Islamic Finance: The Role of Offshore Jurisdictions

As the Islamic finance industry strives to drive forward and out of the global financial crisis, the roles of offshore jurisdictions continue to grow exponentially. Caroline Barton analyses.

Offshore jurisdictions have played a vital role in the development of the Islamic finance markets. The Islamic finance industry is projected to become a US$2 trillion industry very shortly as the usage of these structures has expanded dramatically over the last decade; and offshore jurisdictions have been a key component to this growth.

Investment in the funds market in the Middle East and the re-Takaful market have grown annually, while global markets over the past five years have welcomed ground-breaking Shariah compliant securitisations and have witnessed increased issuance in large-scale, internationally placed sukuk.

Market professionals anticipate continued growth in all types of Islamic debt financings and funds. Jurisdictions such as the Cayman Islands, Jersey, the British Virgin Islands, Guernsey, the Isle of Man, Mauritius, the Seychelles and Bermuda will continue to be used as bases from which to raise finance and establish funds.

A paper from the International Monetary Fund states that: “More and more countries are climbing aboard the sukuk issuance bandwagon in order to tap into the massive pools of money in the hands of Muslim individuals and their countries.” France, Japan, Thailand and the UK have all begun to establish sukuk issuance programs. Offshore centres have emerged in the Islamic finance market as key players. They are strategically placed to facilitate this growing finance trend.

Why offshore?

Many offshore centres offer a wide range of features allowing Shariah and legal principles to be upheld while providing sophisticated financial products to sophisticated financiers. The offshore vehicle is a flexible tool often incorporated into many of the well-known Islamic structures such as sukuk, murabahah, ijarah, wakalah and musharakah. Off shore companies and trusts have proven to be a useful ingredient to Islamic finance products.

The offshore jurisdictions most frequently are, by no coincidence, already well-established jurisdictions; particularly as banking hubs. Their reputation as financial centres and the presence of highly skilled legal and financial professionals lends well to expanding an already stable finance market into Islamic financing for Middle Eastern investors.

Some of these jurisdictions can offer multiple benefits such as no (or low) income, capital gains, profit or withholding taxes; no restrictions on foreign exchange or foreign ownership; and experienced service providers and operational support.

Cayman Islands

The Cayman Islands have for some time been the jurisdiction of choice for the listing of Islamic finance products and are arguably the most popular offshore jurisdiction; particularly for sukuk. The jurisdiction’s flexibility, particularly with regard to the drafting of issuer constitutional documents and transaction documents while still complying with Shariah requirements, suits the demands of Middle East clients.

A special purpose vehicle (SPV) can be formed in the Cayman Islands as the issuer. This SPV issues sukuk to investors in exchange for subscription money. The SPV can be owned by a charitable or purpose trust established under Cayman Islands law which holds the shares of the issuer. Of course, the SPV and trust structure is used for more than sukuk and is also commonly adopted for ijarah and mudarabah structures.

The introduction in 2007 of the option for dual language registration in the Cayman Islands increased the competitiveness of the jurisdiction and aimed to trigger business from the Arab region. The ability to register companies in Arabic and English was specifically aimed at the Islamic finance market and means that Arab banks or banks focusing on the Arab world can create structures, documents and bank accounts in Arabic and English.

The Cayman Islands continues to pioneer the development of new trends in the Islamic finance sector through the partnership of the Cayman Islands government and the private sector.


Bermuda has been pursuing efforts to become the first western centre for Islamic finance in a favourable tax domicile, with the country seeking to introduce legislation to accommodate a Shariah compliant platform.

In 2010 Bermuda entered into a double taxation avoidance treaty (DTA) with Bahrain which was considered a big step towards positioning itself as the offshore jurisdiction of choice for Islamic finance. The DTA is a reciprocal agreement between Bermuda and Bahrain not to tax the repatriated income that an individual or corporate resident of one country has earned in the other country and which has already been taxed.

Given their high level of experience with shipping and aviation acquisition and financing structures, both Bermuda and the Cayman Islands are attractive to Middle Eastern clients regularly requiring financing for these investment assets.

British Virgin Islands

The British Virgin Islands (BVI) have historically been a popular jurisdiction for Asian clients. In fact, Chinese government statistics reveal that BVI is the second largest investor in China. BVI companies are increasingly being used by Islamic asset managers, financial institutions and managers. In particular, popular BVI joint venture vehicles provide some specific advantages particularly for certain Islamic finance structures such as musharakah.

By providing a neutral jurisdiction for the joint venture vehicle for what is often two shareholders from differing jurisdictions, the BVI joint venture vehicle is unique in that the directors of the BVI joint venture company can act in a manner which is in the best interest of one or all of the shareholders rather than the best interest of the company as a whole. While with this approach one might seem to move away from the duty of directors to act in the best interest of the company, it should be clear that this duty remains however only in addition to the duty that the directors have to consider the interests
of the shareholders; and to resolve the situation where directors are nominated by shareholders and are expected to act in their interest.


Jersey has been undertaking Islamic finance-related work for a considerable amount of time as a result of its well-established regulatory regime known to protect the interests of investors. The jurisdiction has a strong investment funds market and this is being expanded to accommodate Shariah compliant funds.

The structure of a Shariah compliant fund is not dissimilar from other investment funds in that it can take the form of any of the legal structures which are available: including a limited company, protected cell company, unit trust or limited partnership. The most noteworthy difference is the requirement to appoint a Shariah board to guide the directors and investment manager of the fund on matters of Shariah law.

Jersey provides local professionals who are experienced in the specific requirements of the Shariah board and there are legal, administrative and accounting experts locally who are experienced in the roles and responsibilities of the Shariah board in such funds; and can prepare the structuring of a fund in line with these expectations.

Hong Kong

Hong Kong has started to assume a larger portion of the market and has made tax changes to develop into a global capital formation. The Hong Kong Monetary Authority has detailed its objective to develop Hong Kong an Islamic finance hub. To its advantage, in December 2011 Hong Kong topped the World’s Economic Forum’s Financial Development Index, coming out above the US and the UK. It is now an even more attractive market for capital raising, product launches and specialised financial services.

The most common form of Islamic finance product in Hong Kong seems to be sukuk, with many of these being listed on the Hong Kong Exchange. However with the determination of the Hong Kong Monetary Authority, the introduction of the Hang Seng Shariah Compliant China Index Fund and the growth in the number of banks and financial institutions providing Islamic banking and financing services in Hong Kong, the expansion of Islamic finance products seems to be imminent.

Not only is Hong Kong in itself a potential Islamic finance hub; but with the services of many offshore firms such as Appleby being available, many of the SPVs being formed in other jurisdictions can be handled by these service providers in a more time and distance-friendly location.

Where to next? The potential of the African Islamic market

The African region has significant potential as it is home to more than 412 million Muslims and the Islamic finance industry in Africa is virtually untapped as yet. With the introduction in 2011 by the Central Bank of Nigeria of a final set of regulations introducing Islamic banking to the country, Kenya’s Islamic finance market growing at a notable pace and South Africa now actively trying to position itself as the Islamic financial hub of the continent; many eyes are on the African Islamic market. As with the MENA and Asian regions as well as the western hemisphere, there are off shore jurisdictions nearby and willing to become a part of this growth.


Shariah compliant investment opportunities in Mauritius are growing and it is setting itself up to be a potential Islamic financial hub. The Mauritius government has already paved the way for Islamic finance by amending tax laws which appeal to global investors wishing to make Shariah compliant investments.

Mauritius generally imposes a flat rate of income tax of 15%. However, funds holding a Category One Global Business Licence are effectively taxed at a maximum rate of 3% and can end up paying no income tax depending on the foreign tax credit.

The country has approximately 36 double taxation avoidance treaties and protection agreements with several Islamic financial emerging countries in Africa, Europe, the Middle East and Asia. As Mauritius has already implemented laws to accommodate Islamic financial transactions; and with the African Islamic finance market opening up, it promises to offer an increased opportunity for Shariah compliant investments in this area.

A number of Shariah compliant global funds have already been set up in Mauritius and there is growing interest in Mauritius as a place to structure Sukuk using Shariah compliant trusts as vehicles.

Rundheersing Bheenick, the governor of the Bank of Mauritius, in his speech at the launching ceremony of Century Banking Corporation, the first Islamic bank in Mauritius, on the 30th March
2011, commented: “We need to develop our own niche market and strive to become a regional hub for Islamic finance.”


Islamic finance continues to be a significant niche market with the promise of an even larger capture of the global financial market. As more and more first-time Muslim investors become interested in Shariah compliant products there will be an even higher level of demand for suitable vehicles and structures to invest in and more jurisdictions to become involved. As the industry strives to drive forward and out of the global financial crisis, we will hopefully see the roles of offshore jurisdictions continue and grow exponentially as they each actively develop models to satisfy this wealthy industry.

Caroline Barton is an associate and a member of the corporate and commercial practice group in the Cayman Islands office of Appleby

This article first appeared in Islamic Finance News (30 May 2012, Volume 9, Issue 21, Page 24 – 25).  For more information, please visit