Proposals for legislative amendments to accommodate the introduction of Sukuk

Abstract

Over the past years, the Western world, particularly Europe, has seen a growing awareness about Islamic finance. This is not only due to the effects of globalisation, whereby the number of Muslims living in Western countries and/or doing business with them is increasing. Islamic finance is receiving even more attention now, following the recent global credit crisis, because Islamic finance is being considered by some as being a more „ethical‟ form of doing business and not susceptible to some of the causes of the economic recession the Western world is currently in. Malta is also making attempts to reap some of the fruits known to exist in attracting Islamic finance our way. And indeed, Malta has a special link with the Arab world as may be seen from the success stories of Corinthia as a Maltese investment in Libya, SmartCity as an Arab investment in Malta, and others. Substantial differences exist between Islamic financial services legislation and the Western financial services legislation. Among the most notable is that under Islam, money is seen as a measure of value rather than it being a valuable asset in itself. Thus the concept of money being made from money is unrecognised and interest on money (riba) is prohibited under Islam; as a result, conventional borrowing and lending requires modification if it is to be allowed in the Islamic world. Bonds, being a tool companies use to raise finance, are of course, of extreme importance for business growth. Yet in order for them to be issued and/or subscribed by Muslims, bonds must adhere to certain fundamental Islamic principles, notably contained in Islamic, or Shariah, law. The Malta Financial Services Authority has shown interest in the Islamic finance market by issuing the May 2008 consultation document titled „Islamic Finance in Malta – Application to Banking and Securities‟, wherein it also promised that a consultation paper would be issued regarding sukuk by the end of 2008, as well as the more recent MFSA Guidance Notes for Shariah Compliant Funds. In this dissertation I have explored the possibility of sukuk being issued in Malta. Chapter One delves into the fundamental principles of Shariah-compliant financial products, focusing especially on sukuk. This provides a general backdrop against which the rest of the dissertation may be set. Chapter Two contains a review of the legislative amendments which have been made in the United Kingdom in order to facilitate the introduction of sukuk. The United Kingdom was chosen for this analysis based not only on the fact that it is also part of the European Union (EU) and thus similarly subject to the same EU directives, regulations and other legislative instruments, but also because Malta often refers to this jurisdiction when it comes to drafting financial services legislation. Chapter Three contains a brief analysis of the challenges being faced by potential and current sukuk issuers. This analysis shall be divided into two parts: one to describe those challenges being faced in every jurisdiction, whether secular or otherwise, and the second to describe those challenges being faced by secular jurisdictions as a second layer over and above those challenges being faced by one and all. The first three Chapters are intended to pave the way for the core Chapter, i.e. Chapter Four, which analyses the Maltese legislation relevant when considering sukuk, highlighting problem areas and suggesting solutions thereto. As shall be examined in this Chapter, the main problems are of a fiscal nature in that, under the current fiscal regime, sukuk transactions could, in some situations, be subject to double taxation which double taxation is not faced when issuing and/or subscribing to conventional bonds. It is being suggested that Malta should adopt the stance espoused by the UK Financial Services Authority, i.e. 'no obstacles, no special favours' in the sense that legislative reform should be undertaken to put sukuk at par with their conventional counterpart, but not on a higher level. The analysis undertaken in the first four Chapters shall lead to the Conclusion, in Chapter 5, which shall highlight that it is commendable to encourage Islamic finance to be considered at the same level, in a regulatory as well as a fiscal manner, as conventional finance, not only in order to attract Islamic investment towards Malta so that Malta may benefit financially therefrom, but also because it is equitable for persons professing a particular religious belief, which religion dictates an entire way of life, to have the same access to finance as those whose religious beliefs, or lack thereof, do not restrict them from accessing conventional finance in the same manner.