Arabian heights

Jersey has become renowned as a destination for sharia-compliant investment vehicles, mainly because of the expertise and knowledge of its local professionals. Bill Gibbon reports

Jersey has been particularly active in recent years on sharia-compliant legal structures. Jersey law firms have witnessed spectacular demand for sharia-compliant collective investment funds as well as structured products aimed at Gulf-based sophisticated investors.

Jersey’s regulatory regime is becoming increasingly familiar with the nuances and requirements of sharia law and sharia principles simply due to the number of alternative structures being proposed to the regulator on the island.

Partly due to the familiarity of the local professionals, both lawyers and administrators, Jersey is an increasingly popular transitional destination for investment from the Gulf regions and especially in sharia-compliant products, whether as formalised collective investment funds or as more private corporate arrangements. Much of the most recent investment by sharia products has been in UK and European property.

The popularity of UK property investment through Jersey schemes derives both from historic associations and from the confidence and familiarity that Gulf investors have with the UK as a property investment area as well as with Jersey’s regulatory environment.

Jersey has certainly been active in the area of Islamic investment funds and sukuk (Islamic notes) since the mid-1980s. More recently, sharia-compliant investment funds have been set up in Jersey to invest in developments in the Gulf regions themselves, as opposed to being a conduit for UK and European property investment.

Oil revenue windfalls have made it important for investment managers to consider the potential in sharia-compliant products in order to attract the potential wealth in the Gulf region.

Although sharia collective investment funds are self-evidently aimed principally at Muslim investors, investment in sharia products does not, in fact, come exclusively from the Gulf Cooperation Council and Middle East and North Africa areas.

The products are attractive to Muslims worldwide. Some evidence of this is in the more recent developments in Dubai to develop a centre for regulated collective investment funds.

There is a hope that sharia products can also be attractive to conventional investors. Sharia-compliant investments can combine the virtues of ethical investments with the advantages of non-correlation with mainstream trends and mainstream equity funds.

Arguably, sharia constraints on investment, such as restrictions on debt margins, have meant that sharia funds are less likely than conventional investment funds to over-extend chasing a market bubble.

Sharia investors are much more familiar with property and asset-backed investments and did not, for instance, tend to invest in technology products because of their debt to equity levels.

Sharia investors are, however, increasingly looking into new direction of equity and equity-linked investment funds, including the idea of sharia-compliant hedge funds.

Over recent years, Jersey law firms have worked together with a large number of the island’s service providers and worldwide clients in developing sharia-compliant products.

Jersey’s presence and involvement in the recent STEP Arabia Conference in Dubai attracted a worldwide audience of interested professionals and confirmed the emphasis that Jersey places on developing expertise in the sharia arena.

Sharia property funds
Jersey law firms have worked on the documentation for a large number of sharia funds over the past 10 years. This involvement has included, for instance, the structuring of several sharia-related real estate funds for the DMI group, including the first Jersey sharia property/real estate fund in 1996.

Many of these funds were originally invested in US real estate. Such sharia-compliant property funds have been set up in Jersey as hybrid corporate structures, property unit trusts and/or limited partnerships.

A sharia Egyptian country fund for Faisal Finance and a sharia Japan fund for the Industrial Bank of Japan and other Gulf promoters have also been set up. Several Gulf promoters also looked at setting up sharia-compliant technology and venture capital funds during the 1990s.

Jersey has also seen diverse sharia-related special purpose and private equity structures aimed at Gulf-based sophisticated investors and high net worth individuals.

The documentation for sharia structures can be increasingly complex. sharia collective investment funds will always appoint a sharia supervisory board which oversees the investments of the fund and signs off on the material contracts.

All sharia funds must particularly avoid generating or receiving riba or interest. The Sharia Supervisory Board will periodically review all the assets of the fund with regard to ongoing sharia compliance.

Any minor amounts of derived interest received by way of indirect investment activity will be purified under the guidance of the Sharia Supervisory Board which will involve a percentage of income being paid to a nominated charity.

A sharia fund’s offering documentation will always stress the Islamic-based restrictions on the investment universe. In particular, it will not be permitted to invest in companies involved with alcoholic beverages, pork-related products, gambling, weapons, pornography or in financial institutions that make a substantial proportion of their profits from commercial interest. Sharia funds are also not permitted to invest using conventional non-sharia leveraged contracts such as options, futures, forwards and other derivative instruments.

Expert funds in Jersey
It is anticipated that Jersey will see the increased use of sharia-compliant expert funds. Jersey’s Expert Fund regime, introduced in February 2004, has facilitated the swift set-up of collective investment funds generally.

A Jersey expert fund can be set up in three days provided that the promoter/investment manager is appropriately regulated and experienced and the fund is aimed at sophisticated investors.

Sharia-compliant securitisations
There has also recently been a great deal in the way of development of Islamic securitisation structures which repackage assets into tradable instruments.

Securitisation is seen as a logical direction for Islamic finance and there is a great deal of similarity between Islamic finance and conventional asset-backed securitisation. Both sharia-compliant sukuk structures and conventional asset-backed security structures transfer the legal ownership of assets and/or the assets’ cash flows to the new holders of the Sukuk/securities. Both are intended to generate predictable returns for investors.

Islamic securitisation requires two separate levels of sharia compliance. The underlying assets must be sharia compliant. Suitable assets include motor vehicle fleets, aircraft, ships and equipment leases.

The contract governing the ownership and use of the assets must also be based on sharia-compliant principles. Contracts governing the assets will be in the form of Ijarah, Istisna, Murabaha or Mudaraba contracts, which will be specifically approved by sharia scholars.

Sharia products provide a challenging new direction, which will increasingly be used for both inward investment into the Gulf region and for worldwide investment. n
Bill Gibbon is head of the fund and investment fund group at Voisin & Co