News From : DagangHalal.com (03 Sep 2009)
Level playing field
As there are inherent difference in Islamic and conventional products, Western governments have decided to be flexible and change their tax laws to create a “level playing field”.
The UK’s FSA operates under a single piece of legislation that applies to all sectors, the Financial Services and Markets Act 2000.
The FSA’s policy towards Islamic banks, and indeed any new or innovative financial services company, can be summed up simply as “no obstacles, no special favours”. One of the most important issues for the FSA is that of Islamic deposits. The UK legal definition of a deposit is: “a sum of money paid on terms under which it will be repaid either on demand or in circumstances agreed by the parties”.
In other words, money placed on deposit must be capital certain. For a simple non-interest bearing account there is no problem. The bank safeguards the customer’s money and returns it when the terms of the account require it to do so. However, with a savings account there is a potential conflict between UK law, which requires capital certainty, and Shariah law, which requires the customer to accept the risk of a loss in order to have the possibility of a return. Islamic banks resolve this problem by offering full repayment of the investment but informing the customer how much should be repayable to comply with the risk-sharing formulation. This allows customers to choose not to accept full repayment if their religious convictions dictate otherwise. The UK has also begun to modify its tax laws to avoid, for example, double taxation.
Shaikh said: “If you buy a house in the UK you pay a stamp duty, which is about two per cent of the house purchase transaction. In Islamic finance transaction, the bank cannot just lend you money so it has to sell you something, an asset.
“In home purchase, banks have to buy the house first then they sell it to you whereas in a conventional operation, the bank will lend you the money and you buy the house. The difference is because the bank has to buy the house now, stamp duty kicks in, then you buy the house from the bank and another stamp duty kicks in. This is where the government needs to amend the laws and this is what the UK Government has done but changing tax laws is not something that happens overnight.”
Robust growth in the Gulf
The popularity of Islamic finance in the wholesale and retail is gaining grounds and is in fact growing faster than conventional products, said Malik Sarwar, Head of Global Wealth Management at Abu Dhabi Islamic Bank.
“There is a growing interest in Islamic finance in the region as it matches with people’s spiritual values. It is growing much faster than conventional banking,” he said.
On the wholesale side as an example, Malik said there is growing interest in sukuk issuance while retail is also performing well due to increasing awareness, greater product offering, avoiding use of derivates in products, and Islamic finance being in line with people’s values. Knowledge about it is not widely spread yet. However, clients feel comfortable with the concept and many of them transact with Adib just on basis of trust,” he said.
“Knowledge about Islamic Finance is growing rapidly and Adib’s goal is to spread it as a culture rather than just knowledge about products that are labeled as Islamic.”
The issue of profitability, if properly addressed can also further spur the growth of Islamic Finance, says Laldin. “The initial principle in Islam is that you generate commercial activities. The reason why Islamic banking exists is based on real economic activities,” he said, adding: “In conventional banking there is borrower and lender relationship with a contracted interest regardless of the outcome. But you see the problem is caused be derivatives that is selling and buying of debt without even knowing the origin of the debt.”
He said: “It’s been used all over again to the point that the economy nearly collapsed. When you think profitability, the profit in conventional is not sustainable and that is important because we have the underlying activity which supports the way you get the profits. In conventional there is no strong foundation that will to collapse as what we are experiencing nowadays.”
Customer service needs to be more sophisticated as well, Laldin added.
“Customer service is another area we need to look at. But there are institutions operating through Islamic windows that already give good service because they already have existing infrastructures,” said Laldin.
Read Islamic finance still in search of global credibility – PART 1