The British Virgin Islands remains the most popular international financial centre for incorporating companies due to its tax neutrality, political stability and flexible legal system based on English common law. It is a ready-made platform for the needs of the Islamic finance market. BVI companies are commonly used as holding companies for cross-border investments into many developing markets, including those where Islamic financing is increasingly popular. BVI companies are also used by Islamic high-net-worth individuals and families as holding companies for assets in developed markets.
Further, as the Islamic finance market grows and matures, international financial centres such as the British Virgin Islands are being used to facilitate the structuring of Islamic finance products and transactions such as sukuk and musharakah and the incorporation of investment funds and corporate structures.
Review of 2015
In June 2015 the British Virgin Islands introduced two new fund products under the Securities and Investment Business (Incubator and Approved Funds) Regulations 2015. Incubator funds and approved fund are lightly regulated funds aimed at start-up managers and those managing funds for smaller groups of closely connected investors. There is a maximum of 20 investors per fund and a cap on investments of $20 million for incubator funds or $100 million for approved funds. These should prove attractive to Islamic asset managers or advisers of high-net-worth individuals and families from the traditional Islamic finance regions of the Middle East and Southeast Asia.
Last year saw the continued growth of Islamic finance products in the British Virgin Islands. Building on the British Virgin Islands' close connection with the UK real estate market, BVI companies held by Islamic high-net-worth individuals or families are increasingly being used in Islamic financing (mainlymurabahah) of UK real estate by European private banks. There certainly seems to be increased awareness of Islamic financing in the British Virgin Islands and several private banks have revised their private banking documents to become Sharia compliant.
Islamic financing is increasingly seen as going hand in hand with conventional financing. An example of this joint financing with a BVI element was the Abu Dhabi Islamic Bank's involvement in the $125 million (combined conventional and murabahah) facilities to a group in the oil/gas sector operating in the Middle East and North Africa.
Globally, the Islamic finance market is growing, with the past five years having seen compound annual growth of 17%. It is estimated that the current size of the Islamic finance market is between $1.6 trillion and $2 trillion (amounting to 1% of the global finance market) and it is expected to grow to $3.4 trillion by 2018. Not only is the Islamic finance market growing within its traditional user base – such as Islamic banks, Islamic banking departments of conventional banks and governments of Islamic countries – but western firms are now also starting to use Islamic finance products. The predicted continual growth of the market through 2018, coupled with the ever-growing diversification and sophistication of users, is very promising for the growth of the market within the British Virgin Islands during 2016 and beyond.
The British Virgin Islands is tax neutral and politically stable, has a legal system based on English common law and has final recourse to the English Privy Council (important for the use of Islamic finance as the courts will uphold a fatwa from a Sharia board that a contract complies with Sharia) – all of which are attractive to users of Islamic finance products. Further, BVI companies offer a number of benefits in terms of legal flexibility and low costs (in terms of incorporation and maintenance), which make them very popular in such transactions. For example, the British Virgin Islands allows a wide range of corporate entities, including restricted-purpose vehicles, which are commonly used for structured finance transactions including sukuk. There is a valuable element of flexibility for joint venture ormusharakah directors compared to other offshore jurisdictions: a director of a joint venture company can act in the best interests of one of the joint venture partners rather than the company. Finally, BVI companies can have an additional name in Arabic, which is also attractive on the Islamic market.
Based on the aforementioned points, there is likely to be an increase in Islamic asset managers using the British Virgin Islands to take advantage of the new BVI fund products launched during 2015. In addition, there will likely be a continual increase in Islamic financial institutions and investors using BVI companies in Islamic finance structures such as musharakah and murabahah – particularly in respect of investment into the Middle East, Africa and Asia Pacific. Specifically, it is only a matter of time before existing BVI structures holding high-profile hotels and other real estate assets in the Middle East will be refinanced using Islamic finance products.
These are exciting times for Islamic finance globally, with the last five years having seen unprecedented growth in the market. This growth is predicted to continue into the foreseeable future and, given its role in the global financial markets, the British Virgin Islands will continue to be a major player in international Islamic finance through the use of its flexible and progressive legal system.
(Lexology / 04 Febuary 2016)
---Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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