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.
WHY THE CAYMAN ISLANDS?
- Reliable legal system
- Flexibility of trust structure in the Cayman Islands
- Use of Arabic names together with English
- Islamic friendly legislation
- Tax neutral
- Ease and speed of incorporation
- Absence of exchange controls
- Commitment to transparency
- A global financial centre
- Cayman Islands Stock Exchange (CSX)