The managing director at the Malta Institute of Management, Reuben Buttiġieġ, talks to Gerald Fenech from The Malta Independent on how Islamic Finance works and the benefits it can bring to Malta if the country taps into the considerable commercial opportunities that are available.
The term Islamic Finance has been gaining currency recently but few know about the considerable opportunities of this system. What exactly is Islamic Finance?
Islamic Finance is based on Sharia law which to be fair are quite common to various religions. These include no investment in prostitution, immoral activities or companies which deal with the production of pork as obviously Muslims cannot eat pork. Money is not considered as a commodity in this system and speculation or charging of interest is not allowed. However even the Catholic religion speaks about the imposition of interest and this has now become accepted within reasonable limits. Similarly, both religions talk about social responsibility. In fact if one analysis the modus operandi practiced by APS Bank one finds that profit maximisation may not always be the prime objective. Islamic Finance is not actually linked to a religion but is a similar way of doing business to conventional methods with certain limitations.
What are the main pillars of Islamic Finance?
The main pillar is banking followed by insurance and capital markets. The main differences in banking may be explained through the fact that Islamic banks provide a house loan interest free as the property is initially purchased by the bank and then sold at a profit to the buyer who then pays back the loan over a period of time but interest free. One of the advantages in this type of transaction is that there is certainty as one does not have to worry about interest rate fluctuations. Banks also invest in projects directly with an equity stake instead of loaning out to individual companies so profit/loss sharing is carried out here. Banks also provide diverse methods to divest their holdings which may include a repayment programme as well as possible equity flotation.
The major part of Islamic banking is actually project financing and is not aimed at the individual.
Islamic banks offer reasonable time frames to pay back loans if an individual or a company goes bankrupt. How does a bank survive with such methods?
First of all, Islamic banks are quite rigorous and cautious when lending money so the element of risk is considerably less than in other conventional situations. This is also a good thing as our society these days actually encourages credit beyond one’s means. An interesting study which has come to light recently shows that this method of financing is not new to the Mediterranean especially in Sicily and Malta. A typical example of banks investing directly in projects was the Valletta Investment Bank which had similar methods of financing. The other pillar is insurance where policyholders put their money into a fund which eventually covers costs but the money held is not owned by any insurance company but is actually owned by the policyholders. The fund will then appoint an operator to manage the fund. The operator is usually paid a fee or else a profit sharing arrangement on the returns of investments is agreed upon. The operator can actually be called to replenish the fund if the fund is at a deficit. Re-insurance has become an issue, with many Islamic Insurance companies turning to conventional re insurance to carry out certain transactions.
Malta actually had a similar method to Islamic insurance in the form of confraternities where the one dedicated to St Joseph eventually became a fully fledged investment fund which evolved into the APS Bank of today.
What about funds and capital markets?
Islamic companies cannot issue bonds strictly speaking as they cannot borrow money with interest. Furthermore, one cannot invest in companies which have a certain amount of debt – this is normally around 40/45 per cent depending on the screening process. The major stock indexes today such as Dow Jones and FTSE actually have Islamic indexes which are operated according to this method and this is growing considerably. Another controversy in the Islamic world is entertainment as one cannot invest in that sector although the rules have been relaxed somewhat for hotels and other similar areas.
An area of considerable interest and which is also growing considerably is the Islamic trust which can be beneficial to Malta as some countries are stalling to implement reforms with a taxation burden which is quite heavy. For example inheritance tax in Italy is quite heavy so the opportunity for Malta to attract some of these trusts here is substantial.
So what can Malta gain from Islamic Finance and is enough being done to raise awareness on the issue?
In most Mediterranean countries, Islamic Finance is basically nonexistent so these countries are using conventional banking methods. However in countries such as Morocco there is a fear that as soon as Islamic Finance is introduced, the conventional banks there could go bankrupt so this offers a window of opportunity for us as other countries dither. We can use Malta through Special Purpose Vehicles to take the opportunity to offer Islamic banking to those who wish to practice it. Another country where there are opportunities for this method is Libya where the possibility of Islamic Finance has only recently started to be discussed.
The Muslim religion is also the fastest growing religion in the world so opportunities will increase and not decrease. Countries such as Italy also face cultural problems to introduce Islamic Finance so we can start using Maltese financial institutions to tap into this sector.
I believe that an Islamic retail bank in Malta is a bit off the mark at least for the time being but there are considerable opportunities in project financing which we can start tapping into. To be fair, the Prime Minister has committed himself a number of times to this vision but so far nothing much has been done to move the concept forward. The MFSA had also published a consultation document on Islamic Finance and although I am aware that there was positive feedback from the industry, nothing has happened either. The direction we seem to be taking is also slightly misleading as we are trying to put a system of banking into another system of banking but this will not work out. We do have distinct parts of legislation which can be used but unfortunately nothing much is being done to advance the cause. A typical example is what is happening in Luxembourg which is flourishing considerably in the Islamic Funds sector and we have an advantage over this country as they only go for considerable large amounts in funds.
We can attract smaller funds here to Malta and this would not be in competition with larger financial centres. Insurance and Special Purpose Vehicles are other instruments which we can promote and we have advantages over other countries in the sense that we are onshore and EU members and not offshore destinations. Malta could issue what is called a ‘Sukuk’ or an Islamic bond which could finance say the Cirkewwa port which is sold to a group of investors who then rent out the port back to government and with a separate contract drawn up committing the owners to sell the port back to government after a fixed period of years. That way government will not pay interest but will only pay rent. This transaction will eventually put Malta on the Islamic finance map and this will definitely create substantial interest in the country as an investment destination.
There is considerable hunger for Sukuk investments so this is a window of opportunity waiting to be opened. Our stock exchange could also develop considerably in this area where transactions in Islamic equities and investment instruments could happen with even a possible Islamic Finance Mediterranean Stock Exchange in the offing. Why Malta is taking it easy, I fail to understand.
