Shariah Compliant Funds in Ireland
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.
• 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
The Irish regulatory framework
provides a favourable
environment for the
establishment of Shariah
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
• 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
The main difference with
Shariah funds is the
necessity to appoint a
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
From an Irish regulatory
prospective, the Shariah
element is viewed very much
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
Income generated by a
Shariah – compliant
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
The UCITS structure is one
of the commonly used
structures for retail Islamic
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
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.
As the range of assets eligible
for the QIF is very flexible, it is
an ideal product for structuring
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
The quality and transparency
of financial reporting in the
Islamic financial industry
differs significantly across
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.
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
Ireland welcomes the
opportunity to service
Shariah compliant funds
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.
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
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
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
plans and economic analyses as well as advising 21%