CIMB-Principal Islamic Asset Management (CIMB) last week announced that it was in the final stages of launching three Shariah compliant funds in Ireland. CIMB is one of many Asian fund managers which have not been deterred from rolling out UCITs funds by the ongoing Eurozone debt crisis.
Ireland is determined to become a center for Islamic finance with its Taoiseach (prime minister), Edna Kenny, announcing in June that he was doing everything he could to put the country on the map of the Islamic finance industry. Kenny added that Ireland has already made its tax laws and financial regulations Shariah compliant, and had recently signed double-taxation agreements with Saudi Arabia, Bahrain, Kuwait and the UAE.
Ken Owens, the chairman of the Irish Funds Industry Association, was quoted as saying that there is currently a scramble for Islamic business internationally. The surge of offshore centers offering Islamic finance is testament to this. Traditionally associated with conventional finance, these centers have now realized the potential of the Islamic finance industry. Currently there are 14 known offshore centers that are proactively inviting Islamic funds into their jurisdiction, stretching from Bermuda to Labuan, with the latest being Malta.
So what are fund managers looking for when considering whether to set up a fund in an offshore jurisdiction? Fawaz Elmalki, a director at Conyers, Dill & Pearman in Dubai, lists several factors including the ease of conducting business, a low tax regime and regulatory flexibility, as well as high legal standards and a pool of trained specialists. This, he said, has resulted in more offshore centers fast-tracking their efforts to amend their regulatory, tax and legal systems to facilitate Islamic finance.
Realizing that merely creating a Shariah compliant friendly environment is not always enough to attract Islamic investment, many offshore centers have also taken to marketing campaigns in key Islamic finance jurisdictions.
Ian Lancaster, the chief executive officer and chief investment officer at Reliance Asset Management Malaysia, believes that two main factors influence the decision of fund managers to set up a fund in an offshore jurisdiction: cost, and speed of the process. Reliance Asset Management Malaysia manages the World Shariah Funds (WSF) Reliance Global Shariah Growth Fund, which is domiciled in Guernsey.
“Luxembourg and Dublin are more expensive to launch a fund in than Guernsey, as well as [having a slower] speed of regulatory approval. Smaller fund managers will find it more economical to set up a fund in Guernsey. The speed is important because when you obtain seed capital for the fund, it might be withdrawn if the process to set up the fund is too laborious,” he says, adding that some offshore centers can take three to six months while Guernsey takes a maximum of around two months.
Lancaster believes that although Guernsey is less well-known, this does not necessarily affect investors’ perceptions, and that the three offshore centers are of broadly equal footing, with none of them being of questionable quality. He admits that Luxembourg is the more reputable of the three centers due to the strength of its history as the center of European money management and also as the EU’s leading investment center. “There is no particular advantage or disadvantage regarding the regulatory regime of the three offshore centers, although Guernsey has not had the advantages afforded to Dublin or Luxembourg, which have more money because these centers have been established much longer,” he explains.
However, Lancaster notes that funds set up in Guernsey are generally much smaller than conventional funds. “Unless the fund is US$1 billion, the total expense ratio of a Shariah fund will be extremely high and has to be absorbed, so its fund managers must keep the cost of the fund lower in order to be attractive to investors.”
As offshore centers continue to play a key role in the financial services industry, and continue to promote the advantages of doing business in their jurisdictions, Islamic financial institutions looking to establish business will have an increasing number of options. The healthy competition of these centers will ultimately be beneficial to the Islamic finance industry as a whole. — RW