Islamic finance in Malta has now been in the spotlight for nearly three years. In 2008, the Malta Financial Services Authority had issued a consultation document to which it received significant feedback. This exercise was expected to result in a report to the Minister for Finance for his consideration, towards the introduction of the necessary legislative changes to move on.
Yet, nearly two years have passed without anything further being communicated to the industry or to stakeholders.
MFSA's approach to date appears strange. One would expect the regulator to energetically encourage and support all initiatives aimed at seeing, as early as possible, Islamic finance on the same level playing field of conventional finance.
Creating a working group predominantly made up of individuals from the conventional finance field to analyse a subject which is totally different from their line of expertise is far from an ideal choice. Other countries have involved Islamic finance experts in similar consultations on the subject.
The ideal scenario would have been a working group with experts from both sides or, even better, composed of people with sound knowledge of both sectors.
Of course, this comes at a cost and depends very much on the strength of MFSA's willingness or otherwise to invest in the growth of this industry.
As far as the stakeholders are concerned, not even the Commissioner of Inland Revenue and the Commissioner for VAT were involved in the consultation exercise.
The working group on Islamic finance was just a first step.
The international workshops organised by the Malta Institute of Management, the Malta Employers Association, and the Malta Union of Bank Employees, which saw the participation of international highly reputable experts in the industry, clearly indicated that possibilities already exist if Malta wants to take the necessary action and avoid losing precious time in tapping into this lucrative market.
One of the experts present at the workshops, identified channels through which the government may facilitate Islamic finance without having to introduce drastic legislative changes. For instance, certain main concerns, such as that of Article 15 of the Banking Act, may well be solved through appropriate contractual arrangements in Shari'ah Contracts.
This, in itself, is further indication on how advisable and critical it is to involve various experts in any consultation.
The approach taken to date may also give rise to certain questions on whether Malta is, in actual fact, doing what it should be doing.
Article 40 sub-article (1) of the Constitution of the Republic of Malta states that "All persons in Malta shall have full freedom of conscience and enjoy the free exercise of their respective mode of religious worship". Nonetheless, our Income Tax Act, as it is, is basically rendering certain Islamic finance transactions rather complicated.
Is this right? Is this what the government wants?
One needs to also keep in mind that Article 40 of sub-article (3) of the Constitution of Malta further states as follows: "Nothing contained in or done under the authority of any law shall be held to be inconsistent with or in contravention of sub-article (1), to the extent that the law in question makes provision that is reasonably required in the interests of public safety, public order, public morality or decency, public health, or the protection of the rights and freedoms of others, and except so far as that provision or, as the case may be, the thing done under the authority thereof, is shown not to be reasonably justifiable in a democratic society."
I want to believe that the Ministry for Finance would be more than happy to consider introducing certain changes in the legislation to ensure the facilitation of all possible investment, also through clearing any belief-related difficulties there may be, and so further help to increase the revenue of the country.
Other European jurisdictions have been working actively to ensure they reap the best possible fruit from the Islamic finance sector.
There have been continuous massive changes in Luxembourg to facilitate the Islamic finance industry. Apart from the substantial changes that have already been introduced, the UK is considering measures on how to become the global hub of Islamic finance.
France wants to compete with the UK in spite of strong political difficulties. Italy and Germany are expected to be the positive surprise for Islamic finance this year, as the discussions are heading to massive activity. Gibraltar and Cyprus have initiated activities in the sector. Guernsey and Jersey are registering a number of conduit companies.
I have personally presented Malta's case in a few of the most renowned international conferences on Islamic finance. The feedback from the industry was overwhelming.
The industry is eagerly waiting for clear and forward-looking signals from the Ministry for Finance. It is keenly waiting for Malta to act, also in this sector, according to its historical role of bridging cultures and nations. It is fervently waiting for Malta to ensure that all its doors are open as required by the letter and the spirit of its constitution. It is earnestly waiting for Malta to revive a system of finance that, in actual fact, as evidenced by the background of certain organisations in Malta, is not new to the country.
Malta has the potential to excel in the sector. However, it needs to urgently send some positive concrete indications. A simple change in the Income Tax Act is bound to be considered as a major step forward. Furthermore, the issuance of a sovereign Sukuk by the government would amount to a key marketing instrument. Such an initiative would be a guaranteed success for Malta.
The author is managing director of Erremme Business Advisers.