LONDON: Korea is a relatively latecomer to Islamic finance in East Asia. But following the stated ambitions of neighboring countries such as Hong Kong and Singapore that are trying to establish themselves as international Islamic capital market hubs, Seoul is similarly trying to promote Korea as the same. Kim Jong Chang, governor of the Financial Supervisory Service of Korea, the financial services regulator, believes that Islamic finance is a good innovation in the global financial market and stresses that the Korean government is committed to facilitating it in Korea. Korea believes that the global financial crisis has shown that financial services cannot be divorced from the real economy and sees an ideal fit between its vast industrial base and Islamic finance. Here Lee Do Heon, managing director, Global Business Department, Korea Investment & Securities Co. Ltd., discusses the rationale for Korea's new-found interest in Islamic finance and the prospects and challenges that lie ahead.
What is your assessment of Korea's current involvement in Islamic finance?
One of the most important challenges is awareness and trying to help Korean customers understand the principles of Islamic finance. For example, in the case of Sukuk of which most of the standard structures are an Ijara, the initial paper should be a solid one backed by underlying core assets. From a Korean issuer's point of view it looks as if it is an accumulation because they are selling core assets. We are trying to convince them that it is not. Also for Shariah equity funds, we try to explain to them that they are more like a socially responsible investment with lower leveraging. So what we are trying to do is to explain the Shariah financial principles but in terms of a Korean conventional financial nomenclature. We are also promoting real transactions which are acceptable to both Islamic investors and Korean customers. There are still some regulatory hurdles in Korea, so it will take a little bit more time to close Shariah-compliant transactions.
What is the rationale behind Korea's new-found interest in Islamic finance?
Just as Singapore and Hong Kong are doing in their markets, Korea has a long-term vision to promote the country as an international financial center. It is only natural for Korea to pay more attention to one of the more important and growing financial segments which is Islamic finance. It is growing very rapidly even though its market share globally is still relatively small. If any country aspires to be a financial center, it must facilitate the growth of Islamic finance. Islamic investors are also relatively long-term investors and do not like speculative hedge funds. This fits in with the Korean view of doing banking business which is linked to the real economy. One of the causes of the Asian financial crisis in 1998 was short-term buying-and-selling by financial institutions and corporates. It is very natural that the Korean market welcomes more stable and long-term investment such as Islamic finance. The Korean economy has a very strong industrial base. This has a very good fit with the ethos of Islamic finance so that it impacts on the real economy into productive investments.
What are the current regulatory hurdles which prevent the facilitation of Islamic financial products in Korea?
These hurdles are typical of those that you find in conventional financial markets. The main hurdles are taxation issues relating to double stamp duty, value added tax (VAT) and capital gains and the definition of what constitutes a security. From a conventional point of view, Sukuk for instance, may look like asset-backed securities or like investment certificates. There must be a standard guideline that Sukuk is considered as securities. There are also other challenges on the commercial banking side. In a conventional mortgage, for instance, it is like lending with collateral. But in the Islamic mortgage of Diminishing Musharaka the bank must purchase the property and co-owns the asset or property with the mortgagee. The bank then rents out its share of the equity to the mortgagee. Under Korean legislation, commercial banks are not allowed to buy properties for purposes other than headquarters and branches etc. Fortunately, these issues have been recognized by the Financial Supervisory Service of Korea, the central bank.
So is the Financial Supervisory Service reviewing current legislation with a view to introducing tax neutrality measures for Islamic financial products in Asia such as those in Japan, Hong Kong and Singapore?
I am not in a position to say whether the regulator is undertaking such a review. All I can say is that the regulator is aware of the situation and Gov. Kim Jong Chang of the Financial Supervisory Service of Korea is showing interest in this matter and Islamic finance is being investigated and considered very positively.
Have any Islamic financial transactions been concluded in the Korean market to date?
Not yet in the domestic market. We at Korea Investment & Securities Company Ltd. (KISC) are trying very hard to carry out the first Islamic financial transaction in the country. We are looking at the possibility of arranging corporate Sukuk for Korean companies and also at launching a number of Islamic equity funds based on Korean and Asian Shariah-compliant stocks. In the case of Sukuk, we are first thinking of an international placement of a prominent Korean issuer and later when the regulations are introduced we may have a Sukuk placement in Korea for other issuers, say from the Middle East and Southeast Asia. I am confident that a private Korean corporate or government-linked corporate will issue a Sukuk in the near future.
What about issuing a Sukuk by a Korean entity outside Korea, say in the Malaysian ringgit or Indonesian rupiah markets?
We will try to place outside Korea first because of the lack of regulatory framework in Korea. Malaysia is one consideration and the offering can be in US dollars. We do not have any preference as to the location outside Korea where the Sukuk placement might take place. We are actively considering this and are already engaged in some discussions with counterparties and partners. Due to the global financial turmoil, the financial markets are in flux. We cannot say exactly when this issuance will take place but we are actively monitoring the market to ascertain when is the most ideal time to launch the Sukuk.
