Ireland has declared that it is open for business as a centre of Islamic finance. “Who isn’t?” quips Isam Salah, a partner in King & Spalding’s New York office and head of the law firm’s Islamic finance group.

Indeed, the list of countries competing for sharia-compliant investment funds is long. From the countries that might seem its natural home such as Saudi Arabia, Bahrain, Kuwait or Malaysia, to others less obvious such as the UK, Kenya, Luxembourg and now Ireland, the list keeps growing.

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Islamic finance deals in 2011 totalled $1140bn, according to Humayon Dar, CEO of Edbiz Consulting, a London-based Islamic financial consulting firm and editor of the annual Global Islamic Finance Report. “In the context of the global financial services industry it is very small – slightly less than 1%,” says Mr Dar. “However, the interesting aspect is not the absolute figure but that its growth rate is 10% per annum, which is significantly higher than the corresponding rate for conventional funds.”

Widespread representation

The three countries ranked highest by Islamic asset value in a 2011 report by TheCityUK, which promotes UK financial services, were Iran ($315bn), Saudi Arabia ($138bn) and Malaysia ($103bn). In most Islamic countries, however, sharia financing still represents a fraction of the total financial sector, says Mr Dar.

In Europe, the UK has been ahead of the game in encouraging Islamic finance, Mr Dar adds. The report ranked the UK ninth globally by Islamic asset value with $19bn, “largely based on HSBC Amanah”. The bank operates in nine other countries. Standard Chartered Saadiq, which provides banking products and services based on sharia principles, operates in six countries. TheCityUK's report also found that within the UK, 22 banks offer Islamic banking services, five of which are fully sharia compliant.

Promoting itself as a major centre for Islamic finance, the UK city of Birmingham hopes to challenge London’s supremacy. Birmingham is home to the Islamic Bank of Britain, which is the first UK retail bank serving this market and is owned by Qatar International Islamic Bank.

The core issues

The central features of Islamic financing are prohibitions on earning interest, on speculation, and on unethical businesses or products. Transactions are based on a physical asset, and the borrower and lender must share risk. Money is regarded as a measure of value but not an asset in itself. In order to assure observant Muslims that a product or transaction complies with sharia law, sharia advisory boards consisting of Islamic scholars are generally called on to approve them in advance.

One of Ireland’s most significant achievements in the field of Islamic finance – the November listing on the Irish Stock Exchange of a $2bn sukuk (bond) issued by Goldman Sachs – has given the country greater visibility, but proved controversial on religious grounds. Dar Al Isthmar, a subsidiary of Deutsche Bank, advised Goldman on the transaction. However, some Islamic scholars have questioned whether the issue is truly sharia compliant.

While many countries have claimed to be jumping on the Islamic finance bandwagon, Mr Salah says much of it is more talk than action. “The main issue in most countries is tax and regulatory structures that were designed and implemented for a conventional financial system,” he says. “You have to look at the provisions that would make a transaction more expensive or prohibit it entirely.”

Relying on reputation

Ireland is counting on its recognised status as a sophisticated global financial services centre to give it a leg up against stiff competition. In 2010, the Irish funds industry grew by more than 30% to administer funds valued at €1880bn.

“Islamic finance is one of the major growth areas in international finance and the government is playing its role to support the development of this sector in Ireland,” prime minister Enda Kenny said in June, adding that Ireland has signed double-taxation treaties with Saudi Arabia, Bahrain, Kuwait and the United Arab Emirates.

The key element in Ireland’s outreach is the 2010 Finance Act that put Islamic financial transactions on an even tax footing with conventional funds that achieve the same economic result. It applies to:

  • credit transactions such as loans or mortgages that comply with sharia principles;
  • bank deposits that do not pay interest (forbidden by sharia law) but provide a return to the depositor in another form; and
  • investment transactions such as sukuk or structured finance arrangements. 

Sharia tax treatment

The way Islamic finance transactions are structured involves multiple steps, which could give rise to multiple tax points under conventional tax arrangements, says Yvonne Thompson, a tax partner in PricewaterhouseCoopers Ireland. As a result of the legislative changes, the authorities will instead look at the substance of the transaction as a whole. “If that is akin to a conventional bond or lease, then it will receive the same tax treatment under Irish law,” she says.

In other steps to spruce up the Islamic finance welcome mat, the Irish central bank has authorised a number of sharia-compliant funds, accountants can now pursue a diploma in Islamic finance, an Irish Islamic chamber of commerce has been established and daily direct flights link Dublin and key Middle East cities.

Ken Owens, an audit partner in PricewaterhouseCoopers Ireland’s asset management practice and chair of the Irish Funds Industry Association, envisions Ireland as a hub or gateway for Islamic funds seeking to access the EU or global markets. “In the past two years, we have been successful in attracting a small number of asset management firms based in Abu Dhabi, Dubai and Bahrain to establish Irish funds,” he says.

In addition, Malaysia’s CIMB-Principal Islamic Asset Management will this year launch a global fund based in Dublin to attract international investors. One attraction, according to CEO Datuk Noripah Kamso, is that a domicile in Ireland will allow the fund to list under the Ucits (Undertakings for Collective Investment in Transferable Securities) framework, and to be marketed throughout the EU and elsewhere. Ms Noripah says she expects more new Islamic asset management products to be listed in Dublin and Luxembourg.

Ireland’s potential

“Ireland need not compete with locations such as Saudi Arabia or Bahrain, but could offer funds based there complementary services such as asset management or back-office administration,” says Mr Owens. Ireland’s well-established securitisation and aircraft leasing offerings could also attract Islamic investors, says Ms Thompson.

Law firms are paying attention, as well. The Dublin branch of international law firm Maples and Calder has been selected as the representative of IsFin, a network of Islamic finance lawyers. Partners Andrew Quinn and Nollaig Murphy contend that Ireland’s status as a leading European jurisdiction for funds and special purpose vehicles makes a focus on Islamic finance a natural progression. “It is also a plus that Ireland is a common law jurisdiction, as it lends itself to internationally recognised banking concepts,”
 says Mr Murphy.

“The fact that the legislation allows commodities as well as financial assets to be used in securitisation can be crucial to ensure that a transaction complies with Islamic law,” says Mr Quinn.

Mr Owens acknowledges it will take time for Islamic finance to reach its full potential in Ireland, but considers developments to date encouraging. “It is an investment in Ireland’s future,” he says.