This article was first published in Islamic Finance News on April 10, 2019.
Sector Feature: Halal Financing
Outlook for Halal investment in North and South America
The outlook for Halal investment in North and South America looks promising with regulatory adjustments occurring in the US in the 1990s; banks offering Islamic products and services in California, Illinois and Michigan; mortgage lenders active in the Islamic home finance sector in all 50 states of the US; the introduction of a fully-fledged Islamic bank in Suriname on the 7th December 2017, a three year US$900 million aid package from the IDB to Guyana in 2018 and a partnership between the Inter-American Development Bank Group and the IDB Group to co-finance projects in Suriname and Guyana starting in October 2017. Brazil also looks ripe for Islamic finance with a few other countries including Colombia, Argentina, Venezuela, Panama, Paraguay and Trinidad and Tobago exhibiting potential as Islamic finance contenders. CAMILLE PALDI delves further.
In the US, Whittier Bank operates Islamic home financing in California and Devon Bank in Illinois offers Islamic finance services and products, as well as the University Bank in Michigan. Another popular Islamic home financing provider is Guidance Residential, which uses a grassroots community approach to reach thousands of customers across the nation. There are currently a total of 25 Islamic financial institutions operating in the US. These institutions are state-chartered entities subject to the same state and federal regulatory guidelines, corporate governance, banking and insurance operations and tax treatment as conventional financial institutions in the US including the requirement to be insured by the Federal Deposit Insurance Corporation.
The US has not adopted any federal legislation specifically addressing Islamic financing as of yet. Although Islamic financial institutions may be qualified to do business in different states, the majority of an Islamic financial institution’s assets are located in the institution’s home state and licensing and other conditions must be satisfied with respect to any state where the Islamic financial institution seeks to be qualified as a bank or mortgage or loan finance provider.
Only two rulings have been issued by the Office of the Comptroller of the Currency (OCC) in 1997, approving Ijarah and Murabahah structures for home financing and other retail financial products. In 1997, the United Bank of Kuwait requested interpretive letters from its regulator, the OCC, on Ijarah and Murabahah mortgage products. The OCC approved both on the grounds that they were economically equivalent to traditional conventional products. In terms of Ijarah, the OCC determined that Ijarah is the functional equivalent of secured lending. In 1999, the New York State Banking Department (NYSBD) also approved the Ijarah structure and agreed with the OCC that the product was functionally equivalent to secured real estate lending. In terms of Murabahah, the OCC determined that the bank would be functioning as a riskless principal.
These structures have now been approved by the federal government, the NYSBD and the banking authorities of several other states. Furthermore, the relevant authorities have removed the double tax jeopardy of these products where tax was incurred by the initial purchase and at the transfer of final payment. The tax authorities in New York and other states have handled this issue by eliminating double tax burdens on a case-by-case basis where the Shariah compliant structure was equivalent to a conventional financing transaction.
In 2008, the New York State Tax Department determined that no real estate transfer tax is due when the deed is transferred by a bank to its customer at the end of the lease term in accordance with the terms of the Ijarah arrangement. Thus, the US is wide open in terms of Islamic home financing based on the approved models mentioned herein and is also ripe for Takaful, funds, Islamic asset and wealth management, and Sukuk.
The US has seen two major Sukuk issuances — the US$165.67 million East Cameron Gas Sukuk facility, which was the first Sukuk Musharakah in the US backed by oil and gas assets and the US$500 million General Electric Sukuk (Sukuk Ijarah backed by aircraft leases). Both New York and Illinois have enacted legislation enabling Sukuk transactions and Islamic finance. Goldman Sachs issued a US$2 billion Sukuk facility in 2012. There are currently no listings of Sukuk on the US security exchanges. Although there are no applications for fully-fledged Islamic banks pending in the US, there exists a plethora of Islamic financing businesses within the US borders and being done overseas by US entities. The outlook for Halal investment seems promising within the US borders and by US companies abroad.
Suriname hosts the South American continent’s first fully-fledged Islamic bank, Trustbank Amanah, which came into existence on the 7th December 2017 with the help of the Islamic Corporation for the Development of the Private Sector (ICD). The bank focuses on financing SMEs with financing based on Islamic and ethical principles, serves as a mechanism for wealth distribution in Suriname and promotes the economic development and stability of the country.
The ICD also signed an MoU with the Ministry of Trade, Industry and Tourism and the Association for Surinamese Business to work together to support and develop local SMEs. Trustbank Amanah conducts Islamic banking in Suriname and aims to become the Islamic financial hub of the Caribbean and Latin America. Suriname is definitely the South American nation to pick as a headquarters for South American Halal investment due to the support of the Central Bank of Suriname, the Surinamese business community and the Surinamese government for Islamic financing.
Guyana joined the OIC in 1998 and the IDB in 2017 as its 57th member country, which was formalized with a commitment to a five-year work program. The IDB approved a three-year aid package (2018–20) of US$900 million targeting key development areas including economic, infrastructure, rural development, trade and competitiveness for Guyana. Furthermore, the Islamic Research Training Institute — the training arm of the IDB — provides support toward promoting awareness on Islamic finance in Guyana. Guyana also receives grants from the OIC and the Economic and Social Research and Training Centre for Islamic Countries and the Islamic Centre for the Development of Trade.
In addition, Guyana receives funding from the Standing Committee for Economic and Commercial Cooperation of the OIC and project funding for six areas, namely agriculture; finance; poverty alleviation; transport and communication; tourism; and trade. Also, with the support of Malaysia, Indonesia and Suriname through Trust Amanah Islamic Bank, Guyana desires to import modern technology and improve its agricultural and tourism sectors as well as offer Islamic financial products.
Winston Jordan, Guyana’s minister of finance, invited several Islamic development and finance institutions to Guyana in early 2019 in order to assess the appetite and capacity of the local private sector to utilize Shariah compliant financial products and other services of the IDB Group. One of the key objectives of the IDB is to bring together the public and private sectors as well as civil society groups to foster development through public–private partnerships and other joint projects. The future of Halal investment in Guyana appears solidly backed by the Guyanian government, business community and the IDB.
Brazil actively trades with the Middle East with a 400% growth rate over the last 10 years. Brazil exported approximately 1.48 billion tons of Halal chicken in 2014 to the Middle East and North Africa and has been exporting Halal chicken to these regions for decades.
Brazil is equally open to the Islamic finance market as it is to the Halal industry. In 2007, Vicente Rossetto of CVM made a proposal for Brazilian Sukuk at the 19th Asian-Pacific Conference on International Accounting Issues in Kuala Lumpur and in 2008, Brazilian stock exchange Bovespa held a conference on how to leverage Islamic finance in Brazil. It was stressed at the Bovespa conference that tax legislation required alteration in order to avoid double taxation in Islamic finance transactions in Brazil.
A tax change, which should be implemented, involves the indirect taxes levied when Brazilian financial institutions buy or sell tangible assets in order to finance them. A reference can be made to UK tax law, which understands that Islamic finance trading of a tangible asset should not mean higher taxation than normal financing. It is also recommended that the Brazilian central bank amend its rules to accommodate Islamic finance, for example, with regards to the limits imposed on financial institutions in acquiring non-financial assets.
Brazil has already experienced the introduction of a Shariah compliant equity fund in June 2014, which concentrates on Brazilian commodities, mining, construction, public services and the oil and gas sector. In April 2014, Brasil Investimentos and Negocios promoted Islamic finance by hosting an Islamic finance workshop to educate people about the benefits of such financing in Brazil.
Furthermore, the Brazil: Excellence in Securities Transactions roadshow visited the Middle East and returned to promote Islamic finance and Shariah compliant assets in Brazil. Recent Brazilian legislation changes have guaranteed beneficial tax treatments for non-resident wealth fund investors and in some financial assets. This move promotes Halal investment into Brazil from other countries especially the Middle East and Asia. However, challenges remain on the regulatory, accounting and tax fronts in Brazil including:
(i) what prevails for accounting and tax purposes — the substance or the form of contracts
(ii) how to account for the time value of money and non-interest bonds
(iii) responsibility for the exposure of default risks, and
(iv) limitations on banks to acquire and sell non-financial assets.
According to law firm Souza Cescon Barrieu and Flesch in 2017, the Brazilian legal system is well-suited to receive Islamic finance as Brazil has legislation which recognizes atypical contracts or forms of agreements not specifically provided for by legislation and gives formal and substantial flexibility to contracting parties. Furthermore, infrastructure projects involve projects with tangible assets that can be the object of various forms of Halal agreements. Souza Cescon Barrieu and Flesch stated that the projected growing demand for Islamic investment products and the large capital demand for investment in infrastructure projects present a favorable platform for the use of Islamic finance and Halal investment into Brazil. The firm is clear that even in the absence of legal reforms, the Brazilian market is ripe for alternative means of infrastructure financing including through Islamic finance.
The South American nations of Guyana, Suriname and Brazil might also encourage other Latin American or Caribbean nations to act as SPV holders for international Sukuk transactions and take the lead in Islamic finance dispute resolution by establishing an Islamic finance tribunal for the world’s Islamic finance, Sukuk and Takaful transactions. The US might attract a lot of global business by establishing an international dispute resolution center for Islamic finance, Sukuk and Takaful transactions.
For now, we should encourage the governments of North and South American nations to enact federal Islamic finance regulations and legislation and encourage cooperation with the IDB and other Islamic finance entities such as the ISDB, AAOIFI and the many organizations based in Malaysia, Bahrain and Saudi Arabia. Although a small niche business, Islamic finance complements capitalism in promoting the distribution of wealth to SMEs and the citizen as an owner and partner in business transactions rather than as a borrower in the traditional creditor/lender relationship.
Camille Paldi is the founder of the Ethical Finance Forum. She can be contacted at email@example.com.