Midshore Updates

Why Islamic Finance for Guernsey?

I’ve always had an interest in the “different” part of the financial services industry, and Islamic Finance first piqued my curiosity many years ago (I have Edition 2 of the CISI’s Islamic Finance Qualification workbook from 2007). However, this came to the forefront when an email linking to the Islamic Funds Industry: 2015 Review & Outlook issued by Bank Negara Malaysia came into my inbox a little over a year ago.

Jersey as a key competitor

The thing that piqued my curiosity were the charts that gave details of the countries where Islamic funds are established and the percentage of business (both by number of funds and by Assets under Management) in those countries.

Source: ISRA’ & Zawya; 30 September 2015

The thing that grabbed my attention was that Jersey was sixth by number of funds and third by assets under management… but Guernsey did not feature so must be included in the “Others” category. This must mean that Guernsey has less than 2% of the assets under management in Islamic funds and, given that Indonesia and Ireland together account for 11% of the funds but are also lumped into the “Others category on the assets under management list, is likely to have less than 1% of the assets under management.

More recent figures from the same source (Q1 2016) now show that Jersey’s share is around 4% by number of funds but 11% by assets under management. Furthermore, qualitative sources tell us that more Islamic corporate and trust structuring business goes to Jersey than Guernsey.

Luxembourg – another competitor

Another key competitor is Luxembourg (third by number of funds; fifth by assets under management) and whilst it is easy to think that UCITS is a factor here there are also factors to dismiss this. The first is a document issued by ALFI (the Association of the Luxembourg Fund Industry), which was previously freely available but now password protected on their website. This “Collection of Best Practices for setting-up and servicing Islamic funds” contains an appendix on the “Eligibility of Shariah compliant instruments in a UCITS context” in the form of a table. This table clearly indicates that the use of Sharia’a compliant contract structures within UCITS vehicles is at best subject to heavy restrictions, and in many cases not permitted.

Similar restrictions would also be faced by UCITS funds in other domiciles such as Ireland, and gives a clear indication that either Islamic funds in these jurisdictions are predominantly equity funds (utilising appropriate industry and financial screens) or are alternative investment funds. Without empirical evidence, I suggest the former to be more likely.

What happened next?

Within my role at the Guernsey Investment Fund Association (GIFA) I am responsible for the GIFA think tank. Islamic Finance became a topic for one session and we concluded:

  • There is no fundamental difference between Guernsey and Jersey regulation
  • Jersey possibly just beat us into this market, but the market is still open
  • All of the Sharia’a compliant instruments that Luxembourg/Dublin UCITS struggle with are perfectly permissible under Guernsey “B”/”Q” and closed-ended authorised funds as well as registered funds
  • Raising awareness of Islamic funds, and Islamic finance in general, was key

Coming out of this session several us retained a strong interest in the topic and formed a loose “Guernsey Islamic Finance Team”. Further action was discussed and a way forward decided:

  • An Islamic finance town hall would be held (this was held in November 2016)
  • Guernsey Finance would develop and Islamic finance section of their website
  • Case studies of existing business would be used
  • The Guernsey Finance site would also include a register of professionals qualified in Islamic finance – to be proved by relevant qualification*
  • Islamic finance courses would be made available in Guernsey to facilitate qualification

*Islamic finance qualifications are offered by both the Chartered Institute for Securities and Investment (CISI) and the Chartered Institute of Management Accountants (CIMA) – only the CISI examinations are available in Guernsey.

The Islamic finance market

Many people automatically link Islamic finance with the Middle East, however this is one geographic region with a significant Muslim population. In Asia, countries such as Malaysia, Indonesia and Pakistan have significant Muslim populations. Many other countries with large immigrant populations (among them South Africa, the United Kingdom and the United States) have significant minority Muslim populations.

In addition, given that Sharia’a compliant investment values the link between investment and real economic activity as well as both the mandatory (Zakat) and voluntary charitable/social investment, Islamic Finance can be viewed as a good model for socially responsible investing.

Going forwards

Guernsey will seek to increase its share of the Islamic finance market, and we are happy to support this initiative and be part of the process. As a qualified Islamic Finance professional, I will be listed on the coming register and we will support future events aimed to raise awareness of Islamic Finance.

Midshore Consulting is pleased to be the only provider in Guernsey to offer face-to-face training for both of the Islamic Finance qualifications offered by the CISI:

Our services also include offering an Introduction to Islamic Finance seminar (currently face-to-face but soon to be available via our online training platform) as well as consultancy services in this important growth area.

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