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."
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.
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