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Cayman Islands Emerge As Leading Islamic Finance Domicile

by Amanda Banks,, London

26 September 2006

Walkers, the global offshore law firm, has reported that their Dubai office has seen an increase in the use of sukuk, Shari'ah-compliant bonds, with the Cayman Islands emerging as one of the world's most favoured domiciles for the vehicles.

"While the sukuk market is still very small compared to the conventional debt market, there is enormous potential for growth from both local investors and international markets," stated Robert Varley, a partner in Walkers' Dubai office.

"As local institutions in the Middle East partner with conventional Western banks to issue these types of bonds with increasing frequency, it is certain that banks outside the region are watching the sukuk market with great interest," he added.

Sukuk that are developed and marketed in the Middle East predominantly use Cayman-domiciled issuers over other jurisdictions because of its established trusts law regime, lower costs, relatively fast turnaround, and flexibility in structuring.

The Cayman Islands' strong reputation in the world of global finance can also make listing and rating Cayman-issued bonds much easier compared to bonds issued from other jurisdictions.

Meanwhile, new regulations introduced by the Dubai Capital Markets Authority and the launching of the Dow Jones Citigroup Sukuk Index earlier this year are helping to fill a number of gaps in the Islamic market, says Walkers. General business and acquisition finance, project finance, and securitizations have all been funded with sukuk.

The largest sukuk in history was issued earlier this year, a US$3.5 billion bond issue by Dubai Ports. In July 2006, a US$200 million issue from Tabreed became the first sukuk to be listed on the London Stock Exchange and rated by Standard & Poors.

Walkers has also seen a significant increase in the number and range of deals, from USD$150 million to $1 billion, highlighting the flexibility of sukuk structures.

While often complicated to construct, Walkers says that sukuk can nonetheless play an important role in accessing debt without violating Shari'ah rules.

"As the sukuk market continues to grow, we are seeing more innovative sukuk structures being developed such as Sukuk Al-Musharakah and Sukuk Al-Mudharabah," Rod Palmer, Managing Partner of Walkers' Dubai office observed.

"Recently Dubai Civil Aviation announced that it would raise roughly US$1.6 billion through sukuk to fund the first phase of the new Jebel Ali International Airport. Almost every day we see a new deal being developed," he added.

Walkers, which has advised on several high-profile sukuk deals in recent months, also expects to see more offerings soon.

"Investor demand remains enormous," continued Mr Varley.

"Offerings are hugely oversubscribed. The recent listing of Cayman Islands-issued sukuk on both the London Stock Exchange and the Dubai International Financial Exchange will only strengthen that demand," he concluded.

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