Why use Islamic financing structures for aircraft acquisitions?

Aircraft financing has long been a natural fit for Islamic finance. The underlying structures are typically linked to tangible assets and identifiable cash flows, making them well suited to the principles that underpin many Shariah-compliant financing arrangements. 

There has been growing interest in Islamic finance over the past decade from airlines, lessors and investors seeking to diversify funding sources, particularly across the Middle East and Asia. More recently, growth in the Sukuk market and increased participation from international investors have reinforced the role of Islamic capital in funding major aviation assets.  

The global Islamic finance industry reached approximately US$5.98 trillion in assets in 2024, up from about US$2.88 trillion in 2019, and is projected to approach approximately US$9.7 trillion by 2029, according to the LSEG / ICD Islamic Finance Development Report 2025. Within that broader industry, the global Sukuk market surpassed US$1 trillion outstanding in 2024, with issuance up around 11% year-on-year. 

One feature that continues to appear across aviation finance transactions involving Middle Eastern market is the use of special purpose vehicles (SPVs) incorporated in the Cayman Islands. While financing arrangements vary between transactions, Cayman Islands SPVs are regularly used to support aircraft ownership, leasing and financing structures involving Islamic banks, investors and operators. 

This article examines how Cayman Islands SPVs are typically used in Shariah-compliant aircraft financing transactions and why they continue to be a preferred structuring option for airlines, lessors, financiers and investors. 

Why Islamic finance works for aircraft acquisitions 

Shariah-compliant financing structures are high-value, income-generating assets capable of supporting long-term financing arrangements, making them ideal for purchasing aircraft. 

A variety of Islamic finance structures may be used but the Ijarah lease is one of the most common. This involves an asset being acquired and leased to an operator in return for rental payments. Rather than generating a return through interest, investors or financiers gain economic benefit from the use of the underlying asset. 

However, modern aircraft financing transactions often involve multiple parties, cross-border ownership arrangements and layered financing structures. Bringing these elements together requires a legal and commercial framework that is familiar to lenders, investors and operators alike. This is where Cayman Islands SPVs often play a significant role. 

Using Cayman Islands SPVs in aviation finance 

The use of SPVs in aircraft finance extends far beyond Islamic finance. 

In a typical transaction, legal ownership of an aircraft is held through a dedicated corporate vehicle established specifically for the financing arrangement. This creates a degree of separation between the aircraft and the airline, lessor or investor ultimately benefiting from the transaction. 

In Islamic aircraft financing, that separation can serve an additional purpose. Shariah advisers often want to see a clear distinction between the parties providing finance and the entity that owns and leases the aircraft. A Cayman Islands SPV can help facilitate that while also delivering the commercial and insolvency protections expected in modern aviation finance transactions. 

Cayman Islands vehicles often sit at the centre of structures involving operators, lessors, Islamic banks, Sukuk investors and security trustees, particularly where assets and participants are spread across multiple jurisdictions. 

Why orphan SPVs are commonly used 

An orphan SPV structure is used in many aircraft financing transactions. In this structure, the shares of the SPV are held by an independent trustee rather than by the airline, lessor or financing party, making the vehicle legally separate from the transaction participants and does not form part of a wider corporate group. 

Orphan structures are commonly used throughout structured and asset finance markets and are particularly attractive in an Islamic finance context. They help reinforce the arm's-length nature of the arrangement and provide a degree of bankruptcy remoteness that is often valued by investors and financiers. 

Orphan structures enable an SPV to hold legal title to the aircraft while remaining insulated from the balance sheet and insolvency risks of the end user. 

How Cayman Islands SPVs fit within an Ijarah structure 

Although individual transactions will differ, a typical Ijarah lease aircraft financing involves the SPV acquiring legal title to the aircraft and leasing it to the operator in return for periodic rental payments. 

Those payments are then used to meet the SPV's obligations to financiers or investors that funded the acquisition of the aircraft. 

Where capital markets funding is involved, the financing may be raised through a Sukuk issuance. In those circumstances, the proceeds of the Sukuk are used to acquire the aircraft and investor returns are supported by the rental stream generated under the lease arrangement. 

The appeal of these structures is in their familiarity as well as their Shariah compliance. Many of the economic outcomes sought by airlines, investors and financiers are broadly comparable to those achieved through conventional leasing and asset finance structures, albeit through a different legal framework. The Islamic financing may take the form of a Mudarabah partnership, which involves an investment management arrangement that can also take the form of a Sukuk or other structure. 

In this case, an Islamic financier will secure an investment agency agreement with an Islamic bank, which acts as the investment agent and as an investor (the Rab Al Maal). The Islamic bank enters the Mudarabah agreement with the orphan SPV (as the Mudarib) and, in accordance with an investment plan, the orphan SPV uses the financing provided to purchase the aircraft. 

In a simple Sukuk transaction, the orphan SPV will issue Sukuk to investors and use the proceeds to purchase the aircraft. The aircraft is then held by the SPV on trust for the investors. In accordance with the terms of the Ijarah arrangement, the operator pays lease payments to the SPV in line with the amount payable to the holders of the Sukuk. 

Ijarah financing also requires the SPV to sell, and by the operator to purchase, the aircraft upon the repayment of the underlying financing or when other specified events occur. 

Why Cayman remains a leading SPV jurisdiction 

Cayman continues to be a popular choice for aircraft-owning SPVs for a number of reasons. 

One is market familiarity. Cayman Islands vehicles have been used in aviation finance transactions for many years and are well understood by lenders, lessors, investors and professional advisers. The jurisdiction's common law legal system, flexible corporate framework and established trust structures also make it well suited to complex cross-border transactions. The ability to establish bankruptcy-remote orphan SPVs remains particularly relevant in transactions involving multiple financing parties and international assets. 

Perhaps most importantly, Cayman Islands structures have demonstrated their adaptability over time. Whether supporting conventional lending, operating leases, securitisations or Shariah-compliant financing arrangements, they continue to provide a framework capable of accommodating the evolving needs of the aviation market. It is also cost-friendly to incorporate efficiently and maintain SPVs in the Cayman Islands. 

Looking ahead 

Islamic finance will likely remain an important component of the aviation funding landscape as airlines continue to modernise fleets and seek new sources of capital. 

The continued growth of Sukuk markets, and increasing demand for alternative sources of funding suggests that Shariah-compliant aircraft financing will remain relevant in helping structure transactions that satisfy both commercial and Shariah requirements, with Cayman Islands SPVs likely to play a central role. 

How Ogier can help 

Ogier's Aviation Finance experts in our legal team can advise on the structuring and implementation of cross-border acquisition and finance structures specific to aircraft leasing, including advice on direct sales and acquisitions, leasing platforms and ownership vehicles and programmes for aircraft of all types, commercial and private. We can also call upon our specialist industry knowledge to assist our clients on a full range of more general commercial, financial and regulatory matters as they affect industry participants 

As the use of Cayman orphan SPVs continues to grow in Shariah-compliant aviation finance transactions, access to experienced establishment, governance and administration support remains critical. Ogier Global's Dubai team provides a seamless gateway to Cayman orphan SPV solutions, offering incorporation, registered office and RORA services alongside professional director and corporate director appointments. With experienced personnel on the ground in the Middle East time zone, we are able to support sponsors, financiers, investors and advisers throughout the life of the structure, delivering practical governance oversight and responsive local support for complex cross-border transactions 

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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