To an extent, Jersey’s popularity for Sharia-compliant schemes derives from the confidence and
The market for Sharia funds
Although Sharia products are, of course, aimed principally at Muslim investors, investment in Sharia investment funds does not come exclusively from the Gulf. Sharia products are also becoming attractive to conventional investors. Sharia-compliant investments have the potential advantages of non-correlation with mainstream trends. This may become an even more important factor in the aftermath of the present debt market crisis.
One of the most significant differences between bonds and sukuk derives from the Sharia requirement for transparency and clarity of rights and obligations in all compliant structures and contracts. This will mean, for instance, that sukuk investors should have the benefit of full disclosure on the assets behind any Sharia-compliant structure.
This contrasts, of course, with the reported position of 2007 mortgage market securitisation investors who are, sometimes unknowingly, investing in instruments that were exposed to the sub-prime
They have also been supplied with other particulars that would not have been considered appropriate (until recently) in conventional bond investment structures. Hence, the Sharia-compliant sukuk market may develop as a result of the fallout from the
Sharia constraints on investment, such as restrictions on debt margins, have historically meant Sharia funds have proved less likely to invest against the debt-equity logic and chase market bubbles (such as in technology). It has been noted that Gulf investment banks seem to have had relatively limited exposure to US sub-prime instruments.
New Sharia products
Although much more comfortable with property and transparent asset-backed investment products, Sharia investors are looking to new directions in equity and equity-linked investment funds.
The Gulf regions have seen a substantial increase in the size of fund launches in 2007. This has been the case over a range of funds, techniques and products. Sharia product innovation is reflected in the academic analysis of the type of investment techniques necessary for the continued development of varieties of Sharia-compliant hedge funds.
A number of these hedge funds have been structured as
Sharia investment funds in
We have worked on the documentation for Sharia collective investment funds over the last 10 years. For instance, structuring several Sharia-related real estate funds for the DMI group including the first Jersey Sharia property/real estate fund in 1996. Such Sharia-compliant property funds have been set up in
We have also helped set up Sharia-compliant country and venture capital funds as well as many Sharia-related special purpose vehicles and private equity structures.
A Sharia fund’s offering documentation will always stress the Islamic-based restrictions on the investment universe. In particular, it will set out that the
fund will not be permitted to invest in companies that are involved with alcoholic beverages, pork-related products, gambling, weapons, pornography or in financial institutions making a high proportion of their profits from commercial interest.
Sharia funds will also always appoint a Sharia supervisory board to oversee the investments of the fund for the purposes of ongoing Sharia compliance and sign off on its material contracts.
Islamic securitisation
There have also been a number of Islamic securitisation structures in
The underlying assets in an Islamic securitisation must be Sharia-compliant in nature and use. Suitable assets include motor vehicle fleets, aircraft, ships and equipment leases.
The underlying contract (governing the ownership and use of the assets) must also be based on Sharia-compliant contracts and principles. The contracts will normally be in the form of classically Sharia-approved contracts such as Ijarah, Istisna, Murabaha or Mudaraba and will be signed off by Sharia scholars.
Due to its inherent transparency, the Islamic securitisation market could take advantage of the new product-thinking opportunities presented by the conventional credit crisis.
We were involved in the ground-breaking Caravan I sukuk transaction, which helped kick-start the Islamic securitisation sector in 2004. The Caravan I securitisation involved the refinancing of Hanco Rent-a-Car’s SAR102m (£13.4m) motor vehicle receivables and enormously assisted the transformation of Hanco Rent-a-Car in Saudi Arabia. The interest in similar innovative Islamic securitisations is likely to develop, and there have been good signs of this in the interest in
Sharia products structured through
Bill Gibbon is a group partner at Voisin in
