Government forced to go back on plans
By Yoon Ja-young
The government has been preparing for years to introduce sukuk, or Islamic bonds, to the local capital market. The lengthy effort, however, is proving to be fruitless as it stumbles on an unforeseeable obstacle ― the conservative churches and as the biggest supporter of the President Lee Myung-bak administration, they are opposing sukuk with all their might.
Sukuk is an Islamic bond which operates to suit Shariah law, the Islamic code that entails the spiritual and moral obligations and duties of Muslims. As the law regards Riba, or interest, as immoral profiteering, collecting interest on bonds is prohibited. As it only allows taking profit from tangible transactions like investing in real estate or leasing facilities, those who borrow money transfer ownership of their tangible assets like real estate to the lender. The lender receives a dividend from the assets instead of interest for the loan. At the expiration of the loan, the debtor returns the money and reclaims the asset.
As the transaction of transferring the asset and getting it back, however, would incur taxes such as a registration or acquisition tax, the government is trying to exempt sukuk of such taxes. It also wants to exempt it of taxes paid on the dividend, which is de facto interest, as the interest on foreign currency denominated bonds are tax exempted.
The conservative church leaders, however, have been vehemently against the idea. Most of all, they believe that sukuk is dangerous money ― they suspect that part of the profit from sukuk may be used to support fundamentalist Islam terrorism. They argue that most other countries that conduct sukuk don’t exempt tax from the transaction, and criticize the Korean government for giving undue favors.
The government, meanwhile, counters that the introduction of sukuk would benefit the economy. It points out that the country was rattled by the Asian financial crisis or the global financial crisis more recently as sources of funding aren’t diversified. With oil-producing countries forming a major pillar in the global capital market, and as they tend to manage their capital on a long term basis, the funding from the Islamic market would stabilize the local capital market, according to the government. Islamic capital is expected to be more endurable in connection to oil price hikes and an increasing Muslim population ― they represent nearly one quarter of the world’s total population and the number of Muslims is expected to reach 3 billion in two decades.
Church leaders, however, insist that the government is wrong when they say the local capital market is suffering a liquidity problem. “The local capital market is suffering from excessive liquidity, not a lack of liquidity. The government says that they need oil money to solve the liquidity problem, but this is not true,” the Christian Council of Korea said in an announcement.
The sukuk bill wasn’t even a topic at the National Assembly session in February, and it isn’t likely to get approval at the National Assembly in the foreseeable future. Ardent Christian lawmakers like Rep. Lee Hye-hoon of the governing Grand National Party are fiercely opposing the bill, while other neutral lawmakers are reluctant to deal with the issue on fears of losing the Christian vote. Since President Lee Myung-bak is a presbyter and a large part of his victory in the presidential election is due to the Christian community, he is remaining silent about the issue.