Financial institutions in Jersey have been providing services to Muslim clients, and in particular that resident in the GCC, for many years. Unlike some other western countries, Jersey has not had to make any changes to its laws to permit Islamic financial transactions or investment, thereby ensuring that conventional and Islamic financial products are governed, regulated and administered on the same basis. Elsewhere such changes are often driven by ensuring the equality of treatment of financial contracts drafted under Shari’a law (where interest, whether received or paid, is forbidden) which do not readily fit within the countries’ tax laws. Jersey’s position as a tax-neutral jurisdiction means that no such amendments are necessary, in addition our other corporate laws and regulations are such that in over twenty years of structuring Shari’a-compli- ant vehicles, I have yet to encounter a problem with a structure or contract that could not be accommodated within Jersey’s laws.
2017 – A SNAPSHOT
Historically, the two primary areas of Shari’a-compliant services offered by Jersey are:
- Private wealth management services such as the establishment and administration of trusts, foundations and private companies for individuals and family groups and
- The establishment and administration of structured finance vehicles, such as collective investment funds, and other special purpose vehicles for the investment of capital on behalf of Islamic Financial Institutions (IFIs), or small groups of family and friends investors which are often referred to as ‘club deals’.
Whilst 2016 finished with a flurry of activity, particularly in investment in UK commercial real estate by both individuals and IFIs, it was our experience that 2017 started very slowly with minimal activity across all sectors as individuals and institutions were cautious as to the possible effects of the Brexit decision in the UK, with a knock-on effect over investment sentiment for European assets. The Trump effect also led to many investors from the GCC being very cautious and delaying plans for investing into assets located in the US.
It’s not possible to identify a trigger event or timing when activity picked up again, but we saw a steady build-up in activity in the period preceding Ramadan in late May, and then an unusual level of activity during Ramadan itself which is traditionally a very quiet period with regional businesses working shorter hours. Following the annual (lengthy) summer holidays we were inundated with enquiries and transactions from across the region, and beyond, and it seemed the UK real estate had lost none of its appeal.
That was until the UK Chancellor dropped his bombshell in his autumn budget with a proposal that from April 2019 capital profits on UK real estate will be subject to Capital Gains Tax (CGT), and whilst, at the time of writing, this is still subject to ‘consultation’, this development has been talked about for some years and is almost certainly going to be introduced.
Many experts have pointed out that such profits are already subject to taxation in other jurisdictions across Europe, and, over the longer term, rental in- come in the UK is likely to increase to mitigate the effect of the additional tax on individual properties. As such the overall investment returns from UK real estate should prove to continue to be attractive to the overseas investors on which the UK is highly dependent. Meanwhile, we have seen an increase in interest by regional investors in European real estate, utilising Jersey corporate structures rather than European corporate vehicles.
“UNLIKE SOME OTHER WESTERN COUNTRIES, JERSEY HAS NOT HAD TO MAKE ANY CHANGES TO ITS LAWS TO PERMIT ISLAM- IC FINANCIAL TRANSAC- TIONS OR INVESTMENT, THEREBY EN- SURING THAT CONVENTION- AL AND ISLAM- IC FINANCIAL PRODUCTS ARE GOVERNED, REGULATED AND ADMINIS- TERED ON THE SAME BASIS.”
2018 AND BEYOND
There are no indications to suggest real estate will not continue to be the predominant asset class for Muslim investors from the GCC and elsewhere but increasingly the availability of real estate assets where the activities of the tenants are not haram, i.e. prohibited in accordance with the principles of Shariah law (e.g. non-Islamic banks or financial institutions), are becoming more difficult to find.
Shari’a Scholars will generally approve an element of purification (or cleansing) of rental flows arising from haram activities of the tenants, but these can be difficult to ascertain with any real certainty and naturally have an adverse effect on the ultimate re-turns paid to the investors.
Along with this pressure on the availability of appropriate real estate assets, many IFI’s and their clients are looking to diversify their portfolio into new asset classes, and it is for these asset classes that we anticipate Jersey entities playing an active role.
GREEN SUKUK
The worldwide trend towards socially responsible investment (SRI) and increasing environmental awareness has seen a marked rise in the appetite for green bonds and within the Islamic finance sector this is reflected in the potential for Green Sukuk which speak to the underlying purposes of the sector in bringing good and avoiding harmful acts.
Malaysia has been the market leader in the issuance of Green Sukuk, with guidelines issued in 2014 for SRI. These set out that the proceeds of SRI Sukuk can be used to preserve the environment and natural resources, conserve the use of energy, promote the use of renewable energy and reduce greenhouse gas emission.
Jersey has a long history in facilitating Sukuk structures, notably the Caravan Sukuk structure which won an award as the Innovative Product of the Year as long ago as 2004, and we are seeing renewed interest in establishing Sukuk structures through Jersey vehicles, particularly in the energy from waste and renewables sectors.
AFRICA
Many African countries have a large Muslim population, but conversely have only a small and relatively informal Islamic finance sector and therefore have the potential to grow in scale and sophistication. But equally economic growth and financial participation will be critical which gives investment opportunities for both residents and foreign IFI’s and individuals alike.
Islamic financial solutions to support both in- ward and outward investment will be a key part of realising the investment opportunities in Africa, and Jersey is well placed to play its part in assisting with these solutions.
GOLD
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which sets Shariah standards followed in whole or in part by IFI’s around the world, approved a new standard in December 2016 setting out the Shariah parameters for trading in gold, the approved types and forms of gold, and the Shariah rulings for gold-based financial products.
“MALAYSIA HAS BEEN THE MARKETLEADER IN THE ISSUANCE OF GREEN SUKUK, WITH GUIDE- LINES ISSUED IN 2014 FOR SRI”
“MANY AFRICAN COUNTRIES HAVE A LARGE MUSLIM POPULATION, BUT CONVERSELY HAVE ONLY A SMALL AND RELATIVELY INFORMAL ISLAMIC FINANCE SECTOR AND THEREFORE HAVE THE POTENTIAL TO GROW IN SCALE AND SOPHISTICATION.”
Prior to this there had been a degree of uncertainty as to permissibility of gold as an investment product as it had been closely associated with money which cannot be traded or held as an investment.
However, the anticipated flurry of new gold-based, Shari’a-compliant investment structures has not materialised which may be a reflection of the volatility of gold bullion in 2017, or slow acceptance of investors of the new Standard (or both); but this is an area which deserves to be monitored in the future.
FINTECH
And finally Fintech, or for the purposes of this article, Islamic Fintech. The government of Jersey has identified Fintech as a potential new industry sector for the Island and the first regulated Bitcoin fund was given regulatory approval in 2014. But whilst the Scholars have yet to issue conclusive guidance on whether investing in bitcoin and other synthetic currencies is halal or haram, Fintech is a much wider topic and encompasses all technology that is used to give greater access to financial products for all investors. Equality of individuals is a fundamental precept of Islam, and Fintech will assist in achieving this in financial services, so whilst the exact role (or roles) of Jersey in delivering Islamic Fintech remain uncertain, you can be certain that Jersey will be playing a role in this sector in the near future.
CONCLUSION
As noted in my introduction, Muslims have been establishing structures in Jersey for several decades, either for private wealth purposes or the issuance of securities. The rationale for this is similar to that for any other group or nationality, but Jersey’s long-standing connections to the Middle East bring an additional benefit of experience and expertise in establishing these structures in a Shari’a-compliant context, both now and for the future.
“THE GOVERNMENT OF JERSEY HAS IDENTIFIED FINTECH AS A POTENTIAL NEW INDUSTRY SECTOR FOR THE ISLAND AND THE FIRST REGULATED BITCOIN FUND WAS GIVEN REGULATORY APPROVAL IN 2014”
