Hong Kong: Shari’ah Funds – A Bermuda Perspective

Last Updated: 7 January 2010
Article by Jeffrey Kirk

Prior to the global financial crisis, the Islamic banking, finance, insurance (takaful) and investment markets were riding a wave of unprecedented growth.

Banking was growing 15-30 percent annually, with trading levels having increased from US$70 billion in 2005 to US$300 billion in 2008. The takaful industry was growing at an annual rate of 20 percent. The asset growth rate in the Islamic finance industry from 2005-2008 was 400 percent with the industry worth more than one trillion dollars in early 2008.

The global financial crisis may have put an end to that rapid growth, but Islamic finance however may be moving toward providing a new mainstream alternative to western banking and investment products. This development is fuelled partly by the belief that Shari'ah compliant products may not be as vulnerable as conventional products. For instance, the residential sub-prime mortgage backed securities would not have been permissible under Shari'ah investment principles.

An illustration of the movement of Islamic finance structures into the mainstream recently emerged in Sweden where a co-operative has formed a members' bank that has opted for the Islamic finance feature of not charging interest on loans. All bank activities occur outside the capital market – member savings are the sole source of finance for loans.

Explaining Islamic Finance

Islamic finance is the conduct of trade and enterprise in accordance with Shari'ah, which is the Islamic law principles and jurisprudence, the primary sources of which are the Qur'an and the Sunnah (the recorded 'example' of the life and deeds of the prophet Mohammed).

Shari'ah dictates that wealth and prosperity is shared within the community through morally acceptable business practises and that risk in trade and business should also be shared.

For example, the payment of interest (Riba Al Nasiah) is prohibited, as is the excessive or unjustified compensation in the exchange or sale of specified commodities such as gold, silver, barley, or wheat (Riba Al Fadi). Speculation or uncertainty must be avoided (Maisir Gharar). There is also a prohibition on dealing in items that are not halal, including both kinds of riba, pork, pornography, tobacco, alcohol, weapons, conventional financial services, speculation and uncertainty, and biotechnology (e.g. stem cell research).

Shari'ah Investment Funds

Shari'ah investment funds are joint pools wherein investors contribute for the purpose of earning halal (Shari'ah-compliant) profits. The basic objectives are:

  • the return on investment constitutes pro-rata profit actually earned by the fund
  • neither the principal nor the return can be guaranteed (i.e. no guaranteed fixed return investment products)
  • the pooled investment funds must be invested in a business including terms agreed, that are acceptable under Shari'ah

Shari'ah investment funds may be broadly classified as:

  • Shari'ah Equity Funds
    Shari'ah equity funds invest in the shares of listed companies or instruments. Unlike conventional equity funds, the businesses in which these listed companies are engaged must be halal.
  • Shari'ah Real Estate Funds
    Shari'ah compliant investment in real estate funds often involves investment in leased commercial properties, whereby the fund is the lessor to whom the lessee pays rent. Often, such funds (conventional and Shari'ah) are established as a closed fund, thereby ensuring that investors will only be paid their capital upon the disposal of the underlying property.
  • Shari'ah Private Equity or Venture Capital Funds
    Private equity or joint venture investment assumes, for the most part, risk in real economy ventures. Provided that it is a non-leveraged transaction (including the debt position of the target) and that the nature of the acquisition (i.e. whether achieved via an auction or other bidding process) and the nature of the target's activities are Shari'ah compliant, then there is no restriction as to such private equity or venture capital funds being Shari'ah funds.
  • Shari'ah Hedge Funds
    The prohibitions on the payment or receipt of interest, selling of property that the vendor does not legally own, financial speculation and the requirement that financial returns are derived from physical assets would, on the face of it, preclude the use of three of the key techniques traditionally employed by hedge fund managers, namely leverage, short-selling and derivatives.

A number of intrepid investment managers have been working with Islamic scholars in developing Shari'ah compliant techniques that seek to replicate those used by conventional hedge funds. The development of Shari'ah hedge funds is reflected in the launch, in January 2009, of the Dubai Shari'ah Hedge Fund Index, the first internationally recognised index comprised exclusively of Shari'ah compliant hedge funds.

Purification of Earnings

The purification of earnings refers to the methodology employed by the Shari'ah funds to deduct from their returns, any non-permissible income (e.g. interest income), which is earmarked and removed from the permissible income so as not to taint the latter. A Shari'ah supervisory board may either allow the non-permissible income to be credited to the net asset value of the fund and simply reported to investors so that each investor may decide how they wish to deal with the non-permissible income, or insist that the non-permissible income be donated to a charitable trust established by the Shari'ah investment fund's sponsor, or its fund managers for that purpose, or be donated directly to charities as directed by the Shari'ah supervisory board.

In circumstances where the non-permissible income is to be funnelled to charitable causes, the amount of non-permissible income for each share or instrument is to be determined and then deducted from the dividend and transferred to the charitable causes.

Shari'ah Supervisory Boards

If the funds and/or the fund managers are members of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), then the reviews undertaken and reports prepared by the Shari'ah supervisory boards would ordinarily be performed in accordance with AAOIFI standards and requirements.

The interpretations applied to investment products by different Shari'ah supervisory boards have differed substantially, particularly in regard to the jurisdiction of practise of the individual Islamic scholars sitting on each board. The result is that what may be regarded as Shari'ah compliant by a Shari'ah supervisory board based in Malaysia may not be regarded as Shari'ah compliant by a Shari'ah supervisory board based in Saudi Arabia.

In August 2009, AAOIFI's secretary general, Dr Mohamad Nedal Alchaar, announced that AAOIFI will determine the Shari'ah compliance of a product. Such proposed standardisation in Shari'ah rulings is to be welcomed as a stimulus to the development of new Shari'ah products.

A Bermuda Perspective

Bermuda's funds industry has been hit hard by adverse conditions in the global financial markets. However, being on the cusp of a possible recovery in the markets, presents an opportunity for funds jurisdictions in general and Bermuda in particular to aggressively market its position, infrastructure and benefits.

Bermuda is already home to a large institutional Shari'ah compliant fund, and now the marketers are moving in. In December 2007 the Bermuda International Business Association (BIBA) undertook an initial foray into the Gulf region. This has been followed up by a number of subsequent activities by BIBA, the most notable of which was its participation in the second annual Fund Forum, Middle East in Bahrain in December 2008.

The certainty, efficiency and flexibility offered by Bermuda have always drawn the funds industry. A key attraction is the ability to obtain prompt approval, if necessary, for a fund from the Island's leading financial services regulatory authority, the Bermuda Monetary Authority.

In addition, Bermuda is a well-regulated jurisdiction with an established infrastructure and professional services providers. Additional factors that enhance Bermuda's attractiveness as a funds domicile include:

  • the ability to structure Bermuda umbrella funds as segregated account companies with the resultant segregation of assets and liabilities between the segregated accounts;
  • the ability to list funds on the Bermuda Stock Exchange, which is recognised by the United States Securities and Exchange Commission as a Segregated Offshore Securities Market under Regulation S, granted "Designated Investment Exchange" status by the United Kingdom's Financial Services Authority, and designated as a "recognised stock exchange" by the UK's HM Revenue and Customs;
  • typically, no restrictions on investment objectives or strategies;
  • recent amendments to the Bermuda Companies Act 1981 facilitate the delivery of electronic records, including by publication on a website and reduce the requirements for officers or representatives resident in Bermuda; and
  • the ability to use non-roman characters as a second name.


The development of Islamic finance and particularly Shari'ah funds represents an opportunity for Bermuda and other offshore jurisdictions. Bermuda's ability to adapt to specific requirements, and to offer flexibility to investors, as well as the island's sophisticated infrastructure and professional services provider support network can unquestionably support the development of this market.

Appleby has recognised this growth, and in July 2009 it opened a representative office in Bahrain for the purposes of serving clients in the Middle East, including in the area of Islamic finance.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Jeffrey Kirk
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions