Wealth in the Islamic world is accumulating, and investors are seeking competitive offshore locations in which to park their wealth and structure their vehicles. SEAN SCOTT and JOANNA HOSSACK explain the specific advantages of the Cayman Islands for Shariah compliant funds.
Wealth is accumulating in the Islamic world. The UAE, Saudi Arabia, Kuwait and Qatar are mainstays among the top 10 richest sovereign wealth funds in the world. Malaysia and Brunei appear in the top 20. Growth in these countries is not purely as a result of oil revenues; infrastructure development and entrepreneurship have also played their part. As the Islamic finance industry continues to grow and thrive, prosperity is trickling down to individuals and private business owners, when once it was the preserve of ruling families and high net worth individuals. This newly-affluent populace is looking at ways to make its money work whilst still complying with the principles of Shariah, and this presents an opportunity for asset management firms to develop and offer suitable investment products.
The characteristics of a Shariah compliant fund
Islamic and conventional funds share common objectives, such as pooling investors, preserving capital and optimizing returns, but Islamic funds adopt certain conventions in order to adhere to the requirements of Shariah. An Islamic fund should avoid investing in any company that deals with or is connected with gambling, adult entertainment, weapons, pork products, tobacco, alcohol or conventional banking. The list may look concise and straightforward, but there can be grey areas. Investments which may seem innocuous (such as an airline or hotel) can become problematic if, for example, they serve alcohol. In addition, prohibitions on excessive debt or investment techniques designed to create leverage (such as derivatives and short selling) may make equities investing difficult in a Shariah environment.
Islamic funds appoint advisory boards, typically consisting of several recognized Shariah scholars, to certify that the fund is in compliance with the principles of Islam. Regular Shariah reviews are conducted, to ensure that the investments and structure remain Halal throughout the life of the fund.
There are many Islamic indexes, which focus on companies that have been approved for Shariah purposes, but for funds that are not tied to these indexes, it may be difficult to find an investee company that is 100% Halal. Some Shariah scholars will permit investment in companies that are associated with Haram activities, so long as those activities are merely incidental to the company's main purpose or form only a de minimis percentage of the company's overall gross income or value.
In the event Haram income is received by an Islamic fund, it may be 'purified' by the fund donating an equivalent amount to charity. This process can be dealt with differently from fund to fund. Some funds may perform detailed calculations; others may treat the purification as a flat fee. Some may inform investors of the relevant figures and leave it to them to opt in or out of the charity donation.
The advantages of the Cayman Islands
For numerous reasons, Cayman is the dominant jurisdiction worldwide for the establishment of off shore open and closed-ended funds. Cayman has three times as many open-ended funds as the second-largest off shore jurisdiction for funds, with assets under management dwarfing competitors.
Cayman adopts a pragmatic regulatory regime. Closed-ended funds are not subject to regulation, so there are no specifically mandated provisions relating to such funds' administration, audits or custody arrangements. Open-ended funds can be established and registered quickly and Cayman does not seek to impose material conditions on securities offerings by open-ended funds to non-retail investors. There is no limit to the asset classes which a company or limited partnership can acquire or the types of securities which it can issue, making Cayman vehicles suitably flexible for the structuring of Shariah compliant investments.
Companies are not required to pay income, capital gains, corporation or withholding taxes and may apply for an undertaking from the government that such tax-free status will be maintained for a period of up to 30 years from incorporation, irrespective of any subsequent law change. This guarantee against future tax law change is not provided by other leading off shore jurisdictions.
Companies can be incorporated quickly and the cost of forming and maintaining them is competitive. Cayman companies also provide an appropriate level of privacy for investors, since neither the register of directors nor the share register of a company is required to be publicly fi led in Cayman.
Cayman is one of the largest banking centers in the world in terms of assets and has retained a rating of 'Aa3' from Moody's continuously since 2000. There is an established and reliable stock exchange, which currently has more than 1,100 listings (including Shariah compliant funds and Sukuk) and a listed market value of US$170 billion. The courts are highly experienced in the resolution of corporate matters and, because Cayman is a UK Overseas Territory, the ultimate recourse is to the Privy Council of the House of Lords.
Originally published in Islamic Finance News - 12 June 2014
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.