Shariah-Compliant Funds in Malta

Shariah-Compliant Funds in Malta

Hedge Funds in Malta are regulated by the Malta Financial Services Authority (“MFSA”) under a framework regime incorporated within the Investment Services Act (“ISA”).  With the parameters set out by the ISA, and any subsidiary legislation, would make Malta as an interesting domicile for Shariah-Compliant capital investment.

Shariah-compliant investment funds are investment vehicles that operate according to Islamic principles.  Such funds are prohibited from investing in any underlying activities, either directly or indirectly, which are classified as “non-halal”, such as alcohol, tobacco, weapons and gambling.  Additionally, such funds may not enter into interest-bearing instruments and short-selling is prohibited.

Fund Structure of Malta Shariah-Fund

The Guidance Notes as issued by the MFSA regulating Shariah-Compliant funds list down the principal categories of collective investment schemes that can be set up.  Such categories include:

Although Shariah-Compliant investment funds may be set up as both Retail Schemes and PIFs, the nature of the investment and methods used may have a determining effect on the fund category under which the fund is licensed.  Thus, the MFSA’s Guidance Notes address the main types of funds that can be established as follows.

Equity FundsShariah-compliant equity funds can be set up as both Retail or PIFs.
Ijarah FundsSuch Funds will generally have as an investment objective non-conventional asset classes, such as the leasing of property, and may only be licensed as a PIF.
Commodity FundsSuch Funds are very common to Ijarah Funds but would derive their income from the ultimate resale of commodities (unlike Ijarah which would derive their income through, for example, rental income of property). Similarly, such funds may only be licensed as PIFs.
Murabaha FundsThe ultimate objective of such funds is to make a “profit margin” upon the ultimate resale. Such funds can only be licensed as a PIF.

Key Features of a Malta Shariah-Fund

Shariah-compliant funds shall abide by the Standard Licence Conditions (“SLCs”) that are applicable to the funds established under the ISA.  Additionally, due to the sophistication and nature of Shariah funds, the below requirements must apply.

Except for the applicability of the Guidance Notes as issued by the MFSA, Shariah Funds set up as both Retail (UCITS or Retail AIF) and non-Retail (AIF, PIF or NAIF) will be regulated in the same manner as non-Shariah compliant funds falling under the same category.

General Requirements

  • Shariah-compliant funds will be expected to follow the risk-spreading principle except when this can be waived in terms of the proviso to the definition of “Collective Investment Scheme” under the ISA;
  • The managing body of a Shariah Fund will be responsible for ensuring that the Fund satisfies the relevant Shariah principles and requirements as disclosed in the funds Offering Document and other investor information document.

Shariah Advisory Board

  • The Fund Manager shall appoint a Shariah Advisory Board composed of, at least, two people who are internationally recognized Islamic Shariah Scholars to ensure that the fund meets Shariah compliance standards in the management of its assets;
  • Members of the Advisory Board are to be independent from the fund Manager
  • The main roles of the Advisory Board include:
    • Rather than acting as investment advisor, the Board will be expected to provide guidance on the steps to be followed to meet Shariah compliance in the management of assets. The Board will not be expected to issue investment recommendations;
    • Prior the launching of the Fund, the Advisory Board will be expected to approve the fund structure, investment methodology and the Shariah guidelines listed in the Offering Document;
    • Review any counterparty agreements entered into by the Fund;
    • Ongoing oversight of the fund’s operations to aid its ongoing adherence to the Shariah guidelines;
    • On an annual basis, the Advisory Board should report to the fund’s investors to express their opinion regarding Shariah compliance of the Fund. This is usually done through the Audited Financial Statements.

Main Disclosures in Offering Memorandum

  • Details regarding the members of the Shariah Advisory Board;
  • Reference that the members within the Advisory Board may be changed with other individuals of equal standing and reputation;
  • Terms of appointment of the Shariah Advisory Board;
  • Reference to the Shariah compliance review carried out by the Advisory Board prior to the fund launch;
  • Reference to the main features of the Shariah guidelines to be followed by the fund, such as:
    • The nature of assets,
    • Investment strategy,
    • Leverage restrictions,
    • Permitted asset classes,
    • Any distribution of income,
    • The ongoing oversight by the Advisory Board to remain Shariah-compliant
  • A disclaimer that the fund Directors and Manager carry the responsibility to ensure that the fund satisfies the relevant Shariah principles and requirements as disclosed in the Offering Document
  • Disclosures regarding treatment of non-Shariah compliant investments as per the opinion of the Shariah Advisroy Board.
  • The managing body of a Shariah Fund will be responsible for ensuring that the Fund satisfies the relevant Shariah principles and requirements as disclosed in the funds Offering Document and other investor information document.

Disclosures in the Audited Financial Statements

In addition to the disclosure requirements as applicable to non-Shariah compliant funds, the audited financial statements of Shariah funds should also include:

  • A report by the Shariah Advisory Board expressing their opinion about the fund and it being considered as Shariah-compliant;
  • Disclosures relating to any distributions made by the fund to other entities, besides the investors of the fund

Kindly download the FUND ESTABLISHMENT FORM and send it to [email protected]. A representative of our team will get in touch to discuss and assist with your hedge fund needs.

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