Islamic Finance in Malta
Islamic finance in Malta is still largely untouched. So far, there have been few actions taken to introduce Islamic products in Malta such as when the MSE certified the stocks of several listed companies whose activities are shari’ah compliant and finance Malta has held several educational seminars on numerous shari’ah compliant products including shari’ah compliant funds.
For Malta to keep up its GDP growth year on year as it has been doing in recent years (5% annually as at 2016 (Eurostat)) it must begin look at opportunities in other sectors. Hence, Malta has a great opportunity to tap into the Islamic financial markets (Approx. USD1.9 trillion in 2016). Numerous advocates for finance in Malta have identified several reasons for Islamic companies to invest in Malta, including its geographical position, a very flexible Legislation yet robust regulatory framework, extensive double taxation treaties and growing financial sector (2017).
Getting started
Many scholars have suggested that the best way to get the ball rolling with regards to Islamic financial products is by the Maltese Government issuing an Islamic bond (or sukuk) to show that it supports Islamic finance in Malta. This will send a much superior message than if any other private company would issue an Islamic bond (or Sukuk). Furthermore, the Maltese bond market is very liquid with almost every bond issued in recent years oversubscribed. If the Sukuk would be properly marketed there is no doubt that this will also be the case. A sukuk issued by the government could be seen as a gateway into the Islamic financial markets and may attract numerous Islamic investors to Maltese shores.
I will be analysing the possibility of the Maltese government issuing a Sukuk al Mudaraba. Let us first define Sukuk al Mudaraba, a subclass of Sukuk al musharaka. Sukuk al mudaraba are certificates that represent ownership in projects or activities managed on the basis of mudaraba. In mudaraba contract, one of the partners or an outsider is appointed to act as the partner (or mudarib) who takes on the management of mudaraba operations. Mudaraba sukuk are issued by the partner (or mudarib), while the subscriber are the owners of mudaraba capital which is built up by the funds realized from subscription. The sukuk holders become the owners of the mudaraba assets and therefore are entitled to an agreed-upon share of the profits in their capacity as provider of capital (or rab al mal). Shari’ah permits trading in sukuk al mudaraba in secondary markets provided subscription is closed, sukuk are allotted, and operations are commenced in earnest.
A sukuk al Mudaraba issued by the government of Malta can be listed on the Malta Stock Exchange (MSE) or else on The European Wholesale Securities Market (EWSM). Furthermore, it would have to adhere to shariah law, Specifically, there are five prohibitions (Warren) that such a Sukuk need to adhere to:
Prohibition of paying interest (referred to as riba);
Prohibition against gambling or speculation (masir);
Prohibition against unnecessary risk (gharar);
Prohibition against taking unfair advantage (jahl); and
Prohibition against corruption (rishwah).
Geographical Position
With Brexit on the horizon, Islamic finance companies in the UK (which accounts for roughly 63% of all Islamic finance in Europe) may decide to relocate to Malta over other European countries as it has an advantage due to its Geographical location. Malta is geographically closer to Saudi Arabia, United Arab Emirates and Egypt (among others) than most European countries.
Flexible Financial Services Legislation
The Maltese financial Legislation is flexible yet a robust regulatory framework. Most scholars have suggested that Maltese legislation is comprehensive enough to deal with Shari’ah compliant financial products.
Double Tax treaties
Successive Maltese governments have sought to conclude double tax treaties with important trading partners as well as with emerging countries, to encourage the growth of international trade including that of financial services. To date, treaties are in force with over 70 countries and this policy is expected to continue in the future.
Growing Financial Services Industry
Malta is experiencing an ever-growing financial services industry, as can be seen by some statistics quoted by Kenneth Farrugia in a recent interview. In 2016, FDI was up by €9.5bn to €151.4bn of which 98% came from financial and insurance activities, retirement schemes were up from 36 in 2015, to 50 up to June 2017. Other indications that further highlight the success of the industry are the increase in investment services licence holders which improved from 149 as at December 2016 to 163 as at June 2017, the establishment of 60 new funds in the first six months of 2017, the registration of services providers which increased from 67 in 2015 to 158 in 2017. All these indicators amply show that the financial services industry in Malta is robust and is by no means showing any signs of weakness or fragility.
Main advantage for Malta
The main advantage for Malta would be tapping into an industry which has been growing at an annual rate of 15-20% and has an estimated value of $2 trillion as at 2014 (Scardino). This may in turn lead to an increase in other areas. For example, may lead to an increase in the number of Muslim high net worth individuals that would like to participate in Malta’s Individual Investor Program.
There are a few disadvantages that come with issuing a Sukuk al Mudaraba including the following:
As the key element for attracting investors is the credit standing of the obligor, it may be difficult to tap this market for corporates or sovereigns with an inadequate credit rating.
Unlike the conventional bond market, the standardisation of documents for sukuk issuance has been slow to develop and this can have adverse cost implications.
From transaction to transaction, to the extent that the structure used for the sukuk departs from the typical structures already well recognised in the market, the involvement of the sharia scholars is necessarily required, In the case of Malta it is likely that this expertise will have to be imported. This can add some additional cost and an element of unpredictability to the transaction structuring process.
Conclusion
Malta should take a similar innovative approach to Islamic finance as Luxembourg, who was the first Eurozone country to issue a sovereign Sukuk. Furthermore, Luxembourg is the leading non-Muslim domicile for Sharia-compliant investment structure and issuance of Sukuk.
Luxembourg is the largest Islamic investment fund domicile in non-Muslim countries with over €5b of assets under management. Latest figures show that 49 Sharia-compliant funds are domiciled in Luxembourg and more than 12 Sukuk are listed on the Luxembourg Stock Exchange (LuxSE) (EY)
Bibliography
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Eurostat. (n.d.). https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/malta/economic-forecast-malta_en.
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FinanceMalta. (n.d.). https://iconfinancemalta.blob.core.windows.net/libx-128-public/Tags/Islamic%20Finance/FM%20Fact%20Sheet%20-%20Sukuk%20and%20the%20MSE%20(Islamic%20Finance%202015).pdf.
FinanceMalta. (n.d.). https://www.financemalta.org/sections/islamic-finance/key-opportunities-islamic-finance/.
FinanceMalta. (n.d.). https://www.financemalta.org/sections/islamic-finance/key-opportunities-islamic-finance/.
Scardino, A. (n.d.). https://www.timesofmalta.com/articles/view/20170430/business-news/Introducing-sukuk-bonds-in-Malta.646671.
Warren, N. (n.d.). 1. Prohibitions of sukuk retrieved from https://www.financemalta.org/sections/islamic-finance/financemalta-islamic-finance-articles/detail/the-world-of-sukuk-2017/.
