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ANALYSIS

Islamic fund managers in Gulf opt for foreign domiciles

Dubai, March 7, 2013

Islamic fund managers in the Gulf are increasingly choosing foreign domiciles for their products, favouring their cost-efficiency and reputation for strong regulation as investors seek to avoid any suspicion of money laundering or tax evasion.

The last few years have been difficult for the Gulf's Islamic fund industry as a whole; Western firms pulled out as they were hurt by the global financial crisis, and as slumping equity markets reduced investor interest.

The fund arms of UBS, Citigroup, Allianz, Deutsche Bank, Credit Suisse and HSBC have liquidated some or all of their Islamic funds. In total, 88 funds have been liquidated globally in the last two years.

Launches of all types of Islamic funds globally, including locally domiciled ones, fell to 54 last year from 60 in 2011. But the number of foreign-domiciled launches actually rose, to 15 from five, according to data from Lipper, a unit of Thomson Reuters.

The vast majority of the new foreign-domiciled funds focus on customers from the Gulf and the Middle East; they are being domiciled abroad largely because of a tightening global regulatory environment.

"Fund sponsors are sensitive to perceptions that some of these are viewed as being lax from a regulatory perspective or as tax havens," said Muneer Khan, Dubai-based partner at law firm Simmons & Simmons.

"Regional managers are starting to move towards more reputable regulated domiciles for fund domiciliation and investment management, as they seek to meet investor expectations and concerns around governance and regulatory oversight."

LUXEMBOURG FUNDS

Sedco Capital, part of Saudi Arabia's Sedco Holding, launched five Luxembourg funds in 2012, raising $345 million by the end of last year, Lipper data showed. In November, Sedco said it planned an additional fund and expected to double the firm's assets under management in the next five to seven years.

Saudi Arabia's NCB Capital launched two Irish-domiciled funds in December, and said it planned to add more in coming years, including an Islamic bond fund.

Clamp-downs by U.S. and European regulators have increased investors' preference for domiciles with strong tax and anti-money laundering credentials, fund managers said. This appears to be benefitting domiciles in Europe and the Caribbean at the expense of domiciles in the Gulf.

"The international perception of certain local regulators in the Middle East is that they are not engaged or approachable, that it takes too long to obtain authorisations and their regulations are not sufficiently clear or developed," Khan said.

Belgium-based Laurent Marliere, general manager of ISFIN, a global network of Islamic finance law firms, said that under the new U.S. Foreign Account Tax Compliance Act, fund management firms around the world would be required to report more detailed information on income earned by their U.S. account holders, or face harsh penalties.

Starting in April, individuals who own British property through offshore firms will be liable for new taxes, he added.

"Some offshore jurisdictions have been smarter than others to attract Islamic investments. For example, the Cayman Islands introduced dual language - Arabic and English - registration," Marliere said.

Last year, Dubai-based Rasmala Investment Bank and Qatar's Tebyan Asset Management opted for Cayman domiciles for their respective sukuk and equity funds. QInvest Wealth Management, part of Doha-based investment bank QInvest, launched four Cayman-domiciled funds in mid-2012.

In addition to the pull factor of the foreign centres' strong regulatory reputations, there is a potential push factor: some fund managers in the Gulf are being forced to adapt to domestic legislative changes, such as new regulations from the Emirates Securities and Commodities Authority in the United Arab Emirates, said Bishr Shiblaq, head of the Dubai representative office of law firm Arendt & Medernach.

DISTRIBUTION

European jurisdictions such as Ireland and Luxembourg fall under Europe's UCITS regulatory regime, which acts as a passport enabling firms to freely sell regulated investment funds across Europe and in other countries. There are now 33 Islamic funds based in Ireland and Luxembourg, according to Lipper.

As fund-raising has become more difficult, Islamic fund managers have been trying to appeal to their existing investor bases in the Gulf, but also to tap into new markets using UCITS, said Shiblaq.

The ability to launch several products under a single umbrella fund is a key advantage of the UCITS regime. International domiciles such as Luxembourg, Ireland, Cayman and Jersey allow the establishment of umbrella funds, whereas in the Gulf umbrella options are more limited, said Khan.

Regulators in the Gulf have begun to appreciate the strengths of UCITS and are considering how to integrate it into their markets, he added.

"Rules for the distribution of foreign funds in the region are tightening up and regulators, such as the SCA in the UAE, are beginning to differentiate between UCITS and non-UCITS funds." – Reuters




Tags: UBS | NCB Capital | Islamic fund | UCITS |

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