As the Islamic finance industry continues to grow, either in spite of or because of, the global financial crisis the industry is also maturing very rapidly.
With maturity comes a greater need for more flexibility, more transparency, more professionalism, more adaptability, more regulation and more global connectivity. There are a couple of ways of achieving this: do it yourself, or tap into excellence and expertise that already exists.
The Islamic finance industry has already voted with its feet to pursue the latter course and this means that world-standard financial and business centers like Bermuda are being called upon more and more to provide that flexibility, transparency, professionalism, adaptability, regulation and global connectivity. This has certainly been good news for Bermuda, but it is also good news for the Islamic finance industry as Bermuda gears up to be the next global gateway for Islamic finance.
As Christopher Dye, corporate legal counsel for BCB Charter Corporate Services, told The Islamic Globe: "The international business advantages of Bermuda are well-known, including its long history of political and economic stability, its tax neutral regime with an absence of corporate taxes and exchange control for international business, its leading position in the reinsurance industry, its proximity to the major financial centers of the east coast of the United States, and its British common law tradition with final appeal to the United Kingdom. Perhaps above all, its ability to adapt traditional structures such as insurance companies and trusts with purpose-specific laws and regulations makes Bermuda an attractive jurisdiction for new financial structures, such as those used in Islamic financing."
But none of this is happening by accident. The Bermudan government has been actively encouraging the growth and development of Islamic finance in Bermuda - in a canny move that acknowledges the global growth of the industry at a time when many other sectors are in retreat or in decline.
Gulf Arabs are already significant investors in Bermuda-based investment funds, including Shari'ah compliant funds, while financing vehicles originating from the GCC use Bermuda exempt companies and trusts in a range of ways including for Sukuk, investment holding and wealth management purposes.
Why should this be so? A range of factors that take in the political stability of the Bermudan regime, the sophistication of its infrastructure, its extensive human capital resources as well as its regulatory and tax regimes that are modern, flexible, comprehensive and trusted. And in terms of connectivity, Bermuda is in easy flying distance of the major markets of London and New York as well their satellites.
High net worth and ultra high net worth investors looking for a properly maintained Shari'ah compliant investment portfolio simply do not like keeping their wealth anywhere that is even vaguely unstable. For the same reasons they want to make sure that their wealth managers are the best available so that they can take advantage of the widest possible palette of Shari'ah compliant instruments. This is an area where Bermuda excels and where the trust services offered can provide answers to even the most complex and onerous Shari'ah compliant demands. Wealth management, estate planning and generational wealth transference issues are all catered for by specialists with practical experience of solving issues of great complexity with an overlay of Shari'ah compliance.
It's never easy to be brilliant at everything and that is why Bermuda has specialized in certain areas in order to excel in them - such as in the areas of Takaful and reTakaful. Bermuda is already the largest offshore reinsurance and insurance domicile in the world and so it doesn't take much to imagine that this could be the ideal springboard to move into the Shari'ah compliant insurance space.
It is no accident that Mudarabah, Wakala and hybrid models of Takaful can be structured under Bermudan law quite easily. According to Dye: "Bermuda special purpose vehicles (SPVs) are used for a wide range of transactions including; insurance, investment and asset leasing. One example of tailor-made Bermuda legislation for SPVs is the special purpose insurance license.
"Special purpose insurers, which fully fund their liabilities in a manner approved by the Bermuda Monetary Authority (BMA), can obtain a special purpose license which exempts them from certain regulatory requirements of other insurers."
But it's not just about Takaful. Islamic funds are also a focus for the growth of the Bermudan financial services industry. Islamic funds can operate amidst an environment of top asset management firms, fund administrators and other ancillary service providers that are required to keep any mature funds industry operating at peak efficiency. These Shari'ah compliant funds are easily listed on the Bermuda Stock Exchange where listing is important to investors for tradability in the secondary market.
The BMA has also shown its commitment to Islamic finance by publishing its guidance notes on Islamic Collective Investment Schemes. These are principle-based and non-discriminatory and are geared to making sure that Islamic funds are welcomed to Bermuda and properly looked after once they are there.
No conversation about Islamic finance can last very long before the topic turns to Sukuk and here, once again, Bermuda comes up trumps. While once the Sukuk space was reserved for Islamic banks and the sovereigns of Muslim nations, this has now changed to the point where we regularly see western blue-chip behemoths like GE and Goldman Sachs issuing Sukuk.
A swift glance at any Sukuk prospectus is generally enough to show that the Sukuk has been issued by an SPV, and very often the domicile of choice for these SPVs will be Bermuda-based exempted companies. GE's Sukuk, for instance, was structured using a Bermuda limited liability exempted company, showing that Bermuda's expertise is only just beginning to be tapped. Where a Sukuk is also listed on the Bermudan exchange there can be cost efficiencies in structuring and listing in the same jurisdiction.
The overall picture of Bermuda that emerges is not one of an island nation that has adopted a piecemeal approach to offering Islamic financing solutions, but a country that has full government support to ensure that the solutions that it does offer are comprehensive and full. Each segment of the Islamic finance market has been addressed individually with a view to offering a comprehensive solution for all of it together. The new client approaching Bermuda for the first time - whether they are a corporate wishing to structure and list a Sukuk in Bermuda or a Shari'ah compliant family office - will find that professionals have already done much of the thinking for them and that a solution is already in place.
With global financial markets in turmoil there is inevitably a flight to quality and this is a flight that is playing to the strengths of the Bermudan market place. There is little appetite for risk of any kind as stock markets around the world fall and currencies gyrate wildly. Investors want a safe haven for their funds, issuers want a cost efficient and professional level of service, and Takaful operators want the guarantee that comes with playing on the same team as the largest offshore reinsurance and insurance domicile in the world.
In this environment Bermuda presents itself as a well-regulated and trusted domicile for a wide range of Islamic financing needs - and an environment that has explicit and overt government support.
© The Islamic Globe 2011
