Malta can become Bahrain of the Mediterranean

In its evaluation of the benefits that could be generated through the opportunities offered by Islamic Finance, Malta should include the big forward-looking challenge of developing and projecting itself as the 'Bahrain in the Mediterranean'.

In recent years, Bahrain has rapidly become a global leader in Islamic finance, playing host to the largest concentration of Islamic financial institutions in the Middle East. Presently, there are 24 Islamic banks and 11 Islamic insurance companies (takaful) operating in the kingdom.

In addition, Bahrain is at the forefront in the market for Islamic securities (Sukuk), including short-term government Sukuk as well as leasing securities. Its central bank has played a leading role in the introduction of these innovative products (www.cbb.gov.bh).

Like many of the Middle Eastern states, the Bahraini government receives most of its revenues from the oil industry which obviously puts it at an advantage. However, Malta should not be disheartened because it is the ideal location in the Euro Med area to become the only centre that has a full capital market.

Given its advantageous situation, there is no income tax per se in Bahrain. But in June 2007, the government introduced a one per cent 'social insurance tax' on the salaries of both nationals and expatriates living in the state to help fund unemployment benefits for all workers.

A municipal tax is payable by individuals or companies renting property in Bahrain. The rate of the tax varies according to whether the property is unfurnished residential property, furnished residential property or commercial property.

Employers who engage more than 10 employees, irrespective of their nationality, must pay up to 10 per cent of the employee's gross income to social welfare taxes. Currently, there are no other related taxes in Bahrain (www.ailo.org/downloads/Bahrain.pdf).

Given this scenario and considering the advantages offered by our tax system, Malta may well aim to comfortably become the Mediterranean centre for Islamic Finance. Not only that - it can compete globally with Bahrain given that Malta can comfortably compete with these costs providing the same or even better value-added service. However, Malta certainly needs to invest to achieve this.

If one focuses exclusively on the situation in the Mediterranean EU member states, one will immediately recognise that there is currently no other EU country that may offer Shariah investors a competitive market from a cost efficiency to a tax perspective better than Malta. Unfortunately, our system discriminates against certain Islamic finance transactions.

The government would be very wise if it took all necessary steps to correct this situation as early as possible. Regulatory frameworks and policies should be an important driver towards ensuring that Malta succeeds in penetrating this market.

Market growth in the sector may be stimulated by adaptability and flexibility in the regulatory approach. For instance, the free movement of currency such as the US dollar and the employment of foreign experts may enhance resources and facilitate investment. Malta can achieve this by adopting appropriate regulation as other governments did to adjust to developing international best practices and hence create a level playing field for Islamic finance.

The Central Bank of Bahrain has installed a comprehensive prudential and reporting framework, tailor-made for the specific concepts and needs of Islamic banking and insurance. The rulebook for Islamic banks covers areas such as licensing requirements, capital adequacy, risk management, business conduct, financial crime and disclosure/reporting requirements.

Similarly, the insurance rulebook addresses the specific features of takaful and re-takaful firms. Both rulebooks were the first comprehensive regulatory frameworks that dealt with the Islamic finance industry.

In addition to the numerous Islamic financial institutions active in its financial sector, Bahrain also plays host to a number of organisations central to the development of Islamic finance, including: the Accounting and Auditing Organisation for Islamic Financial Institutions; Liquidity Management Centre; the International Islamic Financial Market; and the Islamic International Rating Agency.

Malta can benefit in attracting investment by for example establishing a good relation with the LMC. It was established to address the global liquidity management needs of Islamic financial institutions. LMC facilitates the investment of surplus funds of Islamic banks and financial institutions. Malta's government may create the necessary instruments, with its upcoming capital projects, to attract such funds into Malta while enhancing the country's potential as an Islamic finance centre.

Bahrain's Central Bank has established a special fund to finance research, education and training in Islamic finance (the Waqf Fund) and is active in working with the industry and stakeholders in developing industry standards and the standardisation of market practices. At this stage, such a move may be premature for Malta. Nonetheless, together with the neighbouring countries and/or in collaboration with the Central Bank of Bahrain, Malta may start aiming at having a similar instrument to fuel its potential further.

Malta has been discussing Islamic finance for nearly three years now. The financial services industry, the constituted bodies, the main political forces, various accountants and lawyers are all seeing that there are many benefits to be acquired through targeting this strategic niche correctly. What is holding Malta back?

Mr Buttigieg is managing director at Erremme Business Advisors and chairperson of the Malta Institute of Management education arm.