The Potential - Islamic Finance

Italy

Malta may be primarily used by Islamic Finance Institutions to reach the Islamic community in Italy. Around 1.4 million Muslims live in Italy and there are 70 thousand companies set up by citizens coming from Arab countries. However, an Islamic bank is far from appearing in Italy, despite the fact that investors are saying they are ready for it. Analysts are of the opinion that Italy does not have the tax and regulatory framework to deal with the basic products of Shariah Finance.

In this despite, Italy has seen the first Murabahah deal which has been conclded in Pavia. It featured the acquisition of an industrial building by a special purpose vehicle and its disposal to a local Muslim Association for its use as a cultural center. It seems that this will be followed by an Ijarah wa iqtina transaction. However, the double stamp issue made this transaction very costly

Malta may offer the solution to mitigate such double taxation. Given the jurisdictional rules that Malta has together with its Double Taxation agreement in Italy, the above mentioned Murabahah deal could have avoided the double stamp rules in Italy. This may have been achieved through a holding company in Malta that has a 100 percent subsidiary in Italy. Henceforth, Islamic Financing is possible in Italy through the use of Special Purpose Vehicles in Malta. It must be emphasised that the costs of maintaining special purposes vehicles in Malta is considered to be highly cost efficient.

North Africa

After years of watching from the sidelines, North Africa has begun to embrace Islamic finance. Growth could be far slower than in the Middle East given resistance from political and business elites and more flexible views on which loans and investments qualify as Islamic, analysts predict.

As previously stated, Malta has a Double Taxation Agreement with Libya. This allows Malta to act as channel for Shariah Financing in Libya. The Malta and Libya relations have been traditionally very strong with a clear mutual political sympathy and understanding. In fact Malta, has acted as a strong base for conventional banks to reap the opportunities offered by Libya. Evidence of this is the strong presence of Turkish Banks and Austrian Banks in Malta as well as the representation offices in Libya of Malta banks.

Malta can in this sense assist Islamic Finance Institutions to reap the benefits that Libya offers. Furthermore, through this opportunity Malta may be also giving a social contribution to various North Africans that do not have access to financing.

Apart from Libya, Malta is also an ideal location to reach other North African Countries such as Tunisia.

The Domestic Market
There is a tremendous demand in Malta for project financing that Islamic Financial Institutions may tap into. This is particularly so in the Real Estate as well as other Shariah Compliant projects. IFIs that are looking for investment opportunities should look to Malta as opportunities are guaranteed. In this sense, Malta can be used as a test market in the EU. Given its size IFIs can start testing the waters through smaller investments which would have the required profits and the social contribution necessary.
Malta - The Opportunity

Apart from being in the ideal strategic location Malta offers various other advantages. Given Malta’s Tax Regime, Islamic Financial Institutions establishing in Malta shall be at an advantage with respect to achieving tax efficiency as opposed to those establishing in other EU member states. This is not only with respect to various special purpose vehicles as aforementioned but also for example with respect to the registration of Islamic Funds in Malta.

Establishing in Malta also means the possibility of accessing the other 26 EU member states. Through the integration of financial markets in the EU this is becoming all the more possible. The so called EU passporting where an institution authorised in an EU country may offer products throughout the EU without the need to have a separate authorization renders Malta an even more attractive place for Islamic Financing.

Malta offers an efficient cost structure with highly trained multi-lingual professionals in financial services. The Malta Institute of Management is also training professionals in Islamic Finance to ensure that the necessary resources are available in Malta. This is being done in collaboration with International organisations.


Shariah Funds – The Malta Financial Services Authority (MFSA) is of the opinion that Shariah funds may be set up immediately as there are no major changes necessary to Maltese legislation The MFSA in its analyses has considered various types of funds including Ijarah Funds, Murabaha Funds and Commodity Funds. Particular structures through the use of special purpose vehicles or the use of mixed funds are also possible. Even in these cases the Malta tax system puts certain Islamic Funds at a level playing field.

Islamic Banking - With respect to Islamic Banking as opposed to Shariah Funds the Maltese Legislation will be going through some legislative changes in order to ensure that they accommodate the operational structure of a Shariah Compliant Bank and hence granting a fully fletched licence. Changes in the Banking Act and the Financial Institutions Act are expected shortly. Furthermore, there are Income Tax Act, Duty on Documents and Transfers Act and VAT Act changes that are being proposed in order to ensure that Shariah Institutions are not at a disadvantage.

The analysis engaged into so far by the MFSA includes various types of contracts including Musharaka, Mudaraba, Murabaha, Bai’muajjal, Ijara, Bai’Salam. The various types of bank accounts have also been analysed. The MFSA seems to see no difficulty in adapting the current legislation to enable the functionality of these contracts. The Financial Services Industry has proposed evaluation and analysis of other types of contracts as well.


Takaful and Sukuk - These are not new concepts to Malta particularly Takaful. A similar concept existed in Malta with the co-fraternities. The origins of the APS Bank (the bank owned by the Church in Malta) are actually based on similar principles as Takaful. No major changes to the legislation are expected. It is the opinion of the author that both Takaful and Sukuk are already possible in Malta. There might be certain tax implications with respect to certain structures which may be dealt with directly with the Commissioner for Inland Revenue.
Conclusion
As the legislation stands there are various Islamic Finance Transactions that can take place in Malta both in the domestic market as well as in the Euromed region. On the other hand the Maltese Authorities are actively working in order to ensure that more Shariah Compliant transactions are facilitated.

Islamic Financial Institutions establishing now may benefit of the professional enthusiasm that currently exists towards the sector in Malta and its neighbouring partners. There are various structures already possible and there will be more to come.

Malta is an advantageous location for Islamic Finance in the Mediterranean and Islamic Financial Institutions are encouraged to benefit from the opportunities this country in the Mediterranean provides.

Thanks: Reuben M Buttigieg