The rating agencies have reported a decline in Islamic capital market activity from the core Sukuk-issuing nations, due in part to higher oil prices and interest rates. Notwithstanding unstable economic conditions, offshore centers, such as the Cayman Islands, Ireland, Jersey and Luxembourg, continue to be regularly used for Sukuk issuances and investment structures enabling the expansion of Islamic finance.
Review of 2022
Global public Sukuk issuances in 2022, although much fewer than 2021, continued to feature SPVs formed in the popular offshore centers of the Cayman Islands and Luxembourg.
The year was peppered with global issuances focused on sustainability. At the start of 2022, we witnessed debut issuances of sustainable Sukuk by two Saudi banks. Both Saudi National Bank and Riyad Bank issued US$750 million-worth of sustainable Sukuk using Cayman Islands SPVs, with the latter’s issue reported as the first global additional Tier 1 capital sustainable Sukuk issue and the first Sukuk to be listed on the Irish Stock Exchange’s Sustainable Bond Market.
In March, Infracorp listed US$900 million in exchangeable hybrid (perpetual) Sukuk on the London Stock Exchange also through a Cayman Islands issuer, being the first green Sukuk issuance by a Bahraini entity.
Dubai Islamic Bank (DIB) returned to the markets in November (after a benchmark issue in February) with a debut sustainable Sukuk issue, being the first sustainable Sukuk by a UAE financial institution. DIB’s US$750 million Sukuk facility was issued through a Cayman Islands company, DIB Sukuk, set up as an orphan entity, with its shares held on charitable trust by an independent trust company, MaplesFS.
Other notable issues in 2022, all using a Cayman Islands issuing vehicle, include:
(i) Out of the UAE, First Abu Dhabi Bank’s US$500 million Sukuk in March, the Sharjah Finance Department’s US$750 million Sukuk in April and the Private Development of HE Sheikh Mohammed Bin Khalid Al Nahyan’s US$300 million Sukuk in September
(ii) Out of Kuwait, Boubyan Bank’s US$500 million Sukuk in April, and
(iii) Out of Saudi, Dar Al-Arkan’s US$400 million Sukuk in July.
Two international organizations made significant issuances this year, both with a Luxembourg-domiciled issuer. The IsDB issued in both the second and fourth quarters (US$1.6 billion and US$1 billion respectively) and the International Islamic Liquidity Management Corporation reissued a total of US$1.12 billion in short-term Sukuk in different tenors.
Preview of 2023
Sukuk issuances in 2023 will certainly continue to utilize the reliable offshore centers. A focus on ESG will remain and we will surely see further developments in this area involving such popular financial centers, as was the case in October 2022 when the Dubai Sustainable Finance Working Group, formed in the Dubai International Financial Centre, launched an ESG tool to assist companies with measuring their ESG practices and achievements against global standards, including the UN’s SDGs.
Offshore centers will continue to be favored for the establishment of Islamic investment funds and investment funding structures. GCC-based Shariah compliant financial institutions are creating master Islamic investment platforms for the quick deployment of capital into various asset classes. Prominent fund managers from the US and elsewhere are setting up similar structures to attract investment into their funds by large Islamic investors. These structures typically utilize companies and/or partnerships formed in offshore centers, such as the Cayman Islands and Jersey, which are internationally recognized for their effective regulatory regimes, sophisticated business environment and tax efficiency.
Fitch estimated in early 2022 that the growth of Islamic mutual funds had outpaced that of the global mutual fund industry, a trend that is expected to continue. Offshore centers, such as Jersey, Luxembourg, Ireland and the Cayman Islands are reliable domiciles for Shariah compliant funds. Fitch’s report mentioned Jersey’s flourishing Islamic exchange-traded fund market and Luxembourg’s wide Islamic fund base (reported as the leading Islamic fund center in the EU).
Ireland and the Cayman Islands will carry on as popular Islamic fund domiciles. IFN recently reported on four Irish Islamic funds managed by Principal Islamic being introduced to the Brunei market, and a new Cayman Islands Asia Pacific-focused Shariah compliant fund formed from a partnership between Sidra Capital and BlackRock.
The sustained growth in Islamic fintech will continue to be fueled by the offshore centers. Cayman Islands and British Virgin Islands companies are often used as holding companies for investment into fintech start-ups. Their flexible corporate regimes enable the smooth completion of seed and Series A/B funding rounds, with their tested judiciaries providing additional comfort to global investors. Further east, Labuan continues to expand into Islamic fintech with the recent launch of Labuan Financial Services Authority’s Islamic Digital Asset Centre initiative.
In order to grow Islamic finance, further collaboration is required across industries for its promotion, such as we have witnessed recently in the Maldives where First National Finance and Amana Takaful signed an MoU agreeing to, among other things, facilitate the structuring of Islamic finance instruments and create greater awareness of Islamic finance.
Conclusion
Amid this uncertain economic environment, one thing can be certain — the continued reliance on offshore centers for the structuring of Islamic products, enhancing the growth of Islamic finance in the years to come.
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.
Manuela Belmontes is a partner in the corporate and finance teams at Maples and Calder, the Maples Group’s law firm in Dubai. She can be contacted at [email protected].