Shariah Funds In Ireland

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  • 1. Shariah Compliant Funds in Ireland Close document Previous page Next page Contents October 2008 Print PwC
  • 2. Close document Previous page Next page Contents Print Contents Islamic Finance is growing in global importance as provides barrier-free access to a market of over an alternate, humane and ethical financial system. 490 million consumers. This, in addition with • Introduction Through the prohibition on interest, and the focus several other factors has led to over 1,000 on equity financing and trade of tangible assets, companies from all over the world to choose • Why Ireland? Islamic Finance provides a viable alternative to Ireland as their European base from which to conventional finance, but with a significant focus on conduct their business. • Irish legal and regulatory framework social responsibility and inclusive profit making. The Islamic Finance industry is growing globally, for Shariah funds with billions of dollars already invested in Shariah Why Ireland? investments. • In Ireland today there are over • Ireland welcomes Shariah Funds 11,000 people employed directly in Ireland is renowned globally as being one of the the investment fund industry • PricewaterhouseCoopers approach premier locations for establishing and administering • Ireland is the leading global hedge investment funds. According to the Irish Funds fund administration centre, to investment management Industry Association (IFIA) there are in excess of servicing 37 per cent of the total 7,000 funds with a net asset value of over Euro 1.4 • Contacts trillion serviced in Ireland. global industry • Seven of the top ten hedge fund administrators in the recent As a democratic republic, a committed member of HedgeFund.net survey on the European Union and the OECD, Ireland administrators have operations in PwC
  • 3. The Irish regulatory framework Close document provides a favourable Previous page environment for the Next page Contents establishment of Shariah Print compliant funds Ireland, additionally there are more • Corporate tax rate of 12.5 per cent, Irish legal and regulatory framework for than 340 international fund one of the lowest in Europe for Shariah Funds promoters administrators • There are now over 4,400 funds • Fund activities are exempt from and sub-funds listed on the Irish Irish taxation 1. The appointment of a Shariah Board Stock Exchange, making it the 2. Fundamentals of Islamic Finance/Shariah largest exchange in the world for Investments funds listing With Ireland’s experience within the funds industry 3. The purification of income • 24 hour approval process available and the receptive attitude of the Irish Financial 4. Types of Islamic financial instruments for Qualifying Investor Funds Regulator to new entrants to the market, the Irish 5. Irish Fund Structures (QIFs) regulatory framework provides a favourable 6. Taxation of Irish funds • Flexible, proactive regulatory environment for the establishment of Shariah 7. Shariah Financial Reporting & Standards environment compliant long-only funds and for the development • Market driven alternative of Shariah compliant hedge funds. 1. Appointing a Shariah Board investment product solutions • Extensive industry experience and Shariah funds are set up similarly to other Irish expertise funds. They can avail of any of the legal structures • Location – optimum time zone to available for the establishment of investment funds ensure global coverage, English in Ireland, such as, an investment company, unit speaking, Euro currency PwC
  • 4. Close document The main difference with Previous page Shariah funds is the Next page Contents necessity to appoint a Print Shariah board trust, common contractual fund or investment functions is to review material contracts and to Profit in Islam limited partnership. approve the funds structure. The Board is also Islam does permit the making of a profit. In fact, empowered to issue fatwa’s which are religious profit forms basis of the Islamic Financial system, They also appoint a board of directors and an rulings issued after an examination of fund rules in that it allows for the making of profit by the party investment manager or advisor who manages the and investments made by a fund which in effect providing the capital, as well as the party using the investments of the Fund and advises the board. certifies that the fund is ‘Shariah compliant’. The capital. There are, however, conditions on the The main difference with Shariah funds is the fatwa is an important precondition in order for a manner in which the profit is made, and Islam does necessity for these types of funds to appoint a fund to be marketed to prospective investors as not encourage making of profit in a way that Shariah board which provides guidance to the Shariah observant. violates religious law or is harmful to the directors of the Fund and to the investment stakeholders inherent in the business or economic The role of the Shariah board therefore includes manager on matters of Shariah law and in activity. the following tasks: particular whether the proposed investments of the fund are Shariah compliant. The acceptance of the profits in terms of Shariah will depend on couple of basis rules: The Shariah board should consist of experts on 1. Initially advising on the fund set-up and on matters of Islamic law and practice. The the core documents. 1 – The profit or loss that will incur in an investment Accounting and Auditing Organisation of Islamic 2. Providing ongoing advice on the monitoring will be shared on a pro rata basis. The principle Financial Institutions (AAOIFI), has stated that a of the Shariah element of the fund amount invested and the rate of return (Halal Profit) Shariah board consist of at least three Shariah investments. can not be guaranteed. scholars. The board should be appointed early in the process of structuring the fund, as one of its PwC
  • 5. Close document From an Irish regulatory Previous page prospective, the Shariah Next page Contents element is viewed very much Print as an overlay 2 – The routes of investments and the associated • Businesses which provide interest based also avoiding the concept of borrowing and conditions agreed must be in accordance with the financial services interest. In addition, other fund promoters are Shariah principles. • Nightclubs or businesses which are looking at designing wrapper type products i.e. involved in pornography or adult orientated packaging existing investment products into material. Shariah compliant equivalents. 2. Fundamentals of Islamic Finance/ From an Irish regulatory prospective, the Shariah Shariah Investments In addition a Shariah fund may not invest in element is viewed very much as an overlay, interest–bearing instruments and may not sell comparable to a fund established with a ‘socially short. These restrictions have in the past been responsible’ investment ethos. What the Irish A Shariah fund must ensure that the underlying deemed to rule out Shariah compliant hedge funds. business in which it holds securities is Shariah Financial Regulator will be concerned with is to However, due to recent developments this can now seek to ensure is that the statements of policy and compliant. be achieved through the use of Salaam contracts principle are transparent and clear and that the The fund’s offering document will spell out the and Murabaha. offering document is drafted in such a way that Islamic-based investment restrictions. The list Salaam is a short term contract to make full investors are able to clearly understand the basis below outlines some of the businesses that the prepayment for an asset prior to delivery. on which they are investing. Fund may not invest in: Murabaha contracts are a transaction where the • Businesses which manufacture sell or offer bank buys an asset on behalf of the end user who alcohol or pork-related products then repurchases it over time. Total payment in • Gambling establishments such contracts would be more than the cost of the asset providing the bank with its profit margin and PwC
  • 6. Close document Previous page Income generated by a Next page Contents Shariah – compliant Print funds must be ‘purified’ 3. The purification of income dividends to achieve a Shariah – compliant between two parties, one who provides the funds return and the other who provides the expertise and who Income generated by a Shariah-compliant fund agrees to the division of any profits made in must also be ‘purified’ as it is often unavoidable advance. 4. Types of Islamic Financial Instruments that some of the income generated by the Murabaha - Contract for purchase and resale: underlying companies in which a Shariah fund Murabaha allows the customer to make purchases There are a number of different Islamic financial invests will include some form of interest. without having to take out a loan and pay interest. instruments which can be used individually or in The Shariah board’s input is again necessary in combination including: A bank purchases the goods for the customer, and determining the types of income that need to be re-sells them to the customer on a deferred basis, purified. The amounts purified should, under adding an agreed profit margin. The customer then Ijara - Leasing: Ijara involves a contract where a pays the sale price for the goods over instalments, Islamic principles, be donated to charity. bank buys and then leases an item – perhaps a effectively obtaining credit without paying interest. There are a number of different ways to purify consumer durable – to a customer for a specified ‘tainted’ income: rental over a specific period. The duration of the Musharaka - Joint venture: Both the entrepreneur lease, as well as the basis for rental, are set and and the investor contribute to the capital of the - The ‘tainted’ income can be deducted prior agreed in advance. The bank retains ownership of operation in varying degrees and have a to distribution of dividends the item, taking it back at the end of the contract. prearranged agreement in the sharing of risk and - Investors can be informed of the amount return. that should be deducted from their Mudaraba - Profit sharing agreement: Mudaraba refers to an investment on your behalf by a more skilled person. It takes the form of a contract PwC
  • 7. Close document The UCITS structure is one Previous page of the commonly used Next page Contents structures for retail Islamic Print equity funds Diminishing Musharaka – this entails one partner Istisna – this entails paying “now” for delivery at For example, this means that UCITS funds (or partners) buying out the interest of other some later, pre-agreed time for a commodity that established in one member state of the EU can be partner(s) over time, so that the interest of the has yet to come into existence. sold to the public in all of the EU’s member states other partner(s) in the venture diminishes. once the appropriate notifications have been made. They are the ideal vehicle for promoters who wish Sukuk - Financial certificate that can be seen as 5. Irish Fund Structures to distribute their funds on a global scale without the equivalent of the bond: Sukuk are securities having to obtain authorisation from each individual that comply with Islamic law and its investment There are a number of different fund structures country. principles which prohibit the charging or paying of available in Ireland; UCITS, non-UCITS, PIFs, QIFs, hedge funds, FOHFs etc. The most popular Ireland as one of main locations for UCITS funds interest. Sukuk can be classified according to the structures are UCITS and the QIF. has an abundance of experience and expertise extent of their tradability in the secondary markets. with these types of funds. The UCITS structure is UCITS one of the commonly used structures for retail Takaful - Insurance: Takaful is a system of mutual The UCITS brand is recognised globally and Islamic Equity Funds. insurance, which is based on mutual cooperation, responsibility, protection and assistance between UCITS funds are distributed heavily in Asia, the groups of participants. Middle East and South America as well as in Europe. Salam – this entails paying “now” for a commodity A UCITS fund which must be open ended can avail for delivery at some later, pre-agreed time. of a “single passport” throughout the above mention countries for the sale of its units/shares. PwC
  • 8. Close document As the range of assets eligible Previous page for the QIF is very flexible, it is Next page Contents an ideal product for structuring Print funds in the Islamic market Qualifying Investor Funds (QIFs) • QIFs may invest in up to 100% in there may be times when redemption unregulated schemes subject to a proceeds are paid on a quarterly basis. Qualifying Investor Funds (QIFs) are designed for maximum of 50% in any one unregulated high-net worth individuals or institutional investors, scheme. As the range of assets eligible for the QIF is very borrowing and investment restrictions do not apply. • Redemptions: While open-ended QIFs may flexible, it is an ideal product for structuring funds The basis for QIFs is that the investor must have a provide for dealing on a quarterly basis, the for the Islamic market. high degree of knowledge and experience in the Financial Regulator requires that the time relevant markets along with a detailed between submission of a redemption understanding of the investment risks involved. request and payment of settlement 6. Taxation of Irish Funds QIFs can now be authorised by the Irish Financial proceeds must not exceed 90 calendar Regulator within 24 hours of the submission of days. This period can however be All Irish regulated investment funds available to the relevant documentation to the Financial Regulator. extended to 95 calendar days in the public are exempt from tax on their income and context of a QIF feeder or fund of funds gain, irrespective of where their investors are Some of the main aspects of the QIF are listed resident. Taxation of Irish funds is very favourable below: scheme, including a QIF which provides for dealing on a more frequent basis (e.g. and is considered to be one of the key areas of • There are no investment restrictions for a monthly, weekly etc.) In such competitive advantage. QIF, however, if they invest in more than circumstances, a prominent statement 50% they are considered to be feeder type highlighting the fact that while the scheme No Irish tax arises in respect of distribution or investments deals, for example, on a monthly basis redemption payments made to investors who are neither Irish resident/Irish ordinary resident and PwC
  • 9. The quality and transparency Close document of financial reporting in the Previous page Islamic financial industry Next page Contents differs significantly across Print jurisdictions who have made the necessary declaration to that (Accounting and Auditing Organisation for Islamic Accounting and Auditing Organisation for Islamic effect to the fund. Financial Institutions), Malaysian Accounting Financial Institutions (AAOIFI) has made Standards and some local GAAPs which are commendable effort to formulate relevant Ireland has extensive double taxation treaties with influenced by a combination of IFRS, AAOIFI and standards of practice. Another key contribution is 44 countries, which include most of the world's local central bank reporting guidelines. its compilation of Shariah standards for institutional major economic powers and all the EU Member governance and related contract standards. States. Being relatively young, the Islamic finance sector is lacking in a common framework, although there are For Islamic markets, the Accounting and Auditing Irish collective investment funds are not obliged to number of bodies who continually work on creating Organization for Islamic Financial Institutions charge VAT and most of the services provided to a standards and best practices for Islamic Financial (AAOIFI) sets standards on accounting, auditing, fund are exempt from VAT. Institutions. governance, ethical and Shariah compliance for its members. AAOIFI is a self-regulatory organization The following are some of the main bodies which with members composed of market participants as work on the guidance and promotion of Islamic well as regulatory and supervisory bodies from 24 7. Shariah Financial Reporting & finance: countries. Standards Accounting and Auditing Organization for Islamic Financial Services Board The quality and transparency of financial reporting Islamic Financial Institutions (AAOIFI) Islamic Financial Services Board (IFSB) serves as in the Islamic financial industry differs significantly Established in 1991 to develop accounting and an international standard setting body of regulatory across jurisdictions. Frameworks in place for auditing standards for Islamic institutions, the and supervisory agencies that have vested interest leading IFI countries include IFRS, AAOIFI PwC
  • 10. Close document Ireland welcomes the Previous page opportunity to service Next page Contents Shariah compliant funds Print in ensuring the soundness and stability of the ensured that common standards are adopted. the entrance of the Islamic finance industry to the Islamic financial services industry. It focuses on Minor differences of opinion about interpretation Irish market place would be a welcome introducing new, or adapting existing international have proved to be healthy for the sector. development. The regulatory authorities in Ireland standards consistent with Islamic Shariah have also adopted an “open door” policy in their principles, and recommends them for adoption. So willingness to meet with project promoters and far the board has developed and issued guiding Ireland welcomes Islamic Funds discuss issues directly with them. principles on corporate governance, risk There are opportunities for Ireland, either in management and capital adequacy standards for The Islamic finance industry, although still a relatively young industry, has transformed into a servicing or managing Shariah funds. Building on Islamic financial institutions. The board also the experience and expertise developed in the arranges summit /conferences / workshops on sizeable alternative financial management system. mutual & alternative funds industries, Ireland is well various issues relating to Islamic banking. placed to take on this new challenge of adopting Muslim countries want Islamic finance to be part of the global financial system and are keen for these these Islamic funds. Shariah scholars types of funds to be available worldwide. Constant innovation in financial services has been Over the years, Shariah scholars have made Additionally they are keen to adopt many of the significant contributions by ensuring an appropriate encouraged in Ireland. This commitment is more innovative practices and products relating to epitomised by the manner in which regulatory and balance between advances within the sector and financial transactions as long as they comply with Shariah standards. Forums such as the Fiqh tax legislation has been amended to improve Islamic law. Ireland attractiveness as a domicile for many Academy, established by the 57-member Organisation of the Islamic Conference, have different types of funds. The proactive attitude of the Irish financial services helped promote the sector, and scholars have industry towards new opportunities ensures that PwC
  • 11. Close document Previous page Next page Contents Print Ireland as not simply a funds domicile, but a fund PricewaterhouseCoopers Approach to on the structure of both the investment advisor and administration centre of excellence with US $1.4 Investment Management the underlying fund. trillion assets under administration as of Fitzrovia, at 30th June 2007, is well equipped to service these PricewaterhouseCoopers is the leading Irish funds continue to grow and are now in excess growing Shariah funds. Ireland’s financial service professional services firm in Ireland. At 30 June of Euro1.4 trillion, illustrating the enthusiasm of industry employs in excess of 20,000 people 2007, we maintained the lead across all funds international promoters to continue to choose working across a variety of service providers in audited, with 1,949 funds serviced in Dublin. We Ireland as their base in Europe and administration, custody/trustee, promoters, legal, audit a majority of the larger funds in the industry PricewaterhouseCoopers is confident is supporting tax, audit, consultancy etc. and we have been actively involved in the this growth. Ireland’s experience and position in the funds development and promotion of the Irish Financial industry is well established and Ireland welcomes Services Centre in Dublin since its inception in 1986. Audit Market Share by assets the opportunity to service Shariah compliant funds. Source: Fitzrovia 30th June 2007 PwC also provides a full range of business advisory services for both large organisations and De loitte O the r PwC E&Y 4% 1% KPMG independent advisors entering the investment fund 17% E&Y business. Our business advisory services team can assist clients in making strategic assessments De loitte of the investment business, preparing business PwC O the r KPMG 57% plans and economic analyses as well as advising 21% PwC
  • 12. Close document Previous page Next page Contents Print Andy O’Callaghan Contacts Tel: +353 1 792 6247 Andrea Kelly Olwyn Alexander Tel: +353 1 792 8540 Email: andy.ocallaghan@ie.pwc.com Tel: +353 1 792 8719 Jonathon O’Connell Email: olwyn.m.alexander@ie.pwc.com Email: andrea.kelly@ie.pwc.com Tel: +353 1 792 8737 Pat Candon Joanne Kelly Email: jonathan.oconnell@ie.pwc.com Tel: +353 1 792 8538 Tel: +353 1 792 6774 Email: pat.candon@ie.pwc.com Email: joanne.p.kelly@ie.pwc.com Marie O’Connor Tel: +353 1 792 6308 Fiona DeBurca Vincent MacMahon Email: marie.o.connor@ie.pwc.com Tel: +353 1 792 6786 Tel: +353 1 792 6192 Email: fiona.deburca@ie.pwc.com Email: vincent.macmahon@ie.pwc.com Ken Owens Tel: +353 1 792 8542 Patricia Johnston Damian Neylin Email: ken.owens@ie.pwc.com Tel: +353 1 792 8814 Tel: +353 1 792 6551 Email: patricia.x.johnston@ie.pwc.com Email: damian.neylin@ie.pwc.com Tony Weldon Tel: +353 1 792 6309 Email: tony.weldon@ie.pwc.com PwC