The growth of Islamic finance globally during the past decade has been significant with a recent UN report1 citing research showing that Islamic finance assets had almost doubled between 2014 and 2020 to US$ 3.374 trillion and are projected to increase to almost US$ 5 trillion in 2025.
This growth has also witnessed a substantial increase in the use of Islamic finance products to fund the acquisition of UK real estate, both by Muslim and non-Muslim investors.
All types of Islamic finance transactions must be compliant with Shari’ah principles, which derive from the Quran and Sunnah – the two primary sources of Islamic law. There are various types of Shari’ah-compliant transaction structures. However, the structure we see used most commonly in UK real estate financing transactions is murabaha.
Murabaha involves the relevant lender acquiring an asset from a third party at cost price. The lender then sells the asset to the borrower at an agreed mark-up to the cost price, to be paid by the borrower to the lender in installments or on a deferred basis (thereby avoiding interest payments, which are prohibited under Shari’ah). Typically, the borrower will grant security over the asset in favour of the lender as security for the debt, which security will be released upon payment in full of the debt.
We have seen murabaha and other Islamic finance techniques used in a number of high-profile UK real estate financing transactions involving Cayman Islands, British Virgin Islands, Bermuda, Jersey and Guernsey companies. However, this short note focuses on the use of Cayman Islands companies.
Advantages of using Cayman Islands companies for Islamic finance transactions
Cayman Islands companies are frequently used by borrowers looking to utilise Islamic financing, including murabaha. The prevalence of Cayman companies in Islamic finance structures stems from a number of factors, including:
Ease, speed and cost of incorporation: A Cayman company can typically be incorporated within 24 hours and there are no lengthy regulation or filing procedures. Accordingly, from a Cayman Islands law perspective, Islamic finance transactions can be structured very quickly. The cost of incorporating and maintaining a Cayman company is also low. Moreover, the Cayman Islands have a progressive corporate law framework, which provides significant flexibility when structuring transactions; and a Cayman company’s constitutional documents can be easily tailored to accommodate the applicable Shari’ah principles.
Reliable legal system: As a British Overseas Territory, the Cayman Islands have a strong relationship with the UK and enjoy political and economic stability. The Cayman Islands have their own independent legal system based on English common law, with the final appeal from the Cayman Courts being The Judicial Committee of the Privy Council in London. Since English law is generally the law of choice for murabaha transactions, this provides all parties with additional comfort that English law will ordinarily be recognised and enforceable in the Cayman Islands.
Use of Arabic names: Recognising the growing importance of the Islamic finance industry and as a clear demonstration of the Cayman Islands’ strong commitment to facilitating it, the Cayman Islands Government General Registry has introduced an Arabic language facility which enables companies to register and issue certificates in both English and Arabic.
Sophisticated centre for financial services: The Cayman Islands are widely recognised as one of the world’s most sophisticated financial centres resulting in the Cayman Islands enjoying an ‘Aa3’ sovereign risk rating.
Tax neutrality: The Cayman Islands are a tax neutral jurisdiction. There are no income, capital gains, corporation or withholding taxes. It is also possible for Cayman companies to apply for an undertaking from the Cayman Islands Government to the effect that, for a minimum 20-year period, no tax will be imposed, thereby providing investors and owners with additional comfort.
1 United Nations Development Programme: https://www.undp.org/sites/g/files/zskgke326/files/2023-08/islamic_finance_june_2023.pdf
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