NEWHORIZON

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IIBI Lectures <strong>NEWHORIZON</strong> Jamatul Thani - Sha’ban 1434 example, in Libya you are not allowed to have a foreign bank buy something in Libya and sell it to another Libyan. All the countries surveyed will give tax relief for finance costs; however there is no complete clarity about when you get the deduction. Let us say you do a murabaha transaction that is 18 months long, are the finance costs taken on the day you do the transaction; is it spread over the 18 months? There is no consistency about when you get the deduction. Although only Turkey and the Qatar Financial Centre have rules on sukuk, there are exemptions in other countries. For example, in Kuwait has taxes but they do not apply them to transactions where the company is wholly owned by GCC shareholders, which of course includes Kuwaiti shareholders. Apart from such exemptions and Turkey and the QFC, if you try to do a sukuk transaction the taxes “kill you” making it prohibitively expensive to do them. Some countries such as Saudi Arabia have done sukuk transactions, but it is likely that this is a function of things such as special government dispensations. The overwhelming message is that the tax systems of these countries are so unsophisticated that they simply have not thought seriously about Islamic finance. Malaysia and UK Comparisons Malaysia and the UK have thought about Islamic finance in a serious way; they have addressed the tax issues and equalised the treatment of Islamic and conventional finance. Malaysia and the UK have, however, done this in completely different ways. In Malaysia, a Muslim majority country with an explicit recognition of Islam, the key message is that you have to have government pre-approval of the Islamic finance transaction through one of the approved, standardised transactions that they have defined. If you fall within that defined transaction structure, then you get favourable tax treatment. The UK’s approach is completely different. The UK is a secular country that does not want to have religion in its tax code; legislation is religiously neutral. The UK looks at what Islamic bankers do; analyses the transactions in great detail and then finds a way of reproducing those transactions in normal law without any reference to Arabic or religion in religiously-neutral language. The drawback is that it takes a lot more drafting, a lot more words and you can end up with something that makes sense only to tax lawyers. Malaysia and the UK both get to tax neutrality but in completely different ways. Policy Recommendations The Malaysian model is far more appropriate for the Middle East and North Africa than the UK model for several reasons. Firstly we are talking here about Muslimmajority countries, which do not have a problem about recognising Islam in their legal systems. It is feasible, therefore, to have central certification of Shari’ah transactions, (which actually these countries generally do not have) and it then becomes quite straightforward to draft tax laws. Where Next? Assuming that sponsorship is forthcoming, it would desirable to have a second phase of this study, which would try to get responses from those countries that did not participate in this study. It would also potentially look at other structures and focus on consumption taxes such as VAT and zakat. If tax laws cannot be made to work for these consumption laws as well, then sukuk, for example, become difficult. When the results of the survey were presented in Oman, there were some useful comments from the Saudi tax administration, because they have a single government department responsible for tax and zakat. It is Mohammed Amin is an Islamic finance consultant. Previously he was a partner in PricewaterhouseCoopers LLP and led their Islamic finance practice in the UK. He is a chartered accountant, a chartered tax adviser and a qualified corporate treasurer; a Council member of the Chartered Institute of Taxation and a member of Editorial Advisory Board of New Horizon, the magazine of the Institute of Islamic Banking and Insurance Amin has spoken on Islamic finance in over 20 cities covering every continent except Antarctica. Many of his articles and presentations on Islamic finance can be found on his website www.mohammedamin.com. essential to determine how zakat should be applied in Islamic finance transactions and get a model that works, at least within a single country, so that a conventional financial transaction and an Islamic one get the same zakat treatment. A second phase would also take a closer look at double tax treaties and at how Islamic finance is regulated. Should Islamic banks be regulated in the same way as conventional banks or are different regulations needed? The UK model is crystal clear here; it regulates Islamic banks in the same as it regulates conventional banks. As far as the UK is concerned they are all just banks. Shari’ah governance would be another strand of a second study. What models do these countries apply? A gut feeling is that they do not have a model. The value of this report is that it is based on hard facts. We can say meaningful things about what happens in these countries. March: Form over Substance in Islamic Finance Shaikh Muddassir Siddiqui addressed the issue of whether Islamic finance is really just the reverse engineering of conventional finance, designed to appear to be Shari’ah compliant. To achieve this appearance of Shari’ah compliance contemporary modes of Islamic financing turn every financing arrangement into a trade contract with multiple levels, which in turn leads to problems when disputes arise and courts have struggled to reconcile between the substance and the form of contracts used by Islamic financial institutions. He concluded that the use of fictitious contracts is the main source of the lack of clarity, conflicts and the credibility deficit in Islamic finance. He went on to propose potential solutions to the problem through permissible fixed return capital guarantee transactions, which would result in clarity both in the Shari’ah principles and in their application; harmony between form and substance and between rhetoric and action; the advancement of the true objectives of Shari’ah and easier dispute resolution, because contracts have fewer steps. The content of his lecture is covered in depth in a separate article in this issue, ‘Form and Substance’. 44 IIBI www.islamic-banking.com
<strong>NEWHORIZON</strong> April to June 2013 IIBI NEWS Diary of Events May 13 14: 3rd Annual World Islamic Finance Conference, Dubai Key topics at this conference will include standardising global Islamic banking regulations, building a robust regulatory framework for Islamic finance and updating and upgrading information technology to enable growth. Contact: Karthik Naik Tel: +9714 609 1570 Email: karthik.naik@fleminggulf.com www.fleminggulf.com 16-17: 10th IFSB Summit, Kuala Lumpur The conference titled ‘The Future of the Islamic Financial Services Industry: Resilience, Stability and Inclusive Growth’, hosted by Bank Negara Malaysia, will be held in Sisang Kijang, Kuala Lumpur a centre of excellence for banking in the region. The keynote address will be given by H.E. Dr Ahmad Mohamed Ali Al-Madani, President of the Islamic Development Bank. The conference programme is dominated by discussion of global regulation and its impact on Islamic finance, as well as cross-sectoral regulation within Islamic finance. Contact: Yazmin Aziz Tel: +603 9195 1426 Email: yazmin@ifsb.org www.ifsbmalaysia2013.com 27-28: 9th Annual World Islamic Funds and Financial Markets Conference, Bahrain This year’s conference will focus on the issues of overcoming the challenges facing the Islamic asset management industry and will analyse key initiatives that need to be taken to broaden the international base of Islamic investments. Sessions will include discussions of how to adapt new global financial standards to the Islamic investment industry, improving the competitiveness of Islamic funds, identifying the main drivers for growth in the Islamic investment industry and improving standardisation across Islamic capital markets. Contact: Edwin Johnson Tel: +9714 343 1200 Email: edwin@megaevents.net www.megaevents.net June 3-5: 4th Annual World Islamic Banking Conference: Asia Summit, Singapore The theme for this year’s conference is ‘Bridging the World of Islamic Finance: Boosting International Linkages and Cross- Border Deals’. Key topics will include the role of Islamic finance in facilitating inter-regional trade and investment flows, supporting the further growth of Islamic finance in Asia and internationally, internationalising Islamic capital markets, Sukuk as a driver of cross-border financial flows, reforming the regulatory and supervisory framework to enhance global connectivity and promoting international Shari’ah convergence to support industry globalisation. Contact: Sophie Maclean Tel: +9714 343 1200 Email: sophie@megaevents.net www.megaevents.net 10-11: 4th Asia Islamic Banking Conference, Kuala Lumpur This conference will cover issues such as strategic marketing, corporate and retail banking and human capital issues in the Asia Pacific and surrounding regions. There will be a particular focus on Islamic finance Malaysia, Thailand and Sri Lanka. Speakers include Faizal Salieh, CEO and Managing Director of Amana Bank, Sri Lanka’s only licensed Islamic commercial bank and Shah Fahad Yousufzai, Vice President and Head of Strategic Marketing and Product Development at the Islamic Bank of Thailand. Contact: Karthik Naik Tel: +9714 609 1570 Email: karthik.naik@fleminggulf.com www.fleminggulf.com 12-13: 7th Annual Sukuk Summit, London With a keynote speech by the Lord Mayor of London this two-day conference will take a look at a wide range of sukuk markets and opportunities including sessions on opening up new markets in Europe and Africa; the implications of Turkey’s debut sukuk and the potential impact of Kazakhstan’s sovereign sukuk for neighbouring countries. Contact: ICG Events Tel: +44 (0)20 8200 9002 Email: info@icg-events.com www.sukuksummit2013.co.uk September 13-15: 7th Annual Three Day Workshop, London Titled ‘Structuring Innovative Islamic Financial Products’, this annual fixture has traditionally been held in Cambridge. This year it moves to London and is being hosted by Ernst & Young UK and supported by AAOIFI Bahrain, ISRA Malaysia and CISI UK. The three-day workshop in London will familiarise participants with issues and best practices with regard to structuring Islamic financial products, giving particular attention to improving and updating the understanding of the Shari’ah requirements and the moral and social objectives during the product development cycle. The workshop will be led by Dr Salman Khan, head of the Shari’ah office in a leading GCC bank. Contact: Farhan Quadri Tel: +44 (0)20 7245 0400 Email: farhan.quadri@islamic-banking.com www.islamic-banking.com October 29 31: 9th World Islamic Economic Forum, London This will be the first time this event has been held in Europe. It will take place at London’s Excel Centre and the organisers have indicated that the format will be adapted to increase the level of delegate participation. Islamic finance is just one strand in this event which also covers topics such as infrastructure development, technology and education. Programme details are not yet available. Tel: +603 2163 5500 Email: enquiry@wief.org www.wief.org www.islamic-banking.com IIBI 45
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Page 49 and 50: Deal not unjustly, and ye shall not

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