through the use of Shariah compliant structures and Cayman Islands-domiciled entities.

According to their respective websites:

  • Qatar Airways has more than 300 aircraft on order 
  • Emirates has 29 new additions expected for 2016 (approximately two aircraft per month) and is currently the world’s largest Boeing 777 operator with almost 200 Boeing 777s pending delivery, and
  • Etihad has 10 aircraft expected to join the fleet in 2016 with 183 aircraft deliveries expected over the next 10 years.

Saudi Arabian Airlines will almost double its current fleet through a deal finalized at the 2015 Paris Air Show which will result in the airline taking delivery of 50 aircraft from Airbus over the next couple of years. The national carrier of Saudi Arabia will also be the first airline in the world to operate the new Airbus A330-300 Regional.

The recent drop in the price of oil has resulted in lower operating costs for airlines, but in the Middle East, however, this also means banks taking a more cautious approach to lending. There has been reduced lending from European banks and export credit agencies as well following the global economic crisis. As traditional methods of aircraft financing are proving to be less reliable sources of capital, airlines in the Middle East are looking at alternative ways to diversify their financing portfolio; regional investors have a strong appetite for Shariah compliant products leading to an increase in Islamic financing structures. In addition to accessing finance from banks and other financial institutions, Middle Eastern airlines have sought to issue Sukuk and have also turned to Shariah compliant aircraft leasing investment funds as an alternative source of capital. 
With Middle Eastern airlines such as Emirates and flydubai having already issued Sukuk, the instrument is gaining popularity in the aviation sector. The increasing familiarity of non-Islamic financiers with Sukuk means that the issuance of Sukuk can appeal to both Islamic and conventional investors. 

In 2015, the successful closing of Emirates’s US$913 million Sukuk demonstrated the strong demand from global investors with certificates being distributed in almost equal amounts to European and US investors as to Middle Eastern and Asian investors combined. It was the first Sukuk facility being used to pre-fund the acquisition of aircraft and it was the first Sukuk in the world to be guaranteed by the Export Credits Guarantee Department of the UK government

Offshore jurisdictions such as the Cayman Islands have also realized the importance of this market resulting in the implementation of Islamic finance-friendly legislation to ensure the appropriate regulatory framework is in place to support Shariah compliant structures. This is one of the many reasons that SPVs incorporated in the Cayman Islands are commonly used as the issuer vehicle in capital markets and Sukuk transactions within the aviation industry. 

Shariah compliant aircraft leasing investment funds
Private equity investors have also become increasingly attuned to the growth of airlines in the Middle East and are seeking opportunities to participate in and profit from such growth. One recent trend in this area has been the emergence of Shariah compliant aircraft leasing investment funds. Such investment funds seek to purchase aircraft using the capital injected into the fund by investors, which is often combined with capital raised through traditional financing arrangements. The aircraft are then leased to an operator and returns to the investors are derived from the lease rentals or the sale of the aircraft.

Most notably, the aircraft leasing fund, ALIF Fund, was launched in 2014 with Airbus and the IDB as seed investors further evidencing the growth and innovation in the aircraft financing market. ALIF Fund is a Shariah compliant investment fund focusing exclusively on Airbus aircraft. Through a senior secured Murabahah loan transaction, the fund’s inaugural syndicated loan, ALIF Fund financed the purchase of five Airbus A330-200 aircraft for lease to Kuwait Airways in 2015. 

ALIF Fund is incorporated in the Cayman Islands and is exclusively managed by International Airfinance Corporation which has appointed the Dubai Financial Services Authority-regulated Quantum Investment Bank and Palma Capital as arrangers in a combined debt and equity deal noted by Reuters to be the largest aviation deal to be secured by Islamic financing. The benchmark transaction will see ALIF Fund acquiring 50 Airbus aircraft which will then be leased to Saudi Arabian Airlines in the airline’s largest aircraft leasing deal to date. 

In terms of structuring, the ability to incorporate segregated portfolio companies (SPCs) in the Cayman Islands offers particular advantages in the context of aircraft leasing investment funds. SPCs enable the creation of multiple segregated portfolios (or SPs) within one legal entity (the SPC). Each SP has its own assets and liabilities, which are statutorily segregated from the assets and liabilities of each other SP, and from the general assets of the SPC. 

The use of an SPC enables investors to subscribe for shares referable to a particular SP and for their returns to be linked to the performance of the investments made on behalf of that SP. In the case of an aircraft leasing investment fund, we have seen the SPC structure utilized so that particular SPs are created to purchase aircraft for leasing to particular airlines, with investors seeking to invest in a particular SP on the basis of the relevant airline’s strength of performance and creditworthiness, among other factors.

Aviation is an integral driver of international trade, commerce and economic activity. As emerging markets such as the Middle East continue to develop and flying becomes more accessible globally, we anticipate that Middle Eastern airlines, and the demand for Shariah compliant financing structures, will continue to grow, with the Cayman Islands being well-placed as the jurisdiction of choice for establishing the entities necessary to implement these structures.  

Tom Cochrane is the senior counsel and Terry-Ann Arch is the associate at Walkers (Dubai). They can be contacted at tom.cochrane@walkersglobal.com and terry-ann.arch@walkersglobal.com respectively.


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