Following our recent article “Ship leasing: Does a financial lessor need to be the registered owner of the leased asset?” (the “Original Article”), this piece compares the Conditional Sale – Lease in/Lease Out structure (“CSA Structure”) with the Islamic Ijara leasing model (“Ijara Structure”) which is governed by Sharia principles. Both structures offer an alternative for:
- shipowners who want to retain registered title with their vessel; and/or
- lessors who wish to reduce operational risks of being ‘owners’ of a vessel.
Each structure shares the notable features that the registered ownership of the vessel with the relevant flag remains with the lessee and, as a result, the lessor can take the benefit of the mortgage over the asset. Despite these similarities, and driven by religious and ethical considerations, the two structures are fundamentally different in design and execution, diverging in terms of their treatment of beneficial ownership, risk allocation and contractual obligations.
The below table offers a side-by-side comparison of the key features of the CSA Structure extracted from the Original Article vs an Ijara Structure in a maritime context.
| CSA Structure | Ijara Structure | |
|---|---|---|
| 1 | The financing amount is expressed as consideration for the acquisition of the Ship and will be paid under a Conditional Sale Agreement (“CSA”). | The financing amount is expressed as consideration for the purchase of the vessel by the Purchaser (lessor) under a Purchase Agreement. |
| 2 | The title of the shipShip shall remain with the Shipping SPV until certain conditions under the CSA are met (such as a termination event or event of default). The CSA provides a mechanism whereby such transfer of title shall be feasible at any time during the lease tenor if any such condition is met. | Legal title to the vessel transfers to the Purchaser under the Purchase Agreement. Pursuant to the Lease Agreement, the lessee and the lessor enter into: a) a Purchase Undertaking whereby there is a unilateral promise by the lessee to purchase the vessel at the end of the lease term or upon certain trigger events (e.g., default, termination event); and b) a Sale Undertaking whereby there is a unilateral promise by the lessor to sell the vessel to the lessee under specified conditions (e.g., upon full payment of lease rentals). |
| 3 | Under Bareboat Charter 1 the Shipping SPV (as head lessor) bareboat charters the sShip to the Leasing SPV (as head lessee). Bareboat Charter 1 transfers the possessory rights of the sShip from Shipping SPV to Leasing SPV. | Pursuant to the Master Purchase Agreement, the Purchaser (lessor) and the Seller (lessee) execute a Title Nominee Declaration whereby the lessor agrees to hold legal title to the vessel on behalf of the beneficial owner (typically the lessee). |
| 4 | At the same time the Leasing SPV will onward transfer such rights to the Shipping SPV under Bareboat Charter 2. | Pursuant to a Lease Agreement, the lessor will lease the vessel back to the lessee. |
| 5 | Bareboat Charter 2 is similar to the charter utilised in the traditional sale and lease-back transaction. All ship and corporate-related covenants typically found in a finance lease are included in Bareboat Charter 2. | Typically, the corporate and vessel related covenants are contained in the Lease Agreement or, if there are multiple vessels, a Master Lease Agreement and/or, if the financing is syndicated, a Common Terms Agreement. Under a Service Agency Agreement, the lessor appoints the lessee as its agent to perform the vessel ownership and maintenance obligations on its behalf. |
| 6 | The main differences between Bareboat Charter 2 and a standard finance lease are the CSA and the mMortgage in the security package. | By operation of the Tile Nominee Declaration, the nominee holds title but has no beneficial interest in the vessel which means registered ownership remains with the lessee who can grant a mortgage over the vessel in favour of the lessor. |
We are seeing Islamic finance structures increasingly being adopted beyond purely Sharia compliant mandates, offering flexible, risk-conscious solutions that appeal to a wider range of market participants. As the maritime finance landscape continues to diversify, we anticipate further innovation in structuring tools that balance operational control, enforceability, and ownership risk in both conventional and Islamic frameworks.
