Amongst other things, Islam does not recognise the concept of interest, or Riba, most simply looking to profit from trading money. Money is viewed as a store of value or as a medium of exchange, rather than a commodity. Muslims must spend their wealth judiciously and not hoard or squander it. The Qur’an – Islam’s central religious text – also says individuals must contribute some of their wealth to poorer sections of Muslim society.
Rather than lending money, Islamic finance institutions use a mixture of structures that have been approved by Shari’ah scholars. These include Islamic bonds or Sukuks, profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijara).
These rules are relatively simple to apply to things like project or asset finance – where leasing is well established.
“Private jets are well-suited to Islamic finance as it typically revolves around an asset,” says Tim Pick, a partner at Shearman & Sterling LLP who has advised an Abu Dhabi investor in relation to Islamic financing of a private jet.
Nearly all Islamic aircraft financings to date have been done through an ijara. An ijara is an operating lease with the lessor retaining ownership of the asset after the lease expiry but can be turned into a hire purchase arrangement by the grant of an option for the lessee to purchase the asset on a specified date (ijara-wa iqtina).
Shari’ah requires that a lessor’s profit made from a loan is justified by that lessor taking ownership of the asset. This creates certain exposures to the lender that are not usually involved with conventional finance.
However, in conventional business aviation financing there has been a move towards lenders assuming some amount of asset risk, which makes the industry more suited than most to Shari’ah’s requirement that the risk is assumed by the Islamic investor.
Islamic finance usually requires that the management, maintenance and insurance of the leased assets are the responsibility of the lessor so as to justify the profit made by the lessor, although in practice agency agreements can be used to pass the responsibility for these back to the lessee.
The Islamic investor can appoint the lessee as its agent for the purpose of insurance and maintenance, so that if these are not properly carried out the lessee can be deemed to be in breach of their obligations under the agreement.
Hedging attempts such as fixed interest and foreign exchange rates are also generally not allowed under Islamic finance, as it means one of the parties could profit from the monetary transaction. However, there is an argument that these options may be acceptable as they are an attempt to reduce risk, so subject to certain limitations Islamic deals have been able to incorporate them.
What is clear is that each deal may be affected by some degree of interpretation of the principles of Islamic finance.
“Conventional finance is heavily standardised across institutions and across the world,” says Pick. “Islamic finance can be subject to different interpretations from region to region, and even bank to bank.”
Every Islamic bank has a Shari’ah Committee, made up of Shari’ah scholars whose duty is to certify the bank’s financial products. The scholars must give a Fatwa on each deal – a legal opinion – to confirm that it adheres to Islamic law.
These Committees can have different interpretations of Islamic principles, which can be a particular problem for syndicated loan deals: “You can end up with a situation where one bank’s Committee says it is compliant, and the other says it is not, leading to separate tranches of finance with slightly different structures” says Pick.
Given these complications, you might expect that Islamic financing of a business jet would take longer than a conventional deal.
“Without a doubt, it does,” says Graeme McLellan, an aircraft finance partner at Stephenson Harwood. “If you are trying to incorporate debt into an Islamic finance structure, that can be particularly tricky,” he adds.
Paul Holland, a partner and Islamic finance specialist at SNR Denton says this is not always the case. “If Islamic finance is novel to the bank – say one of their private banking clients has requested that form of finance and the bank has never done it before – then it can take longer as the bank has to learn about the structure. If they have experience with it, then it is a bit of a myth that it takes longer.”
You might also expect a difference in the price of financing, but that is another myth says Mclellan: “In terms of the fees involved, certainly” he says, “but in terms of the cost of the actual financing there is no reason to expect a significant difference.” Islamic finance often uses the same pricing indices as conventional debt, eg. LIBOR.
In the business jet market Credit Suisse, BNP Paribas, Citi, HSBC (through HSBC Amanah) Lombard and UBS all offer Islamic financing to customers.
Some of these banks have had to create Islamic banking arms, to separate the money used in Islamic financing deals from their other funds. Stricter interpretations of Shari’ah hold that the money invested must also be Islamic, and not sourced from a large pot of funds that have been used to profit from interest in the conventional way.
Given the expansion of sovereign and personal wealth in Muslim states over the last few decades, there are plenty of Islamic investors looking to invest their capital in Shari’ah-compliant products. There are over 250 specialist Islamic banks in the Middle East and Asia and these local lenders will often have relationships with buyers and already understand the complexities involved with Islamic finance.
Islamic finance is not the exclusive preserve of Muslims. The tightness of debt markets is making Islamic finance a more attractive prospect for any company looking to diversify its sources of funds. London is reportedly emerging as a financial centre for Islamic banking products, and they are also widely used by non-Muslims in Malaysia – a very important Islamic market.
“The Islamic banks are open for business,” says Holland. “Islamic finance is a much more liquid market than other more conventional sources at the moment, so borrowers facing tightness in the marketplace are turning to them. The Islamic banks aren’t targeting business jets at the moment; they are just doing them for clients as they arrive. If they decide to move into the business jet space properly then many more borrowers might be turning to them for finance.”