Jersey: A Hub For Sustainable Islamic Finance

During this time, Jersey has forged a reputation in the Islamic Finance sector due to its close connections with the Middle East and a long history of offering Sharia compliant structures. Jersey’s modern and flexible legal and regulatory framework lends itself to the features of Islamic Finance, including the ability to structure flexibly to incorporate key tenets of Islamic Finance: The raising of capital through partnership and pooling of risk as opposed to the conventional model of borrowing money and repayment of principle plus interest, and the prohibition on investing in certain industries perceived as harmful, such as alcohol and gambling.

Jersey’s history with Islamic Finance began in 1995 with its first Sharia compliant vehicle, established by Voisin’s related trust company. I became involved in Islamic Finance when I joined Voisin in 1998, setting up multi-jurisdictional Ijara structures, and assisting with the establishment of the award winning ‘Caravan 1’ Sukuk in 2004 (the first Sukuk issued by a Jersey company). Through the years, we have advised on a wide range of other Jersey-based Sharia compliant structures, including a daily-traded multi-class collective investment fund. Since the early 2000s we have seen a lot of change in the type of structures used, such as Sukuk falling out of favour in the 2008 crash and more recently coming back into favour, and the rising popularity of both bank-led Islamic Finance and Murabaha structures. The geographical focus for Islamic Finance in Jersey has also widened from the Middle East to include Asia.

While Jersey started with a small pool of experienced Islamic Finance practitioners, that number has grown and there is now a large vibrant community of practitioners who not only understand the rules, but are well-versed in the customs and expectations of clients from these regions, building lasting relationships, understanding their business, and how Jersey can assist. The forward-thinking regulatory environment and flexible legal structures have allowed us to develop structures to meet the needs and requirements of our customers. At Voisin, it has been some of the most interesting and innovative work we have carried out.

Despite the global economic slowdown, forecasts show that the international Islamic finance industry is expected to grow by 10 per cent in 2023-24, the growth has primarily been spurred by Gulf Cooperation Council countries such as Saudi Arabia and Kuwait. Whilst UAE - in particular Dubai - has historically been a key geographical area for Jersey, the more recent focus in Saudi Arabia to diversify away from oil and build a financially sustainable future without the current reliance on oil has provided a huge opportunity for Islamic Finance worldwide. In recent years, we have seen new opportunities for investments open up for Sharia-compliant funds to invest solely in Middle Eastern stocks, where previously they needed to diversify across worldwide markets in order to invest sufficient stocks and spread risk. Accordingly, intermediaries in Jersey are appreciating the ever-growing importance of having a broad range of Sharia-compliant structures.

The current trend in Jersey structures used in Islamic Finance transactions includes:

• The establishment of Jersey trusts providing a pragmatic solution to the prescriptive forced heirship laws, affording High-Net Worth Individuals (HNWIs) and Ultra High Net Worth Individuals (UHNWIs) a means of achieving greater testamentary freedom, while still respecting the core principals of Islamic Finance.
• Jersey-based special purpose vehicles (SPVs) used in connection with a wide variety of Sharia-compliant capital markets transactions, including structures established for the purpose of making off balance sheet investments and securitising assets.
• Jersey Private Funds (JPFs) are often utilised to structure Sharia-compliant funds. Historically, fully-regulated funds have been utilised, however the current trend is towards the JPF. The ability to incorporate a Sharia Supervisory Board into the Jersey structure to provide guidance on Sharia considerations on an ongoing basis and the regulatory understanding of this concept have given the required flexibility to establish Sharia compliant funds in Jersey. Jersey Private Funds, like other Jersey-based structures, both incorporated and unincorporated (for example companies or unit trusts), can be utilised by Sharia-compliant investors to invest worldwide across a breadth of asset classes.
• The utilisation of Jersey companies, limited partnerships, or Jersey Property Unit Trusts (JPUTs) for real estate structures has always been and is still a popular use of Jersey. Such structures are often used for UK commercial real estate investment or the purchase of prestige real estate in the UK, although in recent years I have seen a diversification into European prime commercial real estate. These are often financed with a Murabaha and conventional finance bifurcated split structure.
• Jersey Trusts and Foundations are often used for philanthropic purposes and, circumstances dependent, can be listed on the general or restricted section of the Jersey Charities Register, which can be material to families arranging awqaf compliant endowments.

In addition to utilisation for the above purposes, Jersey is a well-placed jurisdiction for establishment of a family office. Family offices are generally formed to hold, manage, invest, and administer the wealth of a family or group of families. The advantages of establishing a family office include enhanced privacy, greater control, and as we often see, they can be a springboard for younger family members into the financial affairs of the family, allowing them to assume positions on boards of directors or foundation councils, providing them with exposure and understanding of the operation of such structures and greater understanding of the family’s values before inheriting the family’s wealth. A classic example of this would be having a family member serving on the board of a private trust company which acts as the trustee to the family trust. For clients in politically and financially unstable regions, they can promote geographical diversification of moveable assets, and fundamentally they can allow for bespoke structures which serve the promote the precise needs of the family.

In a similar vain to faith-based considerations governing the way individuals and businesses organise structures and transactions, an increasingly important concern for some stakeholders, in particular the younger generations who are becoming involved in the family wealth, is the push for sustainability. Sustainable Finance is forecast to grow exponentially over the next decade. This has not gone unnoticed in Jersey, and accordingly it has been prioritised. Jersey Finance (the industry body which represents the finance industry in Jersey and helps lead our direction) states: “By 2030, Jersey will be recognised by its clients, key stakeholders and other partners as the leading sustainable international finance centre in the markets it serves.”

In pursuance of this goal, in 2021, Jersey Finance launched Jersey’s Pathway to Success (JPTS), an initial two-year plan which was to act as a catalyst to attaining the overarching goal of becoming a leader in the sustainable finance space. Legislatively, Jersey as a jurisdiction has also sought to mitigate against the risk of green-washing, for instance by introducing a new proportionate disclosure framework. Indeed, the quantifiable data published by Jersey Finance shows increasing adoption of Environmental, Social and Governance (ESG) initiatives. For instance 60 per cent of assets in Jersey regulated funds are managed under responsible investment policies aligned with the Principles for Responsible Investing (PRIs). Additionally, as of June 2022, 729 Jersey-domiciled funds are signatories to the PRIs.

Sustainability is now an important consideration in Jersey’s financial services offering. Examples of this include:

• Enhanced focus on ‘impact investing’ in the private wealth space.
• Increasing use of sustainable investment criteria by Jersey-based fund managers.
• Banks adopting the Principles for Responsible Banking and adding sustainable lending products to their offering.
• The mainstreaming of ESG factors in the investment management industry.
• Tech-enabled dashboards to support ESG benchmarking, compliance, risk and reporting.
• Audit and assurance services for sustainability reporting.
• Virtual Chief Sustainability Officer (vCSO) giving clients access to corporate sustainability services on a flexible, outsourced basis.

This broad offering makes Jersey well placed for consumers looking for financial products with sustainability at heart. I envisage that as the younger generations of HNW and UHNW families become more involved in the management of the family wealth, professionals in Jersey will be asked to combine the Islamic Finance principals with Sustainable Finance. Given the experience screening investments that Jersey already has with Islamic Finance, this could be an ideal pairing.

Jersey’s forward-thinking nature, wealth of experience as a jurisdiction, and the flexibility of its structures and regulatory regime, make it a leading IFC in both the Islamic and Sustainable Finance spaces. At the heart of this is the broad and malleable offering in the wealth management, funds banking, corporate services, funds, investment management, philanthropy, and private wealth fields. Further, increasingly knowledgeable intermediaries and an industry-wide appetite to venture deeper into these spaces will mean both Islamic Finance and Sustainable Finance will continue to develop and expand in Jersey, providing an innovative yet safe space for investment.

Kate Anderson
Kate is an experienced financial services, banking and finance professional. As a Managing Corporate and Banking Partner with Voisin, she has expertise in investment vehicles ranging from joint ventures to full collective investment funds and specialist expertise in large corporate structures, as well as Islamic finance. She has 25 years’ experience in corporate law having qualified as a barrister in 1998 and subsequently as an Advocate in Jersey in 2017.