Pushing The Boundaries Of Islamic Finance
Globally, there are three important sukuk issuers in the world, which have regularly issued sukuk. Emirates is one of them; the other two being Islamic Development Bank and Petronas. The latest book by Datuk Dr Mohd Daud Bakar entitled “An Insightful Journey into Emirates Airline Sukuk” (to be referred as “Emirates Airline Sukuk” in this review article) is an excellent primer on sukuk, in addition to being a detailed and comprehensive case study on the sukuk issued by Emirates Airline between 2005 and 2015. It is written in a style that attempts to make sukuk a darling of Islamic finance, in which Emirates Airline is presented as a bridegroom.
Presenting the facts like the Emirates’ US$913 million sukuk that it issued in 2015 was actually used to finance purchase of its A380-800 aircrafts makes it a jazzy Islamic financial instrument. Although the book is all praise for sukuk and its role in Islamic finance, the author asks some daring questions in the course of his analyses throughout the book. The first half of the book is a kind of friendly reading. The second part starts asking some serious questions, e.g., how to make Islamic finance the popular choice of the world, both in Muslim and non-Muslim countries (p. 128). In the wake of the recent trouble with Dana Gas Sukuk, a number of stakeholders, i.e., lawyers, Shari’a scholars,
regulators, and students of Islamic banking and finance must get attracted to this book of immense importance. The book explains a number of concepts related with the issuance of sukuk. By the time a reader finishes the book, they must have understood the terms and concepts like book building, credit enhancement, and difference between cost of funding of sukuk and bonds, etc., in addition to developing an understanding of various types of sukuk. The non-technical readers may find the style of the book particularly useful, as it does not discuss various sukuk structures with the help of complicated diagrams. While doing so, the author ensures that the technical details are not left out. While all out in praise of sukuk and its potential in Islamic banking and finance, the author also acknowledges failings of Islamic finance, particularly with reference to the global financial crisis of 2008-10. The book admits that Islamic finance missed a great opportunity in the wake of the global financial crisis by not offering an alternative solution. While reading the book, one cnnot help thinking about a wonderful experience of reading “Naqsh-e-Hayat”, a biographical account of Maulana Hussain Ahmad Madani (1879-1957), which contains a comprehensive economic analysis of downfall of the Moghul dynasty in India. While Naqsh-e-Hayat is the best book written in Urdu by an ‘aalim on economic analysis of the downfall of a Muslim state, Emirates Airline Sukuk is so far the best book on sukuk written by a contemporary Shari’a scholar.
EMIRATES AIRLINE AND SUKUK
The book identifies Emirates Airline as the first airline in the world to issue an aviation sukuk. The total amount raised by Emirates Airline through sukuk over a period of 10 years is US$2.463 billion, 47.2% of the world’s aviation sukuk. It was not pioneer only in terms of being the first airline to issue a sukuk but also as regards the sophisticated structures that it used for various issuances. The author acknowledges that the various sukuk issued by Emirates Airline were perhaps the most innovative of all the underlying structures of the sukuk issued worldwide. From its first sukuk in 2005 to the latest one in 2015, all the structures were innovative indeed. The 2005 Emirates Airline Sukuk was based on musharaka. The 2013 Emirates Airline Sukuk was the first sukuk to use ATKMs1 as the underlying assets.
The most innovative Emirates Airline Sukuk was actually the last one, issued in 2015. It involved sale and purchase of ATKMs (an airline industry measure of total capacity calculated as the total tonnage for carriage of passengers and freight multiplied by the distance flown). It also had an innovative credit enhancement structure whereby the UK Export Credit Agency (ECA) provided 100% guarantee to the investors. This sukuk is the main focus of Dr. Mohd Daud Bakar’s this book. According to the author, it is the most brilliant and a gold-plated template for other aviation operators to emulate.
The Emirates was followed by quite a few other players in the aviation industry, namely, Nomura (2010), GE Capital (2009), Malaysia Airlines (2013), Air Asia (2013), Geruda Indonesia (2015), Fly Dubai, and Etihad Airways. The book reports that total amount of the aviation sukuk exceeded US$6.7 billion, representing 2.3% of total sukuk outstanding. The author believes that it is reputable issuers like Emirates Airline, which can invigorate Islamic capital markets globally. There is an implicit message that a reader may get from the book. That is, in the beginning it was not a strict need by Emirates Airline to issue a sukuk; but rather it was to open a new market for having access to liquidity. The 2005 issuance perhaps benefitted Islamic banks and financial institutions more than the benefits accrued to the issuer. The subsequent issues, however, provided excellent opportunities to Emirates to access funding from Islamic capital markets. This was the time when global capital markets were facing liquidity crunch (owing to the global financial crisis). Emirates Airline’s good reputation and goodwill in the Islamic financial services industry helped it in raising the required funds. In some cases, it proved cheaper for Emirates to raise funds through the issuance of sukuk as compared to the conventional bonds it issued during the same time period.
MY PICK IN THE BOOK
The book provides a plethora of information on sukuk, which should be educational in its own right. If I have to pick a small portion of the book for those who would like to have a quick instructions menu for the issuance of sukuk, they must read pages 51-56, where the author explains the full process of sukuk issuance and its execution in just 1,000 words.
IMPORTANT EXCLUSIONS, POSSIBLE CONTROVERSIES AND OTHER OBSERVATIONS
An important exclusion in the book is personal reference to Sheikh Hussein Hamid Hassan, arguably the most innovative Shari’a scholar of the present times, whose genius was behind each and every sukuk structure Emirates Airline issued between 2005 and 2015.Without acknowledging his role, any case study on Emirates Airline sukuk will remain incomplete. A shocking statement on page 144 injects a big dose of excitement into the reader’s brain. It states, “Islamic finance has no religion.” It then continues to claim that the real religion of Islamic finance is the bottom line of product offerings, that is profitability to the shareholders, and competitive costs and services to the customers, on top of being [Shari’a] compliant. This seems like a controversial statement, but as a matter of fact it sums up the ground reality of Islamic banking and finance. If that is indeed the case, then it may not be a bad idea at all to pay a serious thought to the author’s strong advocacy of branding (or re-branding) of Islamic finance, away from its Islamic identity to a wider universally-accepted value proposition. This will certainly be a controversial thing to do.
Brilliantly written in most of the parts, the book at times becomes repetitive. For example, the author refers to the guarantee provided by the UK Export Credit Agency on multiple occasions. Similarly, reference to the fact that the 2015 sukuk proceeds were used to finance purchase of A380-800 planes is also repetitive. An informed reader may find it a bit inefficient use of the words. Almost half of the book (from the 6th chapter onwards) is more about Emirates Airline in particular, without any unique reference to its sukuk issuance programme. The second half of the book is essentially about what Islamic finance can learn from the Emirates Airlines. The comparison between Islamic finance and the Emirates Airline is indeed interesting and thought provoking. However, a keen reader reaching the page 218 all of a sudden realises that the story on the Emirates Airline sukuk had long time ago ended at around page 120. The remainder of the books turns out to be an inspirational account of the success of Emirates Arline and the factors contributing to it. One may ponder if it is adequate to compare an organisation/ corporation with an industry. The author attempts to answer this question rather less satisfactorily (at least in Chapter 7).
There is no doubt that Emirates Airline is an inspiring story for any businesses wishing to excel. However, Emirates Airline and Islamic finance are two completely different business. The author is actually more shrewd than what a critical reader might think of him. He explains the relevance of Emirates Airline to the Islamic financial services in the last three chapters (8 and 9 and the wrap-up). This is indeed an intelligent way of keeping the reader engrossed and engaged.
