Growing trend: Islamic finance goes offshore

By added on 12/08/2015

The rise of Islamic finance and sukuk issuances have brought with it a growing phenomenon: Shariah banking is increasingly taking advantage of offshore banking jurisdictions, and this for a number of reasons, reports the Gulf Times.

Many offshore centres around the world meanwhile offer a wide range of features allowing Shariah principles to be upheld when creating Islamic financial products. This goes in tandem with offshore companies and trusts that have proven to be a useful ingredient to Islamic finance products. Many offshore jurisdictions also offer multiple other benefits such as low income, capital gains, profit or withholding taxes or no taxes at all, no restrictions on foreign exchange or foreign ownership, experienced service providers and operational support.

Offshore financial centres that since have attracted Islamic finance are, among others, Cayman Islands, Jersey, Bermuda, British Virgin Islands and Labuan in Malaysia, the latter mainly for Asian transactions.

For example, earlier this year Labuan was chosen for the issuance of Australia’s first-ever sukuk as solar power joint venture SGI-Mitabu from Brisbane sought $117mn to finance the building of a solar power plant in Indonesia. The company chose Malaysia’s popular offshore finance centre because Australia still has not approved laws allowing for the sale of sukuk since first proposing a plan in 2010.

There have also been issuances of Malaysia ringgit-denominated sukuk from Middle East issuers in Labuan in the past, including National Bank of Abu Dhabi and Gulf Investment Corp. This year’s issuance of the first corporate global sukuk out of Indonesia, Garuda Indonesia’s $500mn sukuk which is also the first ever offshore US dollar offering by an Indonesian corporate issuer and the first sukuk issuance utilising the airline capacity structure, has been facilitated through the establishment of a trustee company based in the Cayman Islands under the name of Garuda Indonesia Sukuk Limited, and the trust certificates that will be listed on the Stock Exchange of Singapore.

The Cayman Islands, one of the largest offshore financial centres in the world, seem to be the jurisdiction of choice for several Islamic finance products for real estate, asset and project finance and particularly for sukuk. While there are no specific regulations for Islamic finance, the jurisdiction’s flexibility, particularly with regard to the drafting of documents with Shariah requirements, suits the demands of Middle Eastern clients, including the option to register companies in both Arabic and English. Furthermore, as a British overseas territory, Cayman is politically stable and its laws are based on English common law, which is the preferred governing law for Islamic finance transactions, according to Jude Scott, CEO of Cayman Finance, one of the islands’ largest finance firms.

Bermuda started focusing on Islamic finance when it entered a double taxation avoidance treaty with Bahrain in 2010 and has been introducing legislation to accommodate Shariah-compliant finance platforms. The island has a thriving sukuk and takaful sector. The British Virgin Islands are increasingly being used by Islamic asset managers and Islamic financial institutions to incorporate investment vehicles especially for China, as they provide some specific advantages particularly for certain Islamic finance structures such as musharakah. In Jersey, the island’s strong investment funds market has been expanded to accommodate Shariah-compliant funds with the mandatory requirement to appoint a Shariah board.

Labuan, through its Labuan Islamic Financial Services and Securities Act, has also been successful in attracting a number of Islamic banks and Islamic banking windows.

Two other upcoming offshore centres for Islamic finance can be found in the Indian Ocean: In Mauritius, the government has paved the way for Islamic finance by amending tax laws which appeal to global investors wishing to make Shariah-compliant investments, particularly focused on Africa. And in the Seychelles, the government is currently working on a framework for Islamic banking activities, with the first bank to be converted into a Shariah-compliant bank being BMI Offshore Bank, partly owned by BMI Bank Bahrain.