By Ian Montgomery and Hamish Masson From Harneys

The British Virgin Islands (BVI) remain the most popular interna- tional financial center for incorporating companies due to it be- ing tax-neutral and politically stable with a flexible legal system based on English common law and 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 invest- ments into many developing markets including those where Is- lamic financing is increasingly popular. BVI companies are also used as holding companies for Islamic high-net-worth individu- als or families for owning assets in the developed markets.

As the Islamic finance market is growing and maturing, the advantages offered by international financial centers such as the BVI are being sought to facilitate and lower the transaction and regulatory costs incurred in (i) structuring Islamic finance products and transactions such as Sukuk and Musharakah, and (ii) the incorporation of investment funds and corporate structures.

Review of 2015

In June 2015, the BVI brought in two new fund products under the Securities and Investment Business (Incubator and Approved Funds) Regulations 2015. The ‘incubator fund’ and the ‘approved’ fund are two lightly regulated funds aimed at start-up managers and those managing funds for smaller groups of closely connected investors. Each type of fund has a maximum of 20 investors and a cap on investments of US$20 million for incubator funds and US$100 million for approved funds. These should prove attractive to the Islamic asset managers or advisors of high-net-worth individuals and families from the traditional Islamic finance regions of the Middle East and Southeast Asia.

In 2015, we saw the continued growth of Islamic finance products in the BVI. Building on the BVI’s close connection with the UK real estate market, BVI companies held by Islamic high-net-worth individuals or families are being increasingly used in Islamic financing (mainly Murabahah) of UK real estate by European private banks. There certainly seems to be increased awareness of Islamic financing in the BVI and several of the BVI’s private banks have revised their private banking documents to become Shariah compliant.

As well as replacing conventional financing, Islamic financing is being increasingly seen in the BVI 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

US$125 million (combined conventional and Murabahah) facilities to a group within the oil/gas sector in the Middle East and North Africa.

Preview of 2016

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 US$1.6-2 trillion (amounting to 1% of the global finance market) and this is expected to grow to US$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 now Western firms are starting to use Islamic finance products. This predicted continual growth of the market through 2018, coupled with the ever-growing diversification and sophistication of users is very promising for the continual growth of the market within the BVI (which is already a leading international financial center and popular for Islamic finance) during 2016 and beyond.

The BVI is tax-neutral, politically stable and has a legal system based on English common law and has final recourse to the English Privy Council (which is important for the use of Islamic finance as the courts will uphold a Fatwa from a Shariah board that a contract complies with Shariah), all of which are attractive to users of Islamic finance products. Furthermore, BVI companies offer a number of benefits in terms of legal flexibility and low cost (incorporation and maintenance), which make them very popular in such transactions. For example, the BVI 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 or Musharakah 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 of further attraction to the Islamic market.

Based on the aforementioned points, we expect to see an increase in Islamic asset managers using the BVI, among other things, to take advantage of the new BVI fund products launched during 2015. In addition, we expect to see 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 the Far East. Specifically, we expect that it is only a matter of time until existing BVI structures holding high-profile hotels and other real estate assets in the Middle East will be refinanced using Islamic finance products.

Conclusion

It is 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 the role of the BVI in the global financial markets, the BVI will continue to be a major player in international Islamic finance through the use of its flexible and progressive legal system which is ready-made for the needs of Islamic finance.

Ian Montgomery and Hamish Masson are senior associates in Harneys’s British Virgin Islands office. They can be contacted at [email protected] and [email protected] respectively.

SOURCE: http://www.harneys.com/files/ifnguide2016-bvi-%281%29.pdf