Choosing an Islamic Investment Jurisdiction: Bermuda as a Primary Case Study

Bermuda’s tax neutrality and favourable yet robust regulations make it an ideal location for Islamic finance investment. Cheryl Packwood and Belaid A Jheengoor explore the advantages of the jurisdiction.

At a time when global financial markets have begun to look perilously like those encountered in 2008, interest in Islamic finance investment has continued to grow. Affluent investors in both Islamic and western countries are looking to Islamic investments as they attempt to gain exposure to the fast-growing economies in the Gulf and Southeast Asia. Demand is also being driven by pressure on sovereign wealth funds and government pension funds in the GCC and Southeast Asian regions to include a Shariah compliant mix within their portfolio allocations.

Furthermore, as the industry grows there is also an emerging shift in investor preference away from traditional Islamic asset classes like equities and real estate in favour of alternatives such as ETFs and hedge funds, which entail more complicated regulation.

The strong growth in the industry offers a number of opportunities for investors and many jurisdictions are promoting their intent to welcome Islamic investment schemes to register on their shores. But for any investor, choosing a jurisdiction can be a complex and difficult decision.

And although the growth in the Islamic finance industry has led to improvements, there are still many jurisdictions where the existing regulations and tax laws are ill-adapted to Islamic finance. Warm words of welcome may not always translate into accommodating policies.

Choosing a jurisdiction can be difficult, but there are some significant areas where an investor can safely assess the suitability and safety of the jurisdiction for their funds. Some of the factors that an investor should consider are:

Regulation, legislation and tax efficiency

Favourable consideration should be taken when a jurisdiction undertakes specific legislation/regulation to clarify and protect the treatment of Islamic funds.

For example, in Bermuda, the country’s regulatory authority; the Bermuda Monetary Authority (BMA) recently published its Guidance Notes on Islamic Collective Investment Schemes (Guidance Notes), strengthening Bermuda’s case as a favourable domicile for the establishment of Islamic collective investment schemes (Islamic investment funds).

This enhances and clarifies its position as one of the world’s leading jurisdictions for the asset management industry and highlights the government’s receptive attitude to new entrants to the market. The competitive advantages that make Bermuda a first choice for conventional fund managers and promoters also apply to Islamic investment funds. Jeremy Cox, CEO of the BMA, said in a statement: “By issuing the Guidance Notes we are helping the market take advantage of this potential business opportunity for Bermuda, while ensuring the sector remains appropriately regulated.”

To facilitate the management of cross-border investment flows, it is vital to have tax efficient global fund platforms in a reputable jurisdiction. Bermuda’s tax efficiencies not only create an opportunity for the establishment of global fund platforms, but are advantageous to locally-based asset management and advisory functions, enhancing the fund managers’ ability to attract capital on a global basis, including cash-rich investors from the growing emerging markets.

Bermuda as a centre of excellence for the alternative fund industry can assist in the development of innovative Shariah compliant alternative investment funds. Islamic investment funds, including sukuk funds, can be listed on the Bermuda Stock Exchange, and umbrella funds can be created as segregated account companies.

BMA’s Guidance Notes

The BMA’s Guidance Notes are principle-based and non-discriminatory (providing a level playing field with conventional funds); hence adding to Bermuda’s competitive advantages by offering flexibility to Islamic investment fund promoters who can confidently structure, manage and administer such funds in Bermuda, bringing innovative investment products such as sukuk funds and ETFs to the global market.

Bermuda’s certainty of the law and its tax neutrality offer the advantages of effective tax structuring and speed to market for these innovative products and structures.

There are no impediments to authorising Islamic investment funds in Bermuda under the current framework. The Guidance Notes provide clarity on a number of issues which such funds may need to consider in complying with the existing regulatory framework, such as required disclosures, notification of material changes, and the role and responsibilities of the Shariah Supervisory Board; an independent governance body, to ensure such fund products conform to Islamic financial principles.

Regular dialogue between Bermuda’s international business community and the government encourages regulations that are innovative, while preserving the highest standards of conduct. The regulatory framework is purposeful, but not obtrusive.

This approach to regulation accommodates a variety of structures for both hedge and private equity products, and for asset managers themselves, including exempted companies, partnerships, unit trusts, and segregated account companies.

Bermuda legislation is robust, but flexible to accommodate Islamic investment funds, and such funds are viewed under the growing, broader umbrella of socially-responsible investing. The same principles and requirements under the Investment Fund Act apply to Islamic investment funds. Islamic private equity, venture capital, real estate, and global infrastructure funds are typically structured as exempted limited partnerships.

Bermuda’s limited partnership structure accommodates both the mudarabah (such as partnership between investment manager and investor) and musharakah (such as partnership profit and loss sharing) structures. The Bermuda Partnership Act does not attempt to regulate the affairs of a partnership to any great extent.

The specific Islamic financial principles requirements and restrictions can easily be incorporated into an investment fund’s offering memorandum/prospectus or partnership agreement. Bermuda structures are also suitable parallel vehicles.

Human capital

Having the right people, with the right expertise in Islamic finance, is vital not only in regulation, but in the ability of a jurisdiction to support international investors. Any fund manager needs the support of analysts, lawyers, accountants and a large number of other back room personnel in order to operate. So there is a clear advantage in operating where these services can be readily provided by experts with a strong grounding in the industry.

The Islamic finance industry is evolving rapidly and the range of investors and product that can be invested in is expanding. Private investors, family wealth, corporate, private equity, asset managers including exempted companies, partnerships, unit trusts, and segregated account companies — the long list of parties that are active in Islamic finance reflects the need for a highly qualified support system in the jurisdiction.

A suitable jurisdiction must provide Islamic investors with top quality support in all of the professional arenas necessary to maintain the quality and stability of the fund. Professionals who are relocating seek out jurisdictions with political and economic stability; an avowedly business-friendly government that understands the importance of a well-regulated international business sector; a safe environment; easy access to other countries, usually favouring North America and London; tax efficiencies; deep pools of talent; and regular visits by high-calibre investors, professionals and business leaders.

On the talent front, Bermuda has an extraordinary concentration of intellectual capital, with administrators, lawyers, audit and tax professionals and independent directors that are highly skilled, well educated and industry focused.

Bermuda’s professionals have a history of dealing with international structures and complex products, and their experience working with emerging markets can provide a high level of customised service, a requisite for alternative fund managers and their products.

Bermuda’s deep pools of intellectual resources and its trusted regulatory framework have contributed to its emergence as a domicile fit for purpose. To help get the most out of its talent, Bermuda also has a pool of internationally experienced nonexecutive directors that can provide ‘mind’ and management, evidence of substance of activities, and independent and objective oversight.

Bermuda maintains a significant number of administration firms with skill sets spanning the hedge and private equity markets, in addition to family offices.

These firms service Bermuda-domiciled entities, as well as entities domiciled in other jurisdictions. Bermuda is emerging as a strong choice for private equity houses as these teams look to provide options and opportunities for their business and their people; in addition, it still remains a jurisdiction strong in servicing the hedge fund industry, with boutique administrators providing highly customised, personal service in well-controlled environment.

Islamic investment fund managers and sponsors will benefit from the presence in Bermuda of world-class asset management firms. Asset managers choose Bermuda for their key operations because it offers one of the world’s highest standards of living and provides an efficient tax structure, both on a corporate and personal level.

Bermuda-exempted entities are provided a period of tax assurance to March 2035, under the Exempted Undertakings Tax Protection Amendment Act 2011, such that certain taxes, including sales, income and capital gains related taxes, would not (if introduced) be imposed on these entities.

Bermuda’s geographic location (two hours flying time from New York and seven hours from London) positions the island as a financial hub with convenient access to global capital.

The regulatory environment promotes innovation and flexibility at the appropriate level of oversight. The tax regime is efficient and beneficial for both corporations and individuals. And the government is committed to the growth and expansion of the asset management industry.

For all of the above reasons, Bermuda has become a recognised and sophisticated jurisdiction for asset managers and a servicing centre for many offshore funds, including Islamic investment funds.

This presents profitable opportunities for fund sponsors and investment managers to expand globally using Bermuda as a platform to develop a globally recognised Islamic asset management brand.

There are many ways in which the requirements of Shariah compliant investors differ from those of other investors. But there are many requirements in common.

So Islamic investors will also benefit from jurisdictions with expertise in conventional asset management, that enable access to major markets, whether through favourable geography or international treaties, and which provide low-tax or tax-neutral environments which enable businesses to keep more of the money that they earn.

The range of options open to Islamic investors as to where they domicile themselves has grown from a mere handful just a few years ago, to dozens today.

With that growth comes an increasing amount of choice and a greater ability to fit your jurisdiction to the market you wish to reach.

And, while it can lead to some confusion over which jurisdictions can truly offer what investors need, the principles above should enable investors to make these decisions with confidence.

Regulation and legislation that ensures that Islamic finance does not incur unnecessary burdens and costs and that it is appropriately regulated to ensure stability, the human capital necessary to support the industry and a jurisdiction with an investment-friendly outlook— if investors are able to satisfy these requirements, they will be excellently placed to benefit from the expansion in the Islamic finance industry.

Cheryl Packwood is the CEO of Business Bermuda and Belaid A Jheengoor is a director in the asset management practice at PwC Bermuda.

This article first appeared in Islamic Finance News (28 September 2011, Volume 8, Issue 38, Page 20 – 22). For more information, please visit­­­