Korean sukuk law rejection is a wake-up call

Korean sukuk law rejection is a wake-up call

By MUSHTAK PARKER | ARAB NEWS Available at: http://arabnews.com/economy/islamicfinance/article223982.ece

The reported failure of the strategy and finance committee of the South Korean National Assembly chaired by Kang Ghil Boo in December to approve a finance bill introduced by the Ministry of Finance which would have given tax neutrality to alternative financial products such as sukuk (Islamic securities) is a wake-up call for the global Islamic finance industry.

The Ministry of Finance had proposed a revision to the taxation regulations with the aim of affording sukuk the same tax relief as conventional bonds to ensure that South Korean issuers would receive the same tax advantages as those applied to conventional bond issuers.

South Korean capital markets sources preferred not to comment on the development which they consider politically and socio-religiously sensitive, although some of them privately expressed dismay over the development especially after the subcommittee of taxation of the very strategy & finance committee had already approved the changes in principle.

It is no secret that some National Assembly parliamentarians have been bombarded with Islamophobic lobbying from powerful Christian evangelical groups, some of which have close links with their US counterparts. These include the prominent Korean Association of Church Communication. The objections to the facilitation of Islamic financial products in South Korea is based on irrational and misinformed fears that such products would generate a flow of funds for terrorist organizations through a web of Muslim charities.

Irrespective of the motives of the people behind the objections in South Korea, the reality is that the Islamic finance movement, despite the impressive growth of the global industry over the last three decades, is still a highly parochial and insular one still largely engrossed in talking to itself and to its principal immediate stakeholders — the shareholders, investors and its regulators.

Outside this limited stakeholder paradigm, there is hardly much interaction with other equally important stakeholder groups — the government policy-makers, national treasuries or finance ministries, parliamentary finance committees, and consumer groups and watchdogs.

Whatever interaction there may be in the Islamic finance space is limited to the memorandum of understanding between regulators, or between governments in a general economic and financial framework, or cooperation between educational and training institutions. When last did a parliamentary delegation from an Islamic Development Bank (IDB) member country discuss Islamic finance with a sister parliamentary group from another IDB member country, let alone with a non-IDB member country? How often is Islamic finance policy discussed as a banking and finance issue between intra-IDB member country policymakers and treasuries?

Unfortunately, the sector is not used to thinking outside the black box which reflects its entrenched parochialism.

Even Malaysia, so often championed as the most proactive country in supporting the Islamic finance industry, has failed to rise to the occasion on a number of occasions. Malaysian Prime Minister Mohd Najib Tun Abdul Razak hosting South Korean President Lee Myung-bak, leader of the ruling Grand National Party, on a state visit to Kuala Lumpur earlier this month did not even raise the issue, not even as an inquiry, in their bilateral talks which took place in the aftermath of the failure of the National Assembly top adopt the tax neutrality recommendations for sukuk. The topic would have been pertinent amongst two long-standing friendly nations — after all the two leaders were celebrating the 50th anniversary of the establishment of diplomatic relations between their two countries.

Cooperation in the Islamic finance space was not even on the agenda especially given the increasing cooperation between South Korean firms such as Woori Investment & Securities Co. and Korea Investment & Securities and Malaysian firms in recent years. Both Bank Negara Malaysia and the Securities Commission Malaysia, the country’s banking and securities regulators respectively, have also penned MoUs, including cooperation in the Islamic finance space, with their Korean counterparts over the last year or so. Bilateral trade between Malaysia and South Korea currently totals $16 billion per year.

Similarly, when Indian Prime Minister Manmohan Singh was on an official visit to Malaysia a few weeks ago, Najib once again failed to officially bring up the question of cooperation in the Islamic finance space to help facilitate access of such products to India’s 200 million plus Muslim population and others interested in ethical finance, perhaps even under financial inclusion policies.

Right wing Hindu nationalist groups have in the past expressed similar antagonism against and opposition to the introduction of Islamic financial products on the ground that it unduly favors Muslims in India.

Another difficulty in India is at the sate level, where communist-inspired legislatures and administrations, for instance, are against the introduction of Islamic banking for ideological reasons. This does not detract from the fact that they do allow conventional banks, the very epitome of the market-based capitalism, supposedly the sworn enemy of socialism. Not surprisingly, in April this year the Kerala High court directed the state government and its institutions not to promote and invest in the Kerala State Islamic Development Corporation, a Shariah-compliant finance company, aimed at developing infrastructure in the state and attracting inward investment from the Middle East and Southeast Asia.

South Korea of course is not unique in experiencing domestic political problems over the introduction of enabling laws or amendments to existing laws to facilitate Islamic financial products on a level playing field to equivalent conventional financial products. India and France, where a court last year refused to allow Shariah-compliant state financing to be extended to credit unions and SMEs (small-and-medium-sized enterprises) on the grounds that France was a secular country, have had there share of market access impediments.

This in contrast to the highly informed attitude shown by the Christian Finance Action Groups in the UK Treasury’s public consultation on the inclusion of tax neutrality measures in the finance bills of 2009 and 2010 for a spate of Islamic financial products including Alternative Financial Investment Bonds (AFIBS) — the UK Finance Bill term for sukuk — and Diminishing Musharaka used in housing mortgages.

In fact, in the UK legislation the word Islamic does not appear at all. Instead the bill talks about alternative financial products with similar economic characteristics to bonds or bills or housing finance. Perhaps herein lies the lesson for the South Korean lawmakers, for seeing Islamic finance as a religious phenomenon rather than an alternative ethical financial offering open to all irrespective of religion, is clouding their understanding of what Islamic finance is all about.

A failure to correct this perception may hamper any semblance of Islamic finance activity in the South Korean market, albeit limited, and perhaps more importantly may limit the access of South Korean corporates and financial institutions to the Islamic finance market, which has estimated funds under management in excess of $1.2 trillion. One estimate puts potential sukuk issuances out of South Korea over the next two years at $1 billion as local corporates seek to diversify their sources of funding in a difficult international credit market.

At the same time the only trade deficit Seoul has is with the oil-exporting GCC countries on which South Korea heavily relies on to drive its industrial and economic machinery.

In terms of population, the fears of the rejectionists too are unfounded. Out of a 50 million or so population, local Muslims account for less than 40,000, with another 100,000 Muslim foreign workers employed in the economy. In contrast Buddhists account for 24 percent of the population, followed by 19 percent for Protestants and 11 percent for Catholics.

Regards
ZULKIFLI HASAN

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