Cash News
The intersection of Islamic finance and modern fiduciary services presents a unique opportunity for forward-thinking international finance centres with Islamic family businesses.
In Islam, wealth is viewed as a resource for achieving falā (success) in this life and the hereafter and wealth creators and owners regarded as guardians or custodians of the wealth for future generations.
The ‘stewardship’ principle takes centre stage, and effective financial planning encompasses the creation, accumulation, protection and distribution of wealth, with Islamic estate planning being a critical component as prescribed in accordance with the principles set out in both the Qurān and adīth (sayings, actions and tolerances of the Prophet Muhammad, SAW).
The guidance and regulations are designed to safeguard heirs’ interests against mismanagement and abuse, in the spirit of wealth preservation, protection and proliferation.
The importance of estate planning is underscored in the Quranic principle of planning for sustenance and wellbeing. In financial management terms, advisers would need to consider creating holistic financial plans that encompass both earthly and spiritual wellbeing, while ensuring sustainable business practices. They’d need to preserve and grow one’s personal wealth but be mindful of its impact on wider society.
Trusts are traditionally viewed as a tool for wealth preservation, estate planning and succession management. In the context of Islamic finance, trusts take on a greater role in ensuring Shari’a-compliance while safeguarding the rights of vulnerable family members and stakeholders who might otherwise be disadvantaged under traditional inheritance frameworks.
A distinctive feature of Islamic finance is its approach to inheritance. Shari’a outlines a prescriptive approach to inheritance distribution, reflecting familial roles and responsibilities.
However, this approach can lead to challenges in modern family businesses, where disputes over inheritance may threaten sustainability, family relations and ultimately the family’s legacy.
Establishing a trust can mitigate these issues and help with family harmony by protecting the interests of all beneficiaries and ensuring equitable distribution of income and capital. By adhering to Shari’a principles, a well-structured trust can provide financial security for all beneficiaries.
This approach demonstrates how trusts can use existing religious inheritance Shari’a principles while offering a safety net for all family members.
Good governance is vital for family businesses, especially during transitions of wealth and control to future generations. A lack of clear governance frameworks can result in disputes and mismanagement, negatively impacting familial relationships and risking the family wealth and legacy.
Effective governance of a family business delineates roles and responsibilities while establishing checks and balances for transparency and accountability.
In conclusion, as family businesses in the Islamic world navigate the complexities of inheritance, succession, and governance, the fusion of Islamic finance with modern fiduciary services offers a promising solution.
As described earlier, in the example of the East African family, the reserved powers trust allowed the settlor to maintain investment direction, ensuring continuity during their lifetime and preventing abrupt changes in strategy.
When the time comes, oversight transitions to the settlor’s sons, facilitating a smooth transfer of responsibility. All witness the prism of the family’s Shari’a beliefs and requirement.
This gradual approach minimises conflicts and prepares the next generation for leadership in an orderly manner. Guided by the settlor’s letter of wishes—a crucial document outlining the vision for the family’s wealth—the trust directs asset management and distribution.
While not legally binding, the letter holds significant influence, ensuring that the settlor’s values and objectives are honoured even after their passing.
Aligning cultural values
For many family businesses in East Africa and beyond, the challenge is not simply wealth accumulation, but wealth preservation across generations.
Islamic finance, with its emphasis on ethical investments, fairness and transparency, offers a framework for addressing these challenges within its religious based value system.
Success hinges on constructing governance frameworks that balance Shari’a principles with modern financial management needs, which in turn requires flexibility within the legal and regulatory framework.
The stability and quality of Jersey’s trust law, one of the world’s first codified Trust laws, a template adopted by many other jurisdictions worldwide, remains highly attractive to international private wealth clients. Incidentally, 2024 marks its 40th anniversary.
Jersey’s trust law supports the establishment of complex structures like reserved powers trusts, enabling families to set up governance frameworks that preserve wealth while ensuring ethical management and keeping to their religious beliefs and faith.
Financial services providers know that efficient, flexible, cost-effective and well-regulated solutions are attractive to private clients across the globe. With over six decades of experience, Jersey’s IFC continues to set the standard in cross-border banking, wealth management and capital markets, with Islamic finance emerging as a key strength.
Firms in Jersey have witnessed that corporate structuring solutions are supporting Islamic finance in increasingly diverse areas, such as Shari’a-compliant investment management and corporate restructuring.
As this demand for Shari’a-compliant solutions grows, Jersey is well-positioned to play a vital role in the future of Islamic finance across Africa.
By adhering to Shari’a principles while embracing innovative financial strategies, families can secure their legacy, protect their vulnerable members, and ensure the continuity of their business for future generations.
The SBOTCJL trust is just one of many examples of how Jersey advisers are seeking to harmonize cultural and financial imperatives.
Faizal Bhana, Director-Middle East, Africa and India, Jersey Finance.