As governments continue to implement restrictive measures to deal with the fallout caused by COVID-19, S&P remains of the view that the global Islamic finance industry will show low- to mid-single-digit growth into 2021. Offshore financial centers, such as the Cayman Islands, Jersey and Labuan, continue to support the growth of Islamic finance and feature prominently in Islamic transactions, notwithstanding the slowdown.
Review of 2020
The vast majority of global Sukuk issuances in 2020 were undertaken by sovereigns, quasi-sovereigns and banks which continue to use SPVs formed in offshore financial centers to increase liquidity.
In terms of sovereigns and quasi-sovereigns, the emirate of Sharjah issued billions under its unlimited Sukuk program featuring a wholly-owned and managed Cayman Islands issuer. DP World issued US$1.5 billion in hybrid perpetual Sukuk also through a Cayman Islands structure, whereas the IsDB issued billions under its Sukuk program structured in Jersey. Both issuing vehicles were set up as ‘orphan’ companies, meaning their shares are held on trust for charitable purposes by a licensed trust company and these issuers are also managed by independent directors.
Saudi Electricity Company (SEC) used a wholly-owned Cayman Islands SPV to float its US$1.3 billion Sukuk on Euronext Dublin. Similarly, Bahrain Mumtalakat Holding Company raised US$500 million through its wholly-owned Cayman Islands issuer.
In the aviation sector, hard-hit by COVID-19, both Etihad Airways and Dubai Aerospace Enterprise (DAE) tapped the international Sukuk markets in November. Etihad issued US$600 million-worth of ‘transition Sukuk’ under its US$3 billion program with an orphan Cayman Islands issuer, while DAE established its US$2.5 billion program and issued US$750 million-worth of Sukuk using a Dubai International Financial Centre (DIFC) company.
Numerous GCC banks made benchmark issuances using vehicles domiciled in popular financial centers. From the UAE and Qatar, each of Dubai Islamic Bank (DIB) and Qatar Islamic Bank (QIB) (issuing over US$1 billion), and Emirates Islamic, First Abu Dhabi Bank, Sharjah Islamic Bank and Masraf Al Rayan (issuing US$500-750 million) made drawdowns under their Sukuk programs using orphan Cayman Islands SPVs.
From Kuwait and Bahrain, Boubyan Bank and GFH Financial Group had successful Sukuk issuances of US$750 million and US$3 billion respectively, also using Cayman Islands SPVs. From Saudi Arabia, we witnessed two notable reset Tier 2 capital securities issuances by Riyad Bank (US$1.5 billion) and Arab National Bank (US$750 million) through Cayman Islands orphan entities. These were followed by a US$1 billion Tier 1 capital securities issuance by DIB (through a Cayman Islands issuer), and were preceded by a US$750 million Tier 1 capital securities issue by National Bank of Kuwait at the end of 2019, which instead chose a DIFC issuer.
Few corporates emerged to tap the global Islamic capital markets over the past 12 months, but several that did again turned to offshore centers. Labuan featured in two issues by publicly listed Malaysia-based companies. Axiata Group made a combined conventional and Islamic securities offering (US$1.5 billion) through two wholly-owned SPVs formed in Labuan and Malaysia, and Serba Dinamik Holdings listed US$200 million-worth of Sukuk at the end of 2019 through a wholly-owned Labuan company on the Labuan International Financial Exchange.
Preview of 2021
Socially and environmentally focused investment products were in great demand in 2020. This trend will extend into 2021 and beyond and continues to highlight the benefits of utilizing offshore centers.
Each of the IsDB, Etihad and SEC floated environmental, social and governance-focused Sukuk using offshore structures. The IsDB (using a Jersey company) issued a debut sustainability Sukuk facility to support its member countries through (and past) COVID-19. Etihad (through a Cayman Islands company) issued transition Sukuk, the proceeds of which will fund its conversion into more environmentally sustainable operations. This transaction was reported as the first sustainability-linked financing in global aviation, with the terms of the Sukuk linked to the airline’s carbon reduction targets. The proceeds from SEC’s issuance of green Sukuk (through a Cayman Islands SPV) will be invested in green projects aligned with Saudi’s Vision 2030 objectives.
In 2021, offshore centers will retain their important role in both the structuring of Islamic funds — which in 2020 noted the launch of three such funds by SHUAA Capital using Abu Dhabi Global Market-incorporated cell companies — and the continued growth of the fintech sector. We witnessed in 2020 how Bursa Malaysia and Singapore-based fintech technology firm Hashstacs partnered up to develop a blockchain proof of concept with the aim of growing the bond market in Labuan by facilitating the issuance of tokenized bonds on the Labuan International Financial Exchange.
We believe Islamic finance would be advanced if more jurisdictions promoted (within their economies and legislation) its benefits, and this can be fostered by recognizing the ease with which offshore centers are used to structure Islamic finance products. For example, in 2020 we saw QIB issue the first Formosa Sukuk through an offshore Cayman Islands SPV. According to the counsel on the transaction, this is the first Reg S Sukuk issuance listed on the Taipei Stock Exchange and was made possible due to amendments to Taiwan’s regulations.
Investors desirous but hesitant to make Islamic investments during this tumultuous period will need additional comfort and this can be provided by the reliable stable offshore centers. Offshore centers used for Islamic finance remain committed to implementing international standards recognized by the OECD, the EU and global investors.
This article is intended to provide only general information for the clients and professional contacts of the legal services division of the Maples Group. It does not purport to be comprehensive or to render legal advice.