The government has promised to enable Sharia-compliancy in Malta in order to attract more Muslim investment. But what does this mean for the Maltese and how can we benefit too?

Islamic finance works on simple and common religious principles, those of social justice and mutual assistance. But within this structure, once money is not seen as a commodity, interest is prohibited - ruling out loans as we know them.

Islam also discourages uncertainty in contracts, so every step of an agreement between two parties must be spelled out beforehand. This disallows conventional insurance, where the amount you pay an insurance agency every year depends mostly on things that cannot be planned.

Reuben Buttigieg, chairman of the training and development division of the Malta Institute of Management, who has spearheaded the discussion of Islamic finance in Malta, believes the Sharia alternative to conventional banking can be ideal, not only for Muslims but for anyone who is willing to give it a try.

When it comes to home loans, he explains, a person does not borrow a sum of money from a bank only to pay it back with interest. Instead, there are a number of options that can be used.

One such option is for the bank and the person to enter into a form of partnership and buy the property together. The individual would then rent the property from this partnership and his share of the rent would serve to acquire the bank's share gradually.

A second option is for a bank to purchase the property and then sell it to you at a margin. You then pay the amount of the house over a number of years through an interest free loan.

In the first case, the bank is forced to be extra cautious that you do not overspend because the risk is being shared - and if the price of property drops, it will do so for both. Another benefit is that if, for some reason, you cannot afford the repayments, your house can be sold and the profits can be divided proportionately.

The same applies for business projects. The bank becomes your business partner and supplies the money you need to start up a business, while you invest your time and energy. Once you start to make a profit, you begin buying out the bank. So if your business goes bust, you lose time but not your own money - making the bank extra cautious about your performance.

When it comes to insurance, things are even simpler. A group of people can simply come together, each put in a sum of money into a fund and make an agreement as to what this fund can be used for. Within this structure, they can choose to insure anything and whoever needs the money takes from the fund - which is, in turn, managed by an operator at a small fee.

The good thing is that if no one needs the money by the end of the year, it can be simply withdrawn, invested or put back in, meaning it remains yours rather than going into the pockets of an insurance agency never to be seen again.

For this and other reasons, Islamic finance institutions have sailed through the economic crisis because the structure is more resistant, given that in most transactions there is a tangible asset.

Obviously, all of this is optional, and when Malta enables Sharia-compliancy, such options will be provided over and above the conventional banking system. But even non-Muslims can make use of Sharia banking, as is being done in the UK, which is the only EU country that is successfully catering for such a market.

However, for Sharia-compliancy, certain laws must be changed or adopted so as to remove all forms of discrimination that make it impossible to work within such a framework.

For instance, banks need to be allowed to deal in property and if a bank is buying and reselling the property to people it does not make sense for duty and tax to be paid twice.

Due to all the benefits and security it provides, Islamic banking is the world's fastest growing sector in world finance, with over 300 Islamic financial institutions in 70 countries. However, few of these are based in Europe and north Africa, so Malta has a strategic position to tap a huge and untapped market.

So once Malta gives the go-ahead, it will not only attract widespread investment and employment but it can also be used as a bargaining tool to get double-taxation agreements with many African and Middle Eastern countries.

cperegin@timesofmalta.com