Offshore Hubs Lure Islamic Finance Business

by Mushtaq Parker.

There are growing signs that offshore banking hubs are increasingly competing with each other to attract Islamic finance business especially as registration domiciles for Islamic capital markets products such as sukuk (Islamic bonds), trusts, and special purpose vehicles (SPVs); for asset management products such as equities, real estate and private equity funds; and allied services such as custodian and administration.
However, the offshore hub of Cayman Islands has recently gone one step further in gaining the edge over its rivals by introducing dual language — Arabic and English — registration and issuance of certification. The Arabic language facility for Cayman Islands offerings is specifically aimed at the Islamic finance market. This means that Arab banks or that matter any other aiming a product at the Arab world, can now structure offshore international investment and other products in their mother tongue of Arabic.
Rival offshore hubs in the Islamic finance space include Bahrain; Labuan in Malaysia; Luxembourg; Dublin in Ireland; Isle of Man; the Channel Islands especially Jersey and Guernsey; British Virgin Islands; the Dubai International Financial center (DIFC); and the Bahamas. However, the Cayman Islands government claims that its offshore incentives such as an established legal regime; competitive costs; efficient turnaround; and professional and expertise infrastructure, are among the best, if not the best, in the world. According to the General Registry of the Cayman Islands government, “the Cayman Islands’ strong reputation in the world of global finance is a significant advantage in securing the desired bond listings and ratings.”
According to the General Registry of the Cayman Islands Government, the Arabic service enhancement was as a result of a roundtable on Islamic finance convened in March 2007 by the Portfolio of Finance & Economics and included representatives from the Cayman Islands government; Cayman Islands Monetary Authority (CIMA); and various sectors of the financial services industry.
Deborah Drummond, Deputy Financial Secretary (Financial Services) of Cayman Islands government, stressed that “this customization of our registry service for a market of growing importance to us is an indication of our commitment to innovation and quality, and we look forward to expertly catering to Islamic finance structures for the long-term.”
According to Drummond, the local office of the Alkhobar-based Saudi conglomerate, Saad Group, helped in facilitating the Arabic language registration and certification service. The group’s flagship Saad Trading, Contracting and Financial Services Company (Saad Trading), whose core business is construction and real estate investments, issued a debut $650 million sukuk Al-Manfa’a in June 2007, which was lead-managed by BNP Paribas, Samba Financial Group and Arab Bank PLC. It was the second largest corporate sukuk originating from the Kingdom after the SR3 billion sukuk issuance by Saudi Basic Industries Corp. (SABIC) in September 2006.
The $650 million sukuk Al-Manfa’a, however, was issued through a special purpose vehicle (SPV), the Golden Belt 1 Sukuk Company B.S.C., domiciled in offshore Bahrain, and according to the issuer, Saad Trading will use the proceeds for general corporate purposes — balance sheet finance, expansion finance or refinancing existing debt.
The Cayman Islands claims to be one of the leading offshore jurisdictions for Islamic finance structures, especially Sukuk structures. In fact, the landmark $600 million Sukuk Al-Ijara which was closed in April 2007 and issued by the Riyadh-based Dar Al-Arkan Real Estate Development Company, one of the Kingdom’s top real estate developers, was structured and registered in Cayman Islands. The three-year sukuk was the first ever sukuk issued by a Saudi corporate in the international capital markets. The issuance was heavily oversubscribed, with many Western investors, especially hedge funds, attracted to the diversification and strong asset backing provided by the rated Islamic bond.
According to Charles Quinn, QC, president of the Cayman Islands Law Society, “the ability of the Cayman Islands to quickly implement service enhancements such as this Arabic language facility is a clear indicator of the jurisdiction’s nimbleness in responding to commercial opportunities, such as the growth of Islamic finance.”
Other offshore hubs such as Jersey are taking another route to gain a competitive advantage in Islamic finance. Local firms are opening offices in the Gulf Cooperation Council (GCC) countries and also acquiring proven structuring skills and expertise in this respect.
For instance, earlier this year, Jersey-based Volaw Trust Company, which has years of experience in structuring and administering Shariah-compliant investment and fiduciary product structures, working with a network of Shariah scholars, opened an office in Dubai, to “help consolidate its already strong position in the Middle East” and its “expertise in dealing with Shariah-compliant financial structures for collective investment funds, property financing structures and family estate planning purposes.”