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Islamic Finance news Guide 2008
Islamic Finance — The Offshore Connection
By Tahir Jawed
As Islamic fi nance has grown over recent years into
a substantial fi nancial industry in itself, some of the
unexpected benefi ciaries have been the offshore
centers dotted around the world. Often the home
of hedge funds, securitizations and holding companies,
offshore fi nancial centers such as the Cayman
Islands and Jersey now provide a convenient domicile
for popular Islamic fi nance structures.
Prior to the boom, most Middle East and Asian jurisdictions
already had strong links with certain offshore centers; for
example, Malaysia favored Labuan while the GCC preferred
Bahrain and certain Caribbean centers. Historically, the
offshore centers were used to organize investments and
structure personal wealth. When practitioners, particularly
lawyers, were presented with the challenges of structuring
Shariah compliant transactions, most were already familiar
with the uses of the offshore jurisdictions and utilized the
effi ciency of these centers to structure the new wave of
Islamic fi nance products.
In return, the offshore centers have kept a keen eye on the
Islamic fi nance market and have been quick to market their
value in structuring complex fi nancial structures, removing
many of the concerns regarding tax, regulation and cost when
compared to using onshore structures.
Sukuk transactions
Sukuk are typically structured as trust instruments under
English law. A company or “issuer” will issue Sukuk, or trust
Corporate services provider
(Provides directors and
administrative services for issuer)
certifi cates, and invest the proceeds in assets. The issuer of
the Sukuk will then hold the assets on trust for the benefi t of
the Sukuk holders, using the income from the assets to make
payments to the Sukuk holders.
The wider Sukuk structure can be more complex with a few
more players involved. Typically, the entity looking to raise
funds, often referred to as the “obligor”, will establish a
company to act as issuer of the Sukuk. The obligor will then,
for example, either sell or lease its assets to the issuer, which
will purchase the assets or lease them using the proceeds
from the issue of the Sukuk.
The issuer will then make periodic payments back to the
Sukuk holders from proceeds generated by the assets,
often by leasing them back to the obligor. At the end of the
transaction, the issuer will sell the assets back to the obligor
and use the proceeds to redeem the Sukuk. There are several
variations to this structure, with the issuer leasing, buying or
entering into a joint venture to buy and manage the assets
from the obligor but the cashfl ows generally follow the same
pattern.
Those in the offshore industry will consider this structure
similar to a securitization structure. All of the benefi ts that
attracted the securitization industry to establish bond issuers
in offshore jurisdictions would apply to the Sukuk issuer
also.
The Cayman Islands, in particular, were quick to market their
services for Sukuk structures as a domicile for the issuer with
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Share trustee
(Holds issuer’s shares on trust for
charity)
Sells assets
Sukuk subscription
Purchase price
Issuer money
Obligor Lease assets
Periodic payments
(Incorporated in the
Cayman Islands)
Periodic payments
generated by assets Investors
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