Menu
Islamic finance in the shipping industry

News / / Dubai

As the shipping industry continues to struggle with access to finance, Islamic finance may be a viable option for ship owners as other forms of finance remain scarce. Nevertheless, Islamic finance also brings its own challenges which are often misunderstood. This article will discuss the difficulties encountered in Islamic finance structures and the ways that they can be dealt with.

Ship finance

The situation with respect to ship finance globally and in the Middle East in particular remains challenging. The declined performance of shipping loans in the recent years have made the banks cautious in their lending strategy. From the ship owners’ perspective, it means that obtaining the finances necessary for survival or expansion of the business can be very difficult. Against this background, Islamic finance has historically been seen as an attractive form of financing because it is generally backed by tangible assets. The selectiveness of the Islamic banks has meant that many of them have fared better in the financial crisis than their conventional counterparts.

Prior to 2016, various shipping sukuk (a certificate of ownership similar to bonds) issuances have prompted more local banks to set up dedicated ship financing teams. This has been a positive move for the UAE ship financing sector and fortunately for ship owners this provides more options to raise funds.

The global growth of sukuks as a form of finance has been steadily increasing year on year. However, Islamic finance has its own uncertainties, which if misunderstood, can be off putting to the potential investors.

The challenges of Islamic finance

Historically, lack of standardisation in the fatwa (legal/shari’ah compliant declaration) obtained from Shari’ah scholars creates uncertainty. The lack of standardisation in documentation further contributes to the uncertainty as the mechanisms for default largely depend on the type of sukuk and the way the documents are structured. Usually the use of a Purchase Undertaking as part of the structure provides investors with an additional contractual recourse against the borrower.

These issues were recently at the centre of a UAE litigation debacle involving Sukuk Al-Mudarabah where investors were involved in a legal battle with the Mudarib(entrepreneur/business partner) who had challenged the Shari’ah compliance of the sukuks shortly before they were due for redemption. The Mudarib relied on their advisors’ opinions to challenge the Shari’ah compliance of their Sukuk albeit the fatwa obtained at the time when the transaction was structured had not raised similar concerns. The litigation sprawled to the English courts where the Mudarib used the same arguments to challenge the validity of a Purchase Undertaking which was subject to English law. The English Court found the Purchase Undertaking valid and enforceable as a matter of English law regardless of the sukuk’s status under Shari’ah (UAE Law). This finding was reassuring to investors and shows that the transaction can be structured with the help of the English law documents providing the level of certainty that most investors could be comfortable with. The case has been subsequently settled by the parties.  

Nevertheless, the differences in the opinions and lack of standard documentation continue to prompt parties to “shop” for a suitable fatwa in their favour. As part of the evolution of Islamic finance, UAE had approved of the establishment of the Higher Shari’ah Authority back in 2016 whose mission is to issue fatwas and ensure the legitimacy of the products, services and activities of the institutions providing Islamic services.

The establishment of the Higher Shari’ah Authority is a welcome development as we expect that it will allow for nationally accepted Shari’ah principles to be implemented in a uniform manner across the UAE. That said, any documentation developed under the auspices of the Authority would still need to be negotiated by the parties and adapted according to the structure and type of the sukuk.

Comments

While recent litigation in the UAE may be causing some discomfort to investors, our view is that it is a temporary instability in an otherwise robust sector. The issues surrounding the above mentioned case are unique to the specific structure discussed. It is important to note that  each of the different sukuk products in the market will have a tailored security package to give more comfort to investors. The general prediction is that the growth of Islamic finance will continue due to its adaptability to market conditions. This has been evident in the continuous development of new sukuk structures being introduced in the market in recent years. It is hoped that the shipping industry in the Middle East region and globally will be able to benefit from the continuous growth of Islamic finance.  

Related sectors:

Related news & insights

News / Ince celebrates one year since Scotland office opening

23-11-2022 / Insurance, Maritime, Real Estate

We are pleased to be celebrating one year since opening our first Scottish office in the city of Glasgow.  Stefanie Johnston, dual-qualified Partner and Head of Scotland, has worked tirelessly over the last year to develop our offering through the opening of an Ince office in what is arguably an established Scottish market. Starting from the ground up, Stefanie and her team have successfully gained an admirable reputation in the region and further afield in the maritime, insurance, real estate and regulatory sectors. 

Ince celebrates one year since Scotland office opening

News / Shipping E-brief November 2022

17-11-2022 / Maritime

The Shipping E-Brief is a publication providing you with key information on legal decisions and developments in shipping and related business areas.

Shipping E-brief November 2022

News / Appeals from arbitration: is reform required?

15-11-2022 / Maritime

In September 2022, the UK Law Commission published a consultation paper with provisional recommendations for updating the Arbitration Act 1996 (the Act 1996). Amongst other things, the Law Commission considered whether any changes need to be made to: (i) s.67 of the Act 1996, which deals with jurisdictional challenges to arbitral awards; and (ii) s.69 of the Act 1996, which deals with appeals on points of law.

Appeals from arbitration: is reform required?

News / Owners not in breach of charter and entitled to claim demurrage

09-11-2022 / Maritime

CM P-MAX III Limited v. Petroleos Del Norte SA (MT Stena Primorsk) [2022] EWHC 2147 (Comm) This recent laytime and demurrage dispute demonstrates that an owner can legitimately refuse orders where such orders may jeopardise the safety of a vessel.

Owners not in breach of charter and entitled to claim demurrage

News / Court of Appeal finds owner should have accepted non-contractual performance

09-11-2022 / Maritime

Mur Shipping BV v. RTI Ltd [2022] EWCA Civ 1406 A majority of the Court of Appeal has held that the Owner under a contract of affreightment (COA) should have accepted payment of freight in Euros, rather than the US dollars provided for in the COA. Its refusal to do so meant that the Owner could not rely on the force majeure clause in the COA, in circumstances where US sanctions might have restricted US dollar transfers from or on behalf of the Charterer.

Court of Appeal finds owner should have accepted non-contractual performance

News / “Due” means due!

03-11-2022 / Maritime

Ceto Shipping Corporation v. Savory Inc (Victor 1) [2022] EWHC 2636 (Comm) The Court in this case had to construe a purchase option clause in a bareboat charter. Specifically, it considered whether the fact that the charterer had not fulfilled certain payment obligations under the charter because it was disputing them in good faith meant that the owner was not obliged to transfer title to the vessel at the end of the charter period.

“Due” means due!