LONDON: South Korea is the latest Asian country to warm to Islamic finance. Officials in Seoul believe that the country’s strong industrial base makes it more amenable to Islamic financial transactions because they would impact directly on the real economy.
An official at the South Korean Financial Supervisory Services confirmed to Arab News that local companies and financial institutions are lobbying the commission to adopt the necessary regulatory, legal and tax framework that would facilitate Islamic financial transactions in the country — including the issuance of Sukuk (Islamic securities).
“We are still at the beginning of our Islamic finance strategy. The government has started to look at developing an Islamic finance strategy like Hong Kong, Japan and Singapore are doing. We have a strong industrial background which could be beneficial and conducive to Islamic transactions.
Islamic finance, we believe, is based on real transactions backed by real assets. Our strategy I believe is a better one compared to Hong Kong, Japan and Singapore. Many Korean companies would like to do business with Islamic financial institutions and Korean banks would like to mediate between Islamic banks and local corporates,” stressed the official.
The good news is that the Korea Financial Services Commission last summer set up an Islamic finance task force to study the system and consult the market regarding the adoption of necessary regulations to facilitate the task force’s introduction into Korea.
However, changing the tax burden and treatment, regulation and legislation for Islamic financial products may take some time because the Korean legal process is different from the one in the UK and more like the Japanese one which is very cumbersome and bureaucratic.
Legislators and regulators, however, have begun to review the existing legislation to see how equal treatment can be afforded to Islamic financial transactions but the timeline for any amendments to the laws is not certain.
However this process could be speeded up with the support of South Korean President lee Myung-bak who is said to be keen on the introduction of Islamic finance in Korea and to help Korean companies to enter the market in a meaningful way.
Indeed, Korean chaebols (conglomerates) such as Lucky Goldstar, Hyundai, Daewoo etc have been accessing Islamic trade finance (commodity Murabaha) facilities, structured mainly through the London market, since the early 1980s.
The official stressed that it was too early to talk about Seoul issuing a debut sovereign Sukuk, although individual corporates may wish to do so offshore in order to raise funds for balance sheet and expansion purposes subject to approval from the Financial Services Commission.
At a recent seminar on Islamic Finance in Seoul, organized by the Kuala Lumpur Islamic Financial Services Board (IFSB) and the Financial Services Commission, Jun Kwang-woo, chairman of the commission, delivering a speech by President Lee stressed the potential benefits of developing a vibrant Islamic financial services industry in Korea.
President Lee noted that “What we would like to see is significantly expanded capital flows and financial services between Korea and Islamic countries in addition to the trade of goods that have benefited each other so much over the past several decades.”
Professor Rifaat Ahmed Abdel Karim, secretary-general of the IFSB said in his opening address that,
“The pursuit of financial stability does not solely depend on the effective enforcement and implementation of high quality prudential standards.” He highlighted that financial stability requires the development of other key components of the Islamic financial infrastructure, which include: A systemic liquidity infrastructure; a legal infrastructure; an information infrastructure; and financial safety net mechanisms.
The Financial Supervisory Services Gov. Kim Jong-chang stressed, “For those of us in Korea who are looking to promote local awareness and development of Islamic finance, today’s seminar is a truly exciting and unique occasion. Amid discussions on fresh approach to global financial challenges, it is also a timely forum that will help us shed new light on opportunities for the Islamic financial services industry, its crucial linkage to global finance, and its potential to contribute to the global economy.”
The South Korean government is keen to attract Islamic investment into the country and may also access Islamic finance in the future as part of its external borrowing strategy.
The Ministry of Knowledge Economy last week acknowledged that foreign direct investment to Korea had increased for the first time in four years and had recorded $11.7 billion in fiscal year 2008 — up from $10.5 billion in 2007.
But due to the global financial turmoil and economic slowdown, FDI flows in 2009 is expected to decline significantly globally. The World Association of Investment Promotion Agencies, for instance, forecast that global FDI will contract by 12 to 15 percent in 2009.
