Why we should tap Islamic banking

When earlier this year we visited Riyadh, Kuwait and Dubai as a Foreign and European Affairs Committee, apart from discussing health services, academic co-operation, maritime affairs and the possibility of servicing mega-yachts in our shipyards, the subject of a possible introduction of Islamic banking operations in Malta came up frequently, particularly in Saudi Arabia.

I know that Gordon Brown who is likely to assume the British premiership in a matter of days has been promoting this concept in British financial circles, particularly in the City itself.

The proposal also came up during the consultation process we had with certain interested parties on the MLP's draft foreign affairs vision statement.

Although I am not in a position to commit the party at this stage, I personally feel that a new Labour government should seriously explore the feasibility of introducing Islamic banking in Malta, in parallel to the ongoing financial services activities that have been developing on the island in recent years - primarily as a result of the long nurtured consensus on financial services that has existed between the two major political parties in Malta.

I was equally intrigued to recently read an article in The Times' Business by a relatively young lawyer advocating the introduction of such a new type of banking in Malta.

From the research I have conducted, there is nothing in EU legislation that prohibits banking or investment banking institutions from setting up sharia-compliant financial arrangements in member states.

Since there is no absolute standard for sharia compliance beyond meeting the subjective demands of would-be investors, and there is no governing body overseeing Islamic banking, standards vary from region to region and firm to firm.

In the past banks that helped companies perform these kind of transactions were few and far between.

Over the past decade, sharia finance has seen steady growth, so much so that the FT has recently chosen to describe it as a global industry. According to S&P's ratings agency there must be around $400 billion of Islamic financial products in the world, ranging from banking to mortgages, equity funds, fixed income, insurance, project finance, private equity and derivatives.

Major banks - including a particular bank currently operating on the island - are getting in on the sharia rush. I can cite at least four key international investment banks that all now offer sharia-compliant investment products.

A recent experiment in Malaysia has shown that when HSBC started offering sharia-friendly mortgages some three years ago, more than half the buyers were not Muslim.

The time is ripe for such initiatives because right now there are many Middle Eastern countries, companies and individuals flush with oil cash.

Sharia-compliant financial services are rapidly expanding in popularity, mainly due to increased oil wealth across Gulf Co-operation Council (GCC) countries; a council whose senior officials we also met during our recent visit to the Gulf.

The core issue at stake with Islamic banking is that you cannot receive or pay interest on borrowed money. For the simple reason that under Islamic sharia, any interest is usurious.

One important thing to bear in mind is that besides the prohibition on the payment and the receipt of interest, the activity being financed has to be compliant itself.

Experts on Islamic banking claim that Caribou Coffeeb which is one of the largest American firms, runs according to sharia business practices, although in actual fact the parent company is partly owned by the government of Bahrain.

There are strong indicators that the industry is growing by about 35-40 per cent annually.

Western specialists in the field have not only managed to come up with structures that are sharia-compliant but that are also tax efficient and enforceable within the jurisdiction where the transaction is being undertaken.

In the Gulf we learnt two important lessons. Not only the obvious - that they were cash rich and that they had high liquidity, but also that as a result of their booming economies it had become perhaps more central than ever for Gulf-based investor groups to diversify overseas.

After first exploring the US, they started to move over to Europe.

Financial experts claim that they are currently seeing a boom in sharia-compliant investments coming to Europe apart from the Far East.

Whether we do it through long established banks or through newly set up boutique investment banks, the important thing is that we must get our act together pretty fast and explore the feasibility of introducing such financial services in Malta too.

It should prove to be an excellent vehicle for attracting more and more Arab - particularly Gulf-originated - capital to our shores.

leo.brincat@gov.mt