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Sun 1 Oct 2006 04:00 AM

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Airlines expected to boost Islamic finance

The use of ‘sukuk’ – financial bonds that comply with Islamic law – is expected to take off in the leasing of commercial aircraft, according to Nadim Fattaleh, regional director at Boeing Capital Corporation.

“Something that could happen in the future is to use aircraft, as opposed to real estate, to back sukuk,” said Fattaleh. Aircraft can be bought as part of a sukuk and leased to airlines looking to expand their fl eet, thus providing a return. This is compliant with Islamic law, which forbids the payment of straight interest (‘riba’), and instead requires a tangible asset on which to pay a return.

Sukuk account for over US$200 billion of assets worldwide, with real estate being one of the more obviously compliant assets. But liquidity in Middle East markets could see Islamic-compliant banks and financial institutions increasingly turning to other forms of investment, such as commercial aircraft.

“Everybody knows how to invest in a building in Dubai,” said Fattaleh. “But now that there is a lot more liquidity than there used to be, you find that a lot of the local institutions are looking at other ways of investing. And aircraft make an excellent Islamic investment.”

One rather obvious advantage over real estate is that aircraft are mobile. “If the value of the asset in that location goes down, you can take an airplane and place it somewhere else. With a building it’s kind of difficult to do that,” Fattaleh pointed out.

Another incentive to investing in aircraft is a legal framework for aircraft and mobile assets agreed in Cape Town in 2001. ‘‘If ratified in the United Arab Emirates, this could mean the cheaper and more secure investment of aircraft,” said Fattaleh.

But increases in the price of aviation fuel could make such an investment vulnerable. Assessing the fuel-efficiency of aircraft, as well as likely increases in fuel prices, would be a vital precursor to investment.

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