Moody’s Investors Service predicts the Islamic capital markets to rebound in 2022 following an anticipated year of flat growth for 2021. The offshore centers, such as the Cayman Islands, Luxembourg and Labuan, remain primed and ready to participate in and satisfy structuring requirements for this anticipated growth in Islamic finance.
Review of 2021
Similarly to 2020, in 2021 global Sukuk issuances were dominated once again by sovereigns, quasi-sovereigns and banks, with such issuances continuing to feature SPVs formed in various offshore centers.
The Maldives had its maiden Sukuk issue this year, and the Emirate of Sharjah and the Kingdom of Saudi Arabia both returned to the capital markets, each using a wholly-owned issuer domiciled in the popular offshore center of the Cayman Islands.
Two notable global issuances this year were made by quasi-sovereigns. In March, the IsDB issued the largest sustainability Sukuk ever (US$2.5 billion) through its existing Sukuk program, which was restructured to add a new Luxembourg co-issuer.
In June, Saudi Aramco made its debut into the Islamic capital markets with the world’s largest US dollar corporate Sukuk (of US$6 billion) through a newly established issuance program structured in the Cayman Islands. Both issuing vehicles are ‘orphan’ companies, meaning their shares are held on trust for charitable purposes by a licensed trust company; these issuers are also managed by independent directors.
Other quasi-sovereigns that issued in 2021 included Malaysian sovereign wealth fund Khazanah Nasional, which raised US$1 billion via a global Sukuk issuance through a Labuan SPV; and Saudi’s ACWA Power which made a SAR2.8 billion (US$745.63 million) debut domestic Sukuk issue through a Dubai International Financial Centre (DIFC) prescribed company. Several banks from all across the GCC made global benchmark issuances this year, with a significant number of them doing so to improve their regulatory capital positions.
Each of Dubai Islamic Bank (DIB) in the UAE; Bank Al-Jazira, National Commercial Bank (now Saudi National Bank) and Riyad Bank in Saudi Arabia; Dukhan Bank in Qatar; and Ahli United Bank, Boubyan Bank and Kuwait Finance House in Kuwait issued additional Tier 1 or Tier 2 capital certificates using orphan issuer SPVs formed in the Cayman Islands. National Bank of Kuwait also issued Tier 1 capital certificates this year but used a wholly-owned DIFC issuer instead.
Several other GCC-based banks also issued Sukuk to raise funding, such as Ahli United Bank in Bahrain and Emirates Islamic and First Abu Dhabi Bank in the UAE, each through a Cayman Islands SPV. In terms of corporate Sukuk (apart from Saudi Aramco), there were two global issuances by real estate developers based in Saudi Arabia and the UAE respectively, namely Arabian Centres and Emaar Properties, also through Cayman Islands issuing vehicles.
Preview of 2022
In addition to the expected continued use in 2022 of the popular offshore centers for Sukuk issuances, such centers will remain an important component for structuring, directly and indirectly, investments into Shariah compliant assets and investments in global assets in a Shariah compliant manner. A popular form of investment which will remain in use throughout 2022 is the Shariah compliant/friendly offshore investment fund that is typically sponsored and promoted by a regulated asset manager.
In 2021, Saudi-based SEDCO Capital launched Islamic funds that were domiciled in Luxembourg, including the sustainability focused SC LO Global ESG Fund for which SEDCO partnered with Swiss-based investment advisor Lombard Odier. Prestige Funds, a UK-based specialist private debt investment manager, launched the first-ever Islamic impact fund, Premium Alziraea Fund, formed in the Cayman Islands. DIFC-based Introspect Capital also launched a Cayman Islands Shariah fund, Introspect Islamic Fund.
Aside from these traditional fund structures, a recent development for offshore centers that we anticipate will expand in 2022 is the structuring of master Islamic investment platforms by Shariah compliant investors to facilitate their quick deployment of capital into global assets. Islamic fintech will remain a major focus for growth in 2022 for several centers. The Central Bank of the UAE recently signed MoUs with the Abu Dhabi Global Market and the DIFC for collaboration on the development of the fintech sector.
The Labuan International Business and Financial Centre continues to strengthen with the recent introduction of a digital governance and cyber resilience framework, which follows the establishment of its digital banking framework in 2020. Environmental, social and governance (ESG) factors will remain key to investors in 2022 and, as was the case in 2021, issuers will continue to turn to offshore centers for the delivery of Islamic ESG products.
As noted previously, the IsDB (using a Luxembourg issuer) floated US$2.5 billion-worth of sustainability Sukuk on Euronext Dublin and NASDAQ Dubai. The proceeds from the issuance will support eligible initiatives under its sustainable finance framework. Kuveyt Turk Katilim Bankasi (using a Cayman Islands issuer) raised a US$350 million ESG Sukuk facility, the proceeds of which will be applied to finance and/or refinance certain sustainable projects. This was reported as being the first-ever sustainable Tier 2 Sukuk issuance globally.
We believe Islamic finance would be advanced with greater promotion and education of the alignment of ESG to the principles of Islamic finance and the methods in which issuers and asset managers could satisfy this requirement. As ESG is becoming a more critical and prevalent investment criterion of global investors, an increased focus on the development of Islamic ESG products would have the potential of drawing more interest from international investors to Islamic products generally.
The successful issues and launches of Islamic securities and products over the year confirm the continued confidence of international investors in Islamic finance and, in particular, in the use of offshore centers for the structuring of the same, a trend which will continue in the coming years.
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.