Islamic liquidity body makes key appointment
1 March, 2011Smart Investor: Does your house insurance really have you covered?
1 March, 2011Islamic Investor, March 2011
South Korea’s National Assembly has blocked a proposed new law that would have smoothed the way for a sovereign sukuk issue. Local reports suggest that lawmakers objected to the bill – a piece of tax equalisation common in any countries seeking to streamline sukuk issues – on religious grounds.
Under Korean tax laws, companies have to pay between 1.5 and 3.5 percentage points more in tax for an Islamic issue than a mainstream one, an imbalance that the government has been pledging to correct since 2009. The new sukuk law would have provided new tax breaks to create a level playing field with mainstream issuance.
While it is not uncommon for tax laws to take time to clear parliament, Islamic practitioners may be concerned to find that religious objection appeared to be the main reason for blocking the new legislation. In particular, Lee Hye-hoon, who is a congresswoman within the Grand National Party and a committed Christian, has been quoted in local media saying: “It is possible that 2.5% of the proceeds from the bond issuance are given to Islamic missionaries,” and “acknowledging the religious restrictions on charging interest is against the Korean constitution that stands for capitalism.”
The government had hoped that the new law would help it to diversify sources of income and attract capital from the Middle East. While the sovereign itself had been expected to issue a sukuk, many other South Korean companies had also expressed interest, including oil refiners, airlines and construction companies. Despite objection, they had been confident about getting the tax change through: as recently as December, the ruling Grand National Party had said it expected the bill to pass within a week. It was recommended by the legislature’s taxation sub-committee, but then blocked at the overall level. Minister of Strategy and Finance Yoon Jeung-hyun is among those who had hoped the bill would go through: he has spoken of a need to “diversify the sources of foreign borrowing. When economic cooperation with the Middle East is important, there is no reason to discriminate against Islamic bonds.”
The news was greeted with some alarm in the Middle East, where Arab News devoted a 1,300-word editorial to it, calling it “a wake-up call for the global Islamic finance industry” and bemoaning “Islamophobic lobbying from powerful Christian evangelical groups”.
It is not clear if Korea will attempt to pass the bill once again, since there is little that can be done in terms of technical modification that would get it past the religious objections that have stymied it so far. In its absence, it is highly unlikely Korean issuers will bother to launch sukuk issues.
