IRELAND plans to become the first European nation to sell sovereign sukuk — Islam-approved financial certificates — as its equal tax treatment for Islamic-finance products attracts investors.
The Government has agreements with more than 60 countries to avoid double taxation on Islamic transactions, Micheál Smith, the south-east Asia director of IDA Ireland, said.
Islamic finance assets around the world may rise about 16% to €1,240 billion this year, Raj Mohamad, managing director at Five Pillars, a consulting firm based in Singapore, told Bloomberg Television yesterday.
While plans to sell sukuk by Britain, France and Luxembourg have stalled, Mr Smith said Ireland will push ahead with a sale.
“Ireland will be going back to the bond market and a sukuk is an option when conditions are right. We also hope to form more working groups with Muslim countries such as Malaysia to build up a critical mass of expertise as the objective is for Dublin to become a centre of excellence for Islamic finance.”
Ireland introduced tax legislation for products that comply with Islam’s ban on interest in 2010, Mr Smith, who is based in Singapore, said.
The Central Bank has a Shariah team overseeing its Islamic funds, which total about €390m under management.
The Irish Stock Exchange listed its first sukuk in 2005 and Ireland is a popular choice for sales because the nation offers a “relatively inexpensive” and timely listing process, he said.
The Government last sold bonds in September 2010, the year it had a deficit that was the highest as a percentage of gross domestic product in the developed world. The Department of Finance estimates the ratio dropped to 10.1% of GDP in 2011 from 31% the previous year.
CIMB Group Holdings, the world’s biggest sukuk arranger, said this week that it got approval to set up the first Shariah-compliant equity funds from Malaysia in Ireland.
Ireland’s bid to become an Islamic finance hub received a boost in October when Goldman Sachs Group got approval from the nation’s central bank to list its $2bn (€1.55bn) sukuk programme. The planned sale has attracted criticism among Islamic scholars, with some saying the proceeds may not be used according to Shariah law.
CIMB-Principal Islamic Asset Management, based in Kuala Lumpur, chose Ireland for its Islamic equity funds because there’s no double taxation and no withholding tax on interest payments, Jim McCaughan, chief executive of US-based venture partner Principal Global Investors, said on Monday.
An initial investment of $20m (€15.5m) will be put into three funds that will open for subscription next month, he said.
“We expect interest from Europe, Malaysia and more importantly the Persian Gulf and other Muslim countries,” Mr McCaughan said. “People are getting wealthier and want to diversify their funds.”
Global sales of sukuk, which pay asset returns instead of interest, total €4.7bn this year, compared with €500m in the same period in 2011, according to data compiled by Bloomberg. Offerings reached a record $36.3bn last year, surpassing the $31bn raised in 2007.
The difference between the average yield for sukuk and the London interbank offered rate, or Libor, narrowed two basis points to 299 basis points yesterday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.
The average yield has climbed nine basis points, or 0.09% point, this year to 4.08%.
Shariah-compliant bonds have dropped 0.1% in 2012, according to the HSBC/Nasdaq index, while debt in developing markets declined 0.2%, JPMorgan Chase & Co’s EMBI Global Composite Index shows.
The Bloomberg Malaysian Sukuk Ex-MYR Index of foreign currency Islamic debt sold by companies in Malaysia rose 0.5% this year to 104.919 yesterday. The gauge increased 5.9% in 2011.
Britain cancelled what would have been the first sukuk sale by a Western government last February, saying the debt didn’t offer value for money. Luxembourg ruled out a plan to sell Islamic bonds in 2011 because the government saw no need to raise additional funding. France has legislation in place to facilitate a sale and has yet to proceed with an issue.
Ireland has a Muslim population of 30,000, according to a Department of Finance document covering the nation’s Islamic industry issued in March 2010. Roman Catholics make up 87% of Ireland’s population.
The Islamic Cultural Centre for Ireland and the Immigrant Council of Ireland have all called for more Shariah-compliant initiatives, the report said.
“There’s been no objection to Islamic products being sold in Ireland,” said Mr Smith, who is also a director in charge of the 10-member Association of Southeast Asian Nations at the IDA.
The European debt crisis provides an opportunity for Islamic finance to grow given it is rooted in ethics and religion, according to Nik Norzrul Thani, the chairman of Malaysian law firm Zaid Ibrahim & Co.
“What Ireland is doing is a step in the right direction,” Nik Norzrul said in an interview in Kuala Lumpur.
“Ireland’s ambition to be a Shariah-compliant hub is a recognition that Islamic finance isn’t only for Muslims.”