Challenges For Islamic Financial Products In Ireland

In recent months there has been growing momentum in Europe to adopt and implement Islamic finance structures, with the UK government in June beating a number of countries in the race to issue the first sovereign sukuk in Western Europe.

A number of European countries are vying to establish themselves as Islamic finance hubs, amongst them Luxembourg and Ireland. However, there are many important steps that need to be taken to establish a recurrent program of issuances by corporates and to innovate capital market products for inward investment.

What structure could be utilized in practice?

 Sukuk

Corporate and sovereign sukuk are well established in the Gulf region and other Islamic jurisdictions such as Malaysia. In Western Europe, however, there had been no issuances until June when the UK issued its sovereign sukuk.

The UK’ s GBP 200 million sovereign sukuk used the ijarah sale and leaseback structure, whereby three central government properties owned by HM Treasury Sovereign Sukuk PLC, the SPV vehicle, underpinned rental payments on the property to provide the income flow for investors.

The profit rate arrived at following the heavily oversubscribed launch of the sukuk was 2.036%, consistent with that of parallel/conventional gilts in pricing terms.

In addition, Luxembourg’s parliament appears set to approve a bill authorising the securitisation of three government properties in a sukuk reported to be worth EUR 200 million, with the issue planned for the end of this year.

Now that proof of concept has been shown, it is hoped that these issuances would kick start activity and demand within Europe for an Islamic corporate bond market. This is particularly important given that, under Basel III, Islamic financial institutions will require to hold ‘AAA’ rated liquid assets as a core liquidity buffer.

In Ireland, the ESB have been reported as targeting a sukuk issuance but the proposal does not appear to have progressed apace with the UK or Luxembourg.

Asset Finance

Airbus and the Islamic Development Bank are launching a shariah-compliant aircraft leasing fund with a target size of USD 5 billion, using a mix of shariah-compliant debt and equity.

Ireland has an established financial leasing industry, particularly in the area of aviation.

A number of major aircraft leasing companies based in Ireland announced large aircraft orders in recent weeks, but it does not appear that they sought to use Islamic financing structures, such as sukuk ijarah. There is considerable scope to develop shariah-compliant asset financing structures in Ireland given the industry knowledge and experience built up.

Investment

There are a variety of structures which can be adopted for investment funds. One area which is developing and actively sourcing funds in a shariah-compliant manner is the green energy sector.

Renewable energy projects involving wind and solar energy could, depending on their size, potentially incorporate use of EIIS tax incentive schemes (formerly known as Business Expansion Schemes (BES)). In much the same way as the sovereign sukuk structures, the revenues generated from the energy produced and/or sold back into the grid would be used to generate the investors profit return on investment.

Joint venture arrangements such as musharakah or agency arrangements such as wakala could be adopted to structure such funds in a shariah-compliant manner.

In a wakala, the principal/investor appoints an agent (wakeel) to invest funds provided by the principal into a pool of investments or assets. The wakeel provides its expertise and manages the investments on behalf of the principal for the term of the investment to generate a profit return for the investor in return for a fee and/or an incentive fee.

Islamic REITS

Ireland has recently introduced legislation to govern conventional REITs. Islamic REITS could be offered to investors subject to specific due diligence being carried out on the underlying property assets to ensure that any ‘haram’ i.e. non-halal or prohibited elements do not exist or are within certain tolerances.

An Islamic REIT (like a conventional REIT) would be offered to the public after a prospectus and listed on the stock exchange. The underlying financing must utilise shariah-compliant financing in terms of its acquisition of properties and working capital.

Shariah compliance necessitates the application of on-going supervision of not just each property, maintenance and ‘normal’ tenant control issues, but also the monitoring of permissible activity and non-permissible activities thresholds.

Any intensification or growth of non-permissible activities and the underlying rental profit deriving from such activities for the purposes of the IREIT’s income cleansing obligations and overall shariah compliance.

It would appear that there is significant opportunity to launch an Islamic REIT in Ireland given the strong demand for rental properties, the available supply of rental properties and broadly shariah-compliant nature of residential properties (compared to issues raised by commercial/mixed use properties).

Shared from: zawya.com