legal guide09.indd - Islamic Finance News

Transportation Finance (continued..)
Most Shariah boards accept this as being Shariah
compliant because the owner remains primarily
liable for the relevant obligations, even though the
actual performance is undertaken on its behalf by a
servicing agent.
In addition, it is acceptable to have rent calculated
by reference to whatever lawful benchmark the
parties agree. Consequently, there is no problem in
having additional rent calculated by reference to the
amount that the owner must reimburse its servicing
agent.
Subject to the view of the relevant Shariah board, it is
also possible to pass other costs on to the customer
using the additional rent formula (increased costs
and market disruption costs, for example). Through
the netting off mechanism, the financial risk is
transferred away from the owner in a manner that
does not contravene Islamic principles.
Another significant difference between conventional
asset financing and Islamic lease finance relates to
total loss. This is particularly important in the context
of aviation and shipping.
Generally speaking, if a total loss occurs, the leasing
arrangements must immediately end. While the
definition of total loss is often subject to negotiation
and is also affected by the insurance policy provisions,
in the context of analyzing total loss in relation to
Shariah principles, total loss means an event which
results in the customer no longer being able to use
the asset for its intended purpose.
to transfer to the customer against payment of a
pre-agreed price. In any event, absent the insurance
proceeds being paid in cash, there is not likely to be
the financial resources to pay such amount, even if a
particular Shariah board permitted it.
The above is mitigated to a certain extent in asset
finance deals by placing an obligation on the servicing
agent to ensure that the total loss proceeds are
paid by a certain date, regardless of whether such
insurance proceeds are ever paid by the insurer. This
is not unreasonable on the basis that the servicing
agent is responsible for ensuring that the asset is
insured. If the total loss proceeds are not paid by
such date, the servicing agent is in breach of its
obligations.
As a result of this breach, the servicing agent is
obliged to pay liquidated damages. These liquidated
damages will be an amount equal to the total loss
proceeds that should have been received from the
insurer. However, the concept of liquidated damages
is not universally accepted by all Shariah boards.
The aviation and shipping industries have huge
amounts of assets that need to be financed over
the next three years. It is unlikely that conventional
financiers will be in a position to fulfil all of these
requirements and the Islamic finance industry
seems well suited to be a viable alternative financing
source.
Once a total loss has occurred, it is not permitted
for the rental obligation to continue, even if the
total loss arose due to the default of the customer.
If the customer caused the total loss, however, the
owner is allowed to claim compensation from the
customer.
In addition, it will not be possible to classify a total loss
as an event of mandatory prepayment. This is because
there will be no asset available for the Islamic financier
Paul Jarvis is a partner at DentonWildeSapte in
Abu Dhabi.
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