Sukuk: A ‘new’ option of aircraft financing

LONDON – Several airlines have indicated that they are exploring the possibilities of financing new fleet acquisitions and expansion through the issuance of sukuk or other suitable Shariah-compliant financing instruments. 

This follows the issuance of sukuk in March by Emirates Airlines and Malaysia Airlines (MAS), who sought to raise funds to finance fleet acquisition and expansion. 

Turkish Airlines and Malaysia’s budget long-haul carrier, Air Asia, have confirmed that they are considering issuing sukuk to finance the purchase of new aircraft, although it will depend on the timing and market conditions. 

Emirates issued a $1 billion 10-year amortizing sukuk, which carries an average weighted life of five years and priced at the tighter end at 300 basis points over 5-year MS (Midswaps). 

Malaysia Airlines, on the other hand, used the proceeds of its 20-year RM5.3 billion sukuk under its Bai Bithaman Ajil (BBA) Notes Issuance Program, established in late 2012, to pay for the delivery of its final Airbus A380 aircraft out of a total order of eight Airbus aircraft, including six A380-800s, one A330-200F and one A330-300. This final aircraft (MSN 114) was Airbus’ 100th A380 delivery. 

So, why this new-found interest in sukuk as a form of aviation finance, and is there a possibility of international airlines from non-OIC countries will also start issuing sukuk for their acquisitions?

Bankers in the UAE and Malaysian suggest that airlines such as Emirates, MAS and possibly Air Asia favor sukuk over ijara (lease) financing and often more costly conventional loans. Sukuk, they stress, are ideal for the airline and aviation industry because of the excellent match between the long-term nature of the assets with a regular income stream from passenger traffic and the structure and tenor of the securities. Sukuk yields are currently also relatively more competitive than conventional loans. 

However, aviation finance industry experts such as Charles F Yeterian, Vice President of the Geneva-based Novus Aviation Capital, which has an established record in arranging Islamic aircraft leasing and other financing facilities, stresses that “sukuk is not necessarily a better option, it is simply a different option in that it affords airlines to find a “new” source of financing. Sukuk has the ability, like its “sister-product” in conventional banking, to go directly to the capital market, and not rely only on commercial bank financing; i.e. going directly to capital, after the uncertainty surrounding the role of commercial banking following the global financial crises. Sukuk represents a still un-tapped Islamic financing reservoir; this market is craving for new Shariah-compliant, well structured financing products and sukuk just seems to fit the bill.”

Both Emirates and MAS have issued Islamic papers in the past. An estimated 60 transactions valued at just under $10 billion have been closed for various airlines and airline leasing companies over the last three decades including Emirates, MAS, Garuda, Syrian Arab Airlines, Gulf Air, Turkish Airlines etc. and several of the major global aircraft leasing firms, all of which are very familiar and comfortable with documentation involving Shariah compliant structures related to purchasing, maintenance and insurance.

MAS itself confirmed in March that it is set to receive 17 new aircraft in 2013 alone.

Some bankers stress that airport infrastructure potentially holds out even more exciting opportunities for various types of Islamic finance instruments and solutions. Both the Kuala Lumpur International Airport (KLIA) and the International Terminal at Istanbul’s Ataturk Airport involved large Islamic financing tranches. 

Perhaps the largest such involvement was in 2012 when the state-owned General Authority of Civil Aviation (GACA) in Saudi Arabia issued a SR15 billion sukuk whose proceeds are being used to part finance the construction of the SR27.1 billion ($7.23 billion) new King Abdul Aziz International Airport in Jeddah. 

GACA since then also issued awarded a contract to Tibah Airport Development Company, a consortium of TAV Airports of Turkey, Al Rajhi Holding Group and Saudi Oger, to build the new $1.2 billion Prince Muhammad bin Abdulaziz International Airport in Madinah. The project is being built under a public-private partnership agreement involving a build-operate-transfer (BOT) structure, and the financing comprises Shariah-compliant equity participation, bridge and istisna (construction forward financing) facilities provided by National Commercial Bank of Saudi Arabia and a $750 million syndicated istisna facility arranged by Japan’s Sumitomo Mitsui Banking Corporation.

The $1 billion Sukuk Al Ijara issued by Emirates Airlines was well received and successfully soled to investors in MENA, Europe, Asia, and offshore US accounts.

(Saudi Gazette / 02 April 2013)

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Turkey makes great strides with Islamic banking

KUALA LUMPUR: The Turkish Islamic banking and finance sector commands a 5% to 6% of the nation’s overall banking assets, much lower compared to Malaysia’s 20% or US$65.6 billion (RM202.7 billion) in assets in 2012.

The secular Turkey is making great strides with more progress expected in the coming years, though it conceded that Islamic banks are still dependent on interest rates as the core benchmark for Islamic banking business, according to a board member of the Turkey’s central bank.

“Turkey is a secular country, hence the government has no Syariah board like in Malaysia where there is a Syariah board, but the Islamic banks have their own consultation boards composed of Islamic experts,” Central Bank of Turkey board member Necdet Sensoy (photo) said at a forum on Islamic finance here last Friday.

“Islamic banks are not allowed to invest in government bonds, and this is a disadvantage for the Islamic banks compared to the conventional banks.”

The government bonds are not interest-free, whereas the Islamic banks are promoting free interest banking and financing.

Turkey has only four Islamic banks, and they are limited in their scope of business unlike Malaysia’s vibrant Islamic finance portfolio, said Sensoy.

The four Turkish Islamic banks are Bank Asya Alkatim, Al-Baraka Turk, Kuveyt Katilim Bankasi also known as Kuveyt Finans and the Turkiye Finance, majority-owned by Saudi Arabia’s National Commercial Bank, accordi ng to Muhammad Islami Onal, the economic counsellor of Turkey in Kuala Lumpur.

Islamic banking in Turkey dated back to 1985, when the government passed legislation for interest-free banking where Islamic banking is called “participation”.

Huge demand

Sensoy said one area where Islamic finance is experiencing growth and even edging conventional banks in Turkey is the provision of private pension via the Asya Pension Fund and in Islamic equity.

Turkish Islamic lender Bank Asya Alkatim has made inroads in its campaign to expand the number of private pension accounts in Turkey, where private retirement funds are still a novelty, said Sensoy.

The bank had opened over 39,000 private retirement accounts so far since the pension fund was created in mid-May 2012, and he added that by year-end the number of private pensioners covered by the bank is expected to be much higher.

The Turkish government has given incentives to encourage long-term deposit of the pension funds, offering 25% profit for funds stocked for at least 10 years, and this is one of the reasons why such funds are popular.

Another important aspect of the Turkish Islamic finance market was the launch in the last quarter of 2012 of the Sukuk al-Ijara, which is the only form of sukuk allowed in Turkey, and known as the lease certificate.

Another success story is Turkey’s Treasury Department’s launching of the sovereign sukuk intended to raise one billion lira (RM1.7 billion) from the market. Due to huge demand, the offering was increased to 1.5 billion lira. The orderbook hit eight billion lira and the offering was oversubscribed by five times.

Sensoy spoke at the 37th Islamic banking and finance discussion series organised by the International Islamic University Malaysia’s (IIUM) Institute of Islamic Banking and Finance.

(F.M.T News / 02 April 2013)

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Islamic finance as an economic tool

When I was a young man newly started in the Islamic banking industry, I was asked to join a business trip to Mindanao, the Philippines, sometime in the late 1990s. It was my first major business trip and naturally I was excited. It remained to this day as one of the most memorable, sobering and enriching experiences in my 16-year career.

The purpose of the trip was to explore how Islamic finance could assist in the redevelopment of Southern Philippines.

Early on, I had personally identified that Islamic finance was the natural partner and catalyst to bring about economic and infrastructure development.

It could support the then brokered peace process, after years of guerilla warfare by the majority Muslim locals who were seeking their own rights to govern.

I was also pretty nervous because I thought I was going into a war zone. At least that was what my young, inexperienced mind was concocting despite the assurance from my bosses that there was no danger to life or limb. The things I had to do for Islamic finance!

I spent a gruelling 20 hours travelling to Manila – yes it was 20 hours because I had to fly from Labuan to Kuala Lumpur, slept at the airport overnight on the bench (since I was not qualified to stay in the transit hotel then) and flew off to Manila the next day before taking a flight onwards to Mindanao. This was despite Labuan being located next door to Mindanao! I wished there was a direct flight to Mindanao from Labuan or Kota Kinabalu, but I digress.

The flight to Mindanao gave me the impression of how poorly connected it was from major business routes and how isolated it was from the rest of the world at that time, which highlighted the importance of the trip I was on. When we landed, all the nervousness that I was carrying dissipated and was replaced with a sense of excitement. Being the most junior in the entourage, I naturally had to carry the bags and sort out the logistics.

Everything about the trip was looking up until we reached our car and saw the armed guards that will be escorting us throughout our visit. There were a dozen of them armed to the teeth plus outriders. It brought back all the imagined danger to the fore especially when our host explained it was for our safety and we were not to travel alone without at least two guards escorting us.

Central tool

Since I was already there and didn’t want to be seen like someone really wet behind the ear, I pushed aside my worries and did what was expected of me. Backed by an allocation of funds from various parties including from supranational bodies, we set about to identify viable commercial projects.

We visited the local rebel leaders, local governments and businessmen. We looked at one of the largest fish ports in the world, fish canneries, sugar cane fields and many other potential projects that could be supported by way of Islamic finance.

The whole trip took about a week including the overnight stays in Manila to meet with government officials, that is, senior Philippine legislators keen to see peace in Southern Philippines. I was involved in all of the discussions since I was tasked with note-taking.

Although I did not fully understand everything that transpired in the discussion, the experience made it clear that Islamic finance was a central tool that could ensure lasting peace in Southern Philippines.

Unfortunately, nothing happened after the visit as the peace process envisaged did not materialise. We could not implement what could have been done under Islamic finance to help make it successful.

Many years have passed and I have fairly put aside any hope of seeing Islamic finance playing a role in the redevelopment of Southern Philippines.

That was until the recent announcement on the signing of the Framework Agreement between the Philippine Government and the Moro Islamic Liberation Front (MILF), successfully brokered by Malaysia.

I was excited again at the prospect of Islamic finance catalysing a lasting peace in the area and sat as a keen observer of the new peace process albeit from a distance.

The Lahad Datu incident was unfortunate but it showcased again the need to bring the people in Southern Philippines into the mainstream economic activities. To me, this can be achieved best through Islamic finance. Real peace cannot exist without economic empowerment.

Of course, this can only happen if Islamic finance is fully enabled and facilitated to operate on a level playing field with conventional finance in the Philippines.

In fact, considering that Islamic finance has proven to be the best tool for the democratisation of the financial market to promote a truly inclusive society in countries like Malaysia, I would even go so far as to recommend that special incentives be given to Islamic banks to operate at least in the Southern Philippines so that it can truly serve the peace agenda.

At the end of the day, Islamic finance is a public good and an economic tool created to benefit all mankind. Since this is the case, it should be the most natural tool to be employed for the peace process not just in Southern Philippines but anywhere else in the world.

(F.M.T News / 01 April 2013)

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Types of Takaful in Islam

Takaful is an insurance contract that is compliant with Shariah, the body of Islamic law. The name derives from the Arabic verb “kafalah” that means mutual guarantee. Islamic insurance is based on the principle of mutuality where policyholders own the company and share in its profits. There are three main types of takaful: mudharaba, wakala and a hybrid of the two.

RELIGIOUS PROHIBITIONS

Islamic law forbids “riba,” a concept that means interest, usury and the exploitation of the poor. It also prohibits “gharar,” meaning risk, uncertainty, hazard and deceit. “Maysir,” which is the acquisition of wealth by chance, or gambling, is also proscribed. Conventional insurance works on the concept of risk transfer where an insurance company accepts a risk from a policyholder in exchange for a premium. The company invests the premiums on capital markets to make further profits. In Islamic jurisprudence, this is viewed as gambling on uncertainty and in the process, exploiting a policyholder by making money from money.

POLICYHOLDERS' FUND

In an arrangement that bears some similarity to mutual, or cooperative, insurance, takaful policyholders pay premiums into a policyholders' fund. Administrative expenses and reinsurance are paid from this fund. Any surplus at the end of the financial years is the underwriting profit. This may be allocated in part to a policyholders' reserve fund, and in part distributed among policyholders as a dividend. Underwriting losses in the policyholders’ fund are covered by an interest-free loan from a shareholders’ fund.

SHAREHOLDERS' FUND

The shareholders’ fund consists of paid-up shareholders’ capital and reserves together with investment income. All investments must be Shariah-compliant, meaning that these should be on a profit-and-loss sharing basis rather than speculative investment in capital markets. The shareholders are liable for the losses of the policyholders' fund, but this liability is limited to the amount of equity they hold in the company.

MUDHARABA

Mudharaba is one of the oldest concepts in Islamic finance and is based on profit-sharing. This type of takaful is practiced widely in the Asia-Pacific region. The company’s management is paid from the profits the company makes and shares in the surplus and losses. The ratio of profit-sharing is pre-agreed on the basis of the company’s performance.

WAKALA

The wakala version of takaful is an arrangement where an agent manages the company and receives a fee for his services. The fee is pre-agreed at the beginning of a financial year and may be a fixed amount or an agreed share of investment profits or shareholder or policyholders' funds. The agent does not share in any of the company’s liabilities. This type of takaful was developed in Sudan.

HYBRID

The mudharaba and wakala models can be combined to produce a hybrid type of takaful. The managing agent of the company receives a fixed fee from policyholders’ funds as in the wakala model and also a share of the profits on the basis of the mudharaba model, but from the company’s investments only. The policyholders have a right to share in both the underwriting profits and in investment profits.

(Demand Media / 01 April 2013)

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When are we going to accept a role for taxes or Zakat?

One of the thorny perennial issues that governments and societies all over the world deal with is taxes.

A key problem in developing countries is the fact that the tax revenue in size and base is small to a point of impeding a balanced and sustainable economic development.

The availability of a tax system that is able to avail domestic financing is a key determinant for economic success and sustainability.

Intellectually, it would be very difficult to advance the idea to tackle the issue seriously in Saudi Arabia given the level of the government’s financial status.

The financial profile is dominated by distributional demands and total immersion in consumption at the expense of long-term economic and financial planning.

Intuitively, everybody would be up in arms against it, yet it is of strategic dimension and is probably timely.
For most, the talk of taxes is probably a non-starter and the reason is really two-fold. For one, the prevailing mindset is that a distributional nature where the sense of entitlement of the people is much stronger than the economic needs and imperatives to work, and the second is the tendency of governments to bank on the path of least resistance without due consideration to future planning.

The economic system has become addicted to top down government expenditure system that distorts as much as it contributes to the building of the society.

It fundamentally allows most people and many companies to skirt the productivity imperatives that are indispensable for real economic growth.

Taxes will go a long way in reordering the economic system structure where taxes or the zakat system are part of tools to affect policy and management in the economic realm.

In most developing countries, tax constitutes about 15-19 percent of GDP while in the advanced countries it is about 35 percent. I do not know the exact figures for the Kingdom but it is certainly less than 10 percent, according to initial data by Department of Zakat and Income. Hence, the road is long toward serious attempts to change the system conceptually and practically.

The taxation does not mean the elimination of distribution or subsidies as these are practiced in all countries at different degrees.

But it means change in the way we think about economic management.

Taxes are proven instruments to calibrate, incentivize, accelerate, and decelerate certain behaviors.

It plays a key role in bringing about a balance between investment and consumption, which is at the heart of economic management.

Productivity will not be part of the Saudi system without taxation or Zakat.

Unfortunately, for various reasons, Zakat has not been applied uniformly or consistently.

Intrinsically, the choice between Zakat and taxes is not really that different.

It is also conceivable that it can be better than taxes (since it is closer to a flat tax that has been popular recently around the world). In accounting terms, 2.5 percent Zakat on sales (assets) can work out to be around 20-30 percent of income approximating those of taxes.

The details should be refined by the accounting definitions and rules.

A key shortcoming has been the loose role of Zakat on real estate, particularly land and rent income, even salaries should be included at certain level.

There is a need for universities, especially Um Al-Qura University in Makkah, Imam University in Riyadh and research institutions to undertake serious studies to modernize Aakat and understand it better in terms of policy. There is a need for conceptual framework with taxation or Aakat at the center of the “new” economic order to affect better economic management and transform productivity in the society at large.

The key vexed issue of the national economic system is ability to upgrade productivity.

Taxes or zakat will likely engender rationality when it comes to subsidies and consumption.

I reckon that it would be very difficult to bring about meaningful improvement in productivity and real economic growth without tax or zakat system.

It is time for the Shoura Council and others to break the mold by bringing tax or Zakat to the center of economic policy making to prepare the economy for a new dawn.

(Arab News / 01 April 2013)

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Malaysia: RM34.77 billion under unit trust management

KUALA LUMPUR: The Securities Commission (SC) said Malaysian unit trust managers have nearly RM353.7 billion under their management as of Jan 31.

This amount represents a 24.86% in net asset value of the market capitalisation of Bursa Malaysia Bhd.

The amount under management by fund managers was RM53.5 billion and as at Jan 31, there were 40 approved fund managers.

The number of approved funds were 192, which included funds that were approved but not yet launched, with 142 of these funds conventional while the others were Islamic-based.

The amount managed by fund managers in December 2012 was RM52.5 billion and the latest figures released by the SC represents an increase of 1.9% on a monthly basis.

The total wholesale funds as at Jan 31 net asset value was 3.76% of the market capitalisation of Bursa Malaysia.

The 41 approved unit trust management companies (UTMC) managed a total of RM300.19 billion as at Jan 31, 2013. There were 607 approved funds where 433 were conventional and 174 were Islamic-based.

The amount managed by conventional unit trusts was RM265.42 billion while another RM34.77 billion was managed by Islamic unit trusts.

The total amount managed by UTMC represented 21.1% of the market capitalisation of Bursa Malaysia. The amount managed by UTMC in December 2012 was RM294.8 billion and the January 2013 figures show an increase of 2.04%.

“The wholesale funds and the amounts managed by UTMC especially the Islamic funds are relatively small and have further upside growth. The authorities should do more to educate the investors about these funds.

The high domestic savings rate of around 34% shows that the investing public may have been choosing alternative investments to invest their monies,” said a local fund manager.

(F.M.T News / 12 March 2013)

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Filling a Niche for Islamic Banking

KUALA LUMPUR, Malaysia — When Fabiola Nava Carrera told her friends that she was going to pursue a master of business administration degree in Islamic finance at a Malaysian university, they were taken aback.

“I was very interested in going there to see what was going on, because I knew nothing about Asian and Islamic culture,” said Ms. Carrera, a 27-year-old Mexican who had previously worked in international trade. “But my friends in Mexico couldn’t believe that I wanted to go to Malaysia, because they thought that it would be too dangerous or that the culture would be too different.”

Ms. Carrera went anyway. Last year, she was one of four students, three of whom were non-Muslim, who graduated from the inaugural class of the Universiti Tun Abdul Razak’s Global Islamic Finance M.B.A. program in Kuala Lumpur.

Islamic finance differs from conventional banking systems in that usury and speculation are prohibited. Transactions have to comply with Shariah, the legal code of Islam based on the Koran, and are based on principles of risk and profit sharing.

Islamic finance is booming. According to figures from Hong Leong Islamic Bank, a financial institution in Kuala Lumpur, Islamic finance activity has been growing 14 percent per year, with Islamic finance assets exceeding $1.1 trillion in cumulative value in 2011.

Such growth has pushed more educational institutions into creating degree programs in Islamic finance. In 2005, the International Islamic University Malaysia created an Islamic banking institute that offers students Master of Science and doctoral degrees in the subject. In recent years, at least half a dozen business schools in Britain, including the University of East London and Bangor University in Wales, have set up M.B.A. programs in Islamic finance.

Ms. Carrera’s alma mater, also known as Unirazak, is a rare business school located in an Islamic banking hub — according to the school, about a quarter of financial activity in Malaysia is compliant with Islamic law and customs — and yet foreigner-friendly.

“Malaysia is the third largest Islamic market after Saudi Arabia and Iran,” said Geoffrey Alan Williams, Unirazak’s deputy vice chancellor, whose jacket lapel sported a pin of the E.U. flag intertwined with the Malaysian flag. “So if you want to be in Islamic banking, you have to come here, unless you want to be in Tehran.”

Unirazak’s participation in the International Business School Alliance, a network of seven schools, also helps. The alliance, which Unirazak joined in 2011, allows students in member institutions to spend time in two schools and graduate with two M.B.A.’s. After one year in school, two thirds of which were spent in Bremen University of Applied Sciences in Germany and a third at Unirazak, Ms. Carrera graduated with an M.B.A. in logistics and supply chain management from the European school and an M.B.A. in Islamic finance from the Malaysian institution.

The other universities in the alliance are the University of Valencia in Spain, the University of Hertfordshire in Britain, Novancia Business School in Paris, the Institute of Business Studies in Moscow and the University of North Carolina Wilmington.

Each alliance member specializes in a particular area of finance and only students enrolled in their university’s specialty program can attend classes at sister schools. While Unirazak also offers more conventional M.B.A. programs, students there do not have access to I.B.S.A. resources.

“Our partners were initially quite skeptical because they thought” an Islamic finance program would be risky, said Barjoyai Bardai, the program’s director. “But global Islamic finance is trendy and will make an impact. A year on, I think we all feel we made the right choice.”

Unirazak has had to engage a wide range of faculty members to teach the course, with a specialized lecturer for each module. Apart from trained accountants like Dr. Barjoyai, the school has brought in a Shariah scholar from Egypt.

Most students, even practicing Muslims, are unfamiliar with the basic concepts of Islamic finance.

So classes are especially vigorous, since the school needs to impart very specialized knowledge in a limited time.

For a typical module in Islamic products and services, for example, students will have 14 four-hour lectures. The classes are aimed at both familiarizing them with the history of Islamic banking products, and encouraging them to think about developing more contemporary services. Apart from lectures, students are also expected to work on their own project papers.

“It would have been easier to get an M.B.A. in something else,” said Azrina Muhammad Aznan, a 28-year-old Malaysian enrolled in the program. “Other students have time to go to parties, but I have to sit down and do work.”

“If you are trained in Islamic banking, you should also be able to do conventional banking,” said Raja Teh Maimunah, the chief executive officer at Hong Leong Islamic Bank, who recently gave a talk to Islamic finance students at Unirazak.

The global Islamic finance master’s degree at Unirazak costs students more than 61,460 Malaysian ringgit, or nearly $20,000. At 29,020 ringgit, the master’s degree in leadership that Unirazak also offers costs less than half as much.

Dr. Williams, the university administrator, said the reason for the discrepancy was the standardization of prices for all programs under the I.B.S.A. aegis.

Because Islamic finance master’s degree programs were developed quite recently, it is difficult to assess how successful their graduates are.

“It must be relatively new, because I don’t see many of them,” said Ms. Maimunah, the banker. “I can see the benefits of regular conventional bankers going through certification programs that help them understand Islamic jurisprudence. I don’t know whether someone with an Islamic M.B.A. can give me something different.”

She cited programs like those offered by the International Center for Education in Islamic Finance, or Inceif, an organization established by the Malaysian central bank, as ones that were particularly valued in the industry.

Noting that Unirazak collaborates regularly with Inceif, Dr. Williams insisted that such programs were complementary with his school’s degrees.

“The whole industry is exploding in size, so we’re not fighting with other people,” he said, adding that Unirazak was preparing to roll out graduate degrees in Islamic branding and halal management in 2014. “There is so much demand, we just need to find out the right type of courses.

(The New York Times / 26 March 2013)

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