They may not grab the headlines like some areas of the finance industry, but Sharia-compliant products and services are going quietly about their business - and increasing in popularity
A few years ago, Islamic and Sharia finance were talked about in many circles, in the Channel Islands, the UK and Europe, as a real opportunity for financial institutions to attract business. Then, as is the fickle nature of the industry, the attention shifted elsewhere and such talk was seemingly forgotten.
Of course, being out of the headlines doesn't mean that progress hasn"t been made. So just what has happened in recent years? What sort of Islamic business has the Channel Islands been doing and how much are they doing now?
As Bruce MacNeil, a Partner at Ogier in Jersey, is keen to point out, Islamic finance in general has been growing steadily over the past few years as an asset class, and he believes this is likely to continue for the foreseeable future.
That forecast for growth is supported by a report from accountancy firm EY, which showed that, globally, Islamic banking assets grew at an annual rate of 17.6 per cent between 2009 and 2013. It estimates that they will grow by an average of 19.7 per cent a year to 2018.
As to how the Channel Islands fits into this growth market, MacNeil says: “In Jersey and Guernsey, the Islamic finance work involving offshore entities has mainly been on the banking and finance side - for example, establishment and financing of SPV [special purpose vehicle] issuers and holding companies to be used in sukuk, murabaha and real estate finance transactions.”
Sukuk is similar to a bond but is compliant with Sharia - Islamic religious law - because it applies a rental fee rather than interest, which is forbidden. Murabaha is an acceptable form of credit sale under Sharia law.
Daniel Hainsworth, Director at Hawksford, agrees with MacNeil that growth within the sector is notable. He points to the fact that the global Islamic finance industry grew from $1.66trn in 2013 to $2.1trn by the end of 2014. Consultancy PwC has projected that this industry will grow to $2.7trn by 2017.
Hainsworth explains why this growth has so much momentum. “More clients, both Muslims and non-Muslims, who would have historically used traditional products, are choosing Sharia-compliant options. This might be down to more competitive offers when it comes to Islamic and Sharia-compliant products, and the British banks that are upping their game and offering clients access to Islamic finance products and services.”
He concedes that this sector may not attract the press attention in the Westthat other areas of wealth structuring do, but this belies the extent of activity.
“It"s a difficult market to assess since most new clients are forming a range of private, unregulated or family structures, which aren"t as easy to calculate versus regulated operations. On the other hand, there have been some significant industry acquisitions, which have certainly captured the media headlines in recent years - much like Qatari bank Masraf Al Rayan acquiring Islamic Bank of Britain.”
Island involvement
In terms of activity in the Channel Islands, one island seems to be leading the way in Islamic finance. MacNeil suggests that Jersey is attracting more business than Guernsey. “For example, we act for the Islamic Development Bank on its sukuk issuance programme, which uses a Jersey issuer and trust structure, with the trust certificates issued being listed on the London Stock Exchange and the Bursa Malaysia,” he explains.
Hainsworth agrees that Jersey has been the more active of the islands. He says: “Jersey has long-standing relationships in the Gulf Cooperation Council (GCC) region, as evidenced by Jersey Finance establishing a representative office in Abu Dhabi. With Jersey"s robust regulatory reputation, its proximity to the UK and an increasing number of Gulf-based businesses establishing roots in Jersey, it"s no surprise that we are seeing an influx of Very Private Funds, typically into UK real estate.”
While Jersey may be enjoying good levels of business, other jurisdictions are highly competitive in the market, reveals MacNeil. “There"s a lot of Islamic finance business in Dubai, the Middle East, Singapore, Malaysia and Indonesia,” he says.
“As regards the offshore world, the Cayman Islands seems to be the most popular jurisdiction used to establish sukuk issuers, although sukuk is only one of a number of different types of Islamic finance transactions.”
Hainsworth namechecks Singapore as an important hub for Islamic finance work in Asia, which stands to reason as it has a large Muslim population and a growing number of high-net-worth individuals.
“Hawksford opened offices in Singapore in 2014, which serves as a convenient hub, attracting finance opportunities within the significant Muslim population in Asia,” he explains.
Given the popularity of jurisdictions such as Singapore and Cayman Islands, why would someone opt to carry out Islamic finance through the Channel Islands? Graeme Paton, Head of Funds and Corporate Services at Minerva, can think of plenty of reasons.
“In addition to their close proximity to London, the Channel Islands offer political and economic stability, world-class financial services regulation, a gateway to markets, a legal system that works very well with Sharia-compliant structures, appropriately experienced professional administrators and a time difference of only three hours from Dubai,” he says.
Paton adds: “Minerva has had an office in Dubai since 2009, and we work closely with our colleagues on a range of services, including Jersey law Islamic trusts and private trust companies.”
Location and reputation
Hainsworth also singles out Jersey"s location and reputation as standing it in good stead. “Jersey"s expertise in Sharia-compliant structuring is highly regarded,” he says. “With London"s ambition to become a centre of excellence in Islamic finance, it stands to reason that Jersey is one of the most respected jurisdictions for structuring. We share geopolitical and economic ties with the UK, and are backed up by our expertise in the area. In a region like the GCC where reputation is paramount, the global Jersey name is
a perfect business enabler.”
Clearly, Jersey offers benefits for Islamic Finance business, but how far can it realistically develop in this space? Hainsworth doesn"t predict a seismic shift towards Jersey as an Islamic finance hub, but he does envisage steady progress. “The wealth structuring industry is made up of niche areas such as succession planning and private equity. I don"t see Islamic finance becoming the most dominant of all niche areas, but I do see it evolving in the same way that other service areas are shaped by regulatory developments and the changing needs of clients.”
MacNeil also predicts steady rather than stellar growth of business. “We expect this market to continue to grow over the next few years, although realistically the Cayman Islands is more often used than Jersey or Guernsey for sukuk issuance.
“The best opportunities are probably in the areas of Islamic funds investing in UK real estate and Islamic financing for UK real estate transactions.”
Islamic finance in brief
Sharia (or Islamic) law is derived from the religious text of the Koran, and Islamic finance represents a part of these laws.
The Islamic legal code stipulates that Muslims must not get involved with industries or products that are considered haram (sinful), such as alcohol, gambling and pig meat.
There is also an instruction to avoid gharar - excessive risk-taking (for instance spread betting and hedge funds). And, while Islamic teaching encourages trading, investment and charitable giving, it bans the creation of money by money.
Indeed, the central concept driving the Islamic finance industry is the prohibition of interest on money - riba - which is considered sinful. The rule forbidding the paying or receiving of interest makes it hard for Muslims to use conventional bank products such as savings accounts, loans and mortgages.