Earlier this year, the Bermuda Monetary Authority (the ‘BMA’), keen to promote the development of Islamic finance, published Guidance Notes that facilitate the establishment of Shariah compliant investment funds in Bermuda.
Located within easy access of both London and New York, Bermuda’s existing relationship with Gulf Co-operation Council countries (particularly Bahrain) and its desire to promote the development of Islamic finance means Bermuda is well positioned to provide opportunities for investors, promoters and asset managers (wherever they may be based) to expand and develop their Shariah-compliant product offerings on an attractive, globally recognised platform.
Bermuda’s highly respected and transparent regulatory framework already provides legal certainty to Islamic finance transactions such as sukuk by providing modern, flexible corporate and trust legislation, based on common law principles, coupled with tax neutrality, a key element in effectively structuring transactions. Company names in Bermuda may also be registered in Arabic or non-Roman script.
Shariah-compliant funds can be established in the same manner as conventional funds. In essence, the Shariah element essentially operates as an extra set of rules layered on top of the corporate structure that influence the underlying investment decisions to suit a specific group of investors. Shariah-compliant funds are thus not dissimilar to ethical investment vehicles.
There is a steady growth in the development of Shariah-compliant private equity funds, global infrastructure funds and alternative asset funds in addition to the traditionally accepted real estate and commodity based funds. Within the private equity space, Shariah-compliant funds often incorporate mudarabah or mushakarah arrangements, structured as limited partnerships operating through specific profit and loss sharing agreements.
Bermuda’s limited partnership legislation accommodates both mudarabah and mushakarah arrangements. In addition, neither Bermuda’s Companies Act nor its Investment Funds Act restricts a fund’s choice of investment objectives.
The Guidance Notes only apply to mutual funds and open-ended funds established under the Investment Funds Act 2006, and not to closed-ended funds (eg, private equity funds). The Guidance Notes aim to recognise certain unique features of Shariah-compliant funds and provide guidance on a number of issues which such funds may need to consider in complying with the existing regulatory framework, including the appointment and role of the Shariah supervisory board, required disclosure in the fund’s offering document (such as risk factors and conflict of interest disclosure) in line with Bermuda’s existing Fund Prospectus Rules, required disclosure in the fund’s constitutional documents (such as investment restrictions) and notification of material changes to the BMA.
The Guidance Notes augment Bermuda’s regulatory regime to ensure that Bermuda domiciled Shariah-compliant funds comply with international best practice. The BMA supervises, regulates and inspects financial institutions operating in or from within Bermuda and is a full member of IOSCO, referring to the core principles issued by IOSCO (deemed to be universal standards of conduct within the investment business industry).
There is currently an unprecedented increase in investor demand for Islamic finance and Shariah-compliant products and thus the publication of the Guidance Notes is timely. Recent developments in the Middle East have highlighted the need for locally based investors and managers to seek greater geographic and product diversification. One of the key determinants for the successful development of Islamic finance in any jurisdiction is the existence of a legal framework that supports the operation and growth of the industry. Bermuda offers such a framework and the Guidance Notes are based on sound corporate governance principles that demonstrate the BMA’s desire to ensure that Shariah compliant products are easily accommodated within Bermuda’s existing regulatory framework whilst remaining appropriately regulated. Shariah compliant mutual/open-ended funds will otherwise still be subject to the same regulatory framework as conventional funds.
Already widely recognised for its contribution to conventional finance and one of the world’s leading fund domiciles, Bermuda is determined to maintain a leading role in the growth of the Islamic finance industry.
Fawaz Elmalki is a director in the Dubai office of Conyers Dill & Pearman and specialises in investment funds, in particular private equity funds, real estate funds, infrastructure funds and hedge funds including Shariah compliant funds.
Sheba Raza is an associate in the London office of Conyers Dill & Pearman and has a wide ranging practice acting for financial institutions, insurance companies and general corporate clients.