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The Cayman Islands, with its Islamic friendly legislation, are the preferred offshore jurisdiction for Islamic financing structures. Cayman companies and trust structures are used in many different Shariah structures and products depending on the requirements of the transaction. The common Islamic finance structures include:
The Cayman Islands, with its Islamic friendly legislation, are the preferred offshore jurisdiction for Islamic financing structures. Cayman companies and trust structures are used in many different Shariah structures and products depending on the requirements of the transaction. The common Islamic finance structures include –
- Capital markets - Sukuk
- Asset financing - Ijarah
- Real estate finance - Musharakah and Murabahah
- Project finance - Istisnah/Ijarah
Sukuk, the most commonly known Islamic financing instrument, are instruments or certificates which represent an ownership interest in an underlying asset. Unlike in the case of conventional asset-backed securities, the underlying asset must be a tangible, profit-generating asset and cannot be a financial asset.
The diagram below shows a typical Sukuk structure using a Cayman special purpose vehicle (“SPV):
A Sukuk structure typically involves the acquisition of assets from the originator (borrower) seeking to raise financing by a SPV (or Issuer) which is frequently established in a tax neutral offshore jurisdiction eg. the Cayman Islands. It is common for the SPV to be owned by a purpose or charitable trust which is also normally established in the offshore jurisdiction.
The SPV will hold the assets in trust for the benefits of the holders of the Sukuk. The SPV will fund itself by the issue of Sukuk instruments, proceeds raised will be used to pay the originator for those assets. Periodic payments will be made to the Sukuk holders using the income from the assets.
Shariah scholars typically require the originator and the SPV to deal at arm's length. The separation can be achieved by having the shares in the SPV wholly-owned by a trust. The combination of a company wholly-owned by a trust enables bankruptcy remoteness to be achieved while enabling the transaction to be effected “off balance sheet” ie. an “orphan” structure in relation to its originator.
- Reliable legal system
As a British Overseas Territory, the Cayman Islands is politically stable and has its own independent legal system based on the English common law. Since English law is generally the preferred governing law for Islamic finance transactions, it provides additional comfort that the Cayman element [component] in the structure is based on English common law.
- Flexibility of trust structure in the Cayman Islands
Purpose trusts with no beneficial owner of the trust assets are attractive for effecting “off balance sheet” transactions and financing commercial transactions. In the Cayman Islands purpose trusts, which are also known as STAR Trusts, are created under Part VIII – Special Trusts Alternative Regime (STAR) of the Trusts Law (as amended). Due to their flexibility, STAR Trusts are a commonly used vehicle. With a STAR trust as the shareholder, the SPV is also bankruptcy-remote and will not appear on the balance sheet of any party to the transaction. Neutrality can be achieved as the trustee of a STAR trust must be a trust company licensed to conduct trust business in the Cayman Islands or a private trust company registered in the Cayman Islands.
- Use of Arabic names
Companies may register their names in both Arabic and English.
- Islamic friendly legislation
The Cayman Islands have been at the forefront of developing Islamic friendly legislation to attract the Islamic finance industry. Issuance of Sukuk instruments that comply with the definition of “alternative financial instruments” falls outside the scope of the Mutual Funds Law (as amended) of the Cayman Islands.
- Tax-free status
The Cayman Islands are tax neutral. Exempted companies are not required to pay income, corporate, capital gains or withholding taxes. The Cayman SPVs may register with and apply to the Cayman Islands government for a written undertaking that such tax-free status will remain for a minimum period of 20 years from incorporation. This guarantee provides additional comfort to holders of Sukuk instruments.
- Ease and speed of incorporation
Cayman companies can be incorporated usually within 24 hours and without lengthy regulation / filing procedures. The cost of forming and maintaining a Cayman SPV is competitive and usually minimal.
- Absence of exchange controls
There are no exchange control restrictions or regulations in the Cayman Islands. Funds can be freely transferred in and out of the Islands in unlimited amounts.
- Commitment to transparency
The Cayman Islands has balanced its commitment to implementing best international practice and continues to show its full participation in relation to international tax cooperation.
- A global financial centre
The Cayman Islands is one of the largest international banking centres in terms of both total liabilities and total assets held in financial institutions. Factors such as political and economic stability, tax neutrality, responsive legal system, sophisticated communication infrastructure, stable banking environment, sound regulatory regime and the presence of service providers such lawyers, accountants and administrators of the highest calibre, provide the level of confidence to foreign investors.
- Cayman Islands Stock Exchange (CSX)
The CSX has been granted approved organisation status by the London Stock Exchange (LSE). Therefore, securities listed on the CSX are eligible for trading in the LSE’s international equity markets and for quotation on the Stock Exchange Automatic Quotation (SEAQ) International trading system. In addition, the CSX is an affiliate member of the International Organisation of Securities Commissions (IOSCO), indicating that the exchange meets the highest internationally accepted standards of securities regulation.
The information in this document is not advice of any kind but general information only and should not be relied on as legal advice. Kensington Trust Group recommends seeking professional advice on legal or tax issues affecting you before relying on it. While Kensington Trust Group tries to ensure that the content of this document is accurate, adequate or complete, it does not represent or warrant, express or implied, its accuracy, correctness, completeness or use of any of the information. Kensington Trust Group does not assume legal liability for any loss suffered as a result of or in relation to the use of this document. To the extent permitted by law, Kensington Trust Group excludes any liability for negligence, for any loss, including indirect or consequential damages arising from or in relation to the use of this document.