By Yoon Ja-young
Staff Reporter
Regulators plan to revise laws to help banks advance into Islamic countries and run businesses according to unique Islamic law. They will be allowed to provide financial advice on commission to diversify their income portfolios.
As Islamic law prohibits the charging of interest in financial transactions, investors are paid dividends or commissions instead. Banks had difficulty advancing into the Islamic countries as these unique practices are not in line with Korean law or financial systems based on the charging of interest. Islamic law also prohibits usury and investing in businesses that are considered unlawful such as businesses that sell alcohol or pork, or media such as gossip columns or pornography, which are contrary to Islamic values.
The Financial Services Commission (FSC) plans to revise laws through a revision this year.
Banks have been eager to advance into the Islamic capital market, which has seen explosive growth on the back of oil money.
In a meeting with FSC Chairman Jun Kwang-woo last month, bank CEOs called for the easing of regulations so that they can raise money from the Islamic capital market. Jun said, ``Financing from the Islamic world is a very good suggestion as the oil producing countries are enjoying abundant liquidity on high international oil prices.''
Jun promised to ease regulation to help banks diversify financing channels, including issuing Islamic bonds, and added that the commission needs to do financial diplomacy to help banks tap the Islamic market.
Sukuk, the unique Islamic bond which pays dividends instead of interest to comply with the Islamic law, is expected to see the market grow. ``The Sukuk market is expected to continue growing as Middle East countries' oil money, infrastructure industry, energy sectors and real estate investment keep expanding,'' said Park Dong-wan, a researcher at the Korea Center for International Finance.
Sukuk is the Arabic name for a financial certificate and Islamic equivalent of a bond. However, fixed income, interest bearing bonds are not allowed in Islam and so these securities comply with Islamic law and its investment principles.
It is estimated that more than $700-$900 billion of assets are managed according to Islamic investment principles. Such principles are part of `shariah,' which is often understood to be the Islamic law, but is actually broader than this because it also encompasses the general body of spiritual and moral obligations and duties in Islam.
Islamic-law compliant assets worldwide are estimated at $500 billion and have grown at more than 10 percent per year over the past decade. In the Gulf and Asia, Standard & Poor's estimates that 20 percent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile.
``Non-Islamic countries such as China, the United Kingdom, or Japan, are planning issuing sukuk to diversify financing channels. The market is expected to grow as sukuk is regarded as the financial product that suits long-term, mega-scale project financing,'' Park said.
Local banks will be permitted to handle investment advisory services, providing total financial services to customers, ranging from financial consulting and product recommendation to asset management, on commissions. Banks have been providing such services to rich private banking customers, without commissions, as they have been banned from doing financial advisory business.
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