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Islamic finance heats up
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| 06 October 2004 |
By Anthony O'Connor
The loosely defined use of the term 'Islamic finance' in various transport finance markets has reflected a general lack of understanding of that growing market. However, the situation appears to be changing.
Although a relatively small number of Islamic finance deals have so far been completed, the interest shown by Western banks is pointing to the emergence of a viable finance alternative for transport companies.
What defines Islamic finance is the interpretation of Islam's teachings in the Koran and how those guidelines can be applied by investors who want to conduct their business affairs according to their religion.
Those innovative professionals developing this Middle Eastern arm of finance are working towards offering investors a framework that they can use to invest in big ticket asset transactions for companies in the Islamic world and also for companies in Africa, Asia, Europe and the US.
One of the most prominent and committed users of Islamic finance has been Dubai-based carrier Emirates. As part of that airline's funding programme for 29 A330 aircraft, the company says that of the overall US$2.6 billion finance requirement, 15% - or the equivalent of US$386 million - was met by Islamic investors.
"This is a liquid market and we will use this type of financing to fund future aircraft too," Emirates' Finance Director Riyaz Peermohamed said earlier this year.
For carriers in the Islamic world - including Etihad Airways, Emirates and Qatar Airways - there is a growing appetite to fund part of their large order books with equity investment from Islamic funds and investment vehicles. In fact, some institutions are said to have sufficient appetite to fund a whole A380 double-decker aircraft, which translates roughly into a US$280 million finance requirement.
However, potential deals of this size highlight the infancy of the Islamic finance market and some of the pitfalls that belie the need for advanced market development. This is where bankers and lawyers are working to create a platform that will help investors marry the Western and Islamic elements of an international structured finance transaction.
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