Ireland s aspiration to become an Islamic Financial Centre

by Mubarak Aziz Jahangiri

"Ireland aims to be home of Islamic finance in Europe" is the news published on 2 nd June 2011 in Guardian from UK.1 Ireland has made significant progress over the past two years in recognizing the Islamic Finance and took a landmark step in 2010 finance bill when the former Irish Finance Minister, Brian Leinhan T.D. (R.I.P.) acknowledged Islamic Finance as the fastest growing segment and an ethical form of international finance due to its strict rules regarding the nature of type of permissible investments.2 The remarks of the late minister are witnessed in the light of recent collapse of the international financial markets that melted many icons of conventional financial industry. While many conventional banks looked like a straw in front of the strong winds of the financial crisis; the Islamic financial institutions r emained intact despite the intensity of the storm. It is acknowledged that Islamic banks have also suffered in the current financial crisis, however, the direct impact of financial crisis to Islamic institutions was either none or to a minimum level. The major reason being that Islamic financial mode does not permit speculative trades. The main cause of the start of financial crisis, sub prime, was a no go area for Islamic Financial institutions, similarly Islamic finance does not approve of speculative derivative trades the two main reasons for collapse of markets. Impact of financial crisis to the Islamic financial institutions was indirect as commodity prices were impacted with the crash of markets and value of the investments of Islamic banks reduced. In addition the business of Islamic Banks has also been impacted with overall economic slump in every market. While the recent financial crisis highlighted many weaknesses in conventional financial models, it also helped many in recognizing, or at least thinking about Islamic finance and amongst them Ireland is a leading country to acknowledge and recognize Islamic Finance in the country. This should provide the Irish financial industry an edge over other EU countries as recognition of Islamic Finance coupled with a very favourable tax regime will encourage many Islamic Institutions to operate In Europe by using Ireland as their base. By a careful estimate, in 2009 the overall Muslim population of Europe is approximately 38 million3 and about half of this would definitely require the financial services and would prefer if they can be offered something in accordance with their faith. This can be a launching pad not only for Irish economy by attracting overseas banks to open offices but this also provide an alternate revenue stream to Irish Banks as they could earn the benefit of their local presence and infrastructure and

http://www.guardian.co.uk/business/2011/jun/02/ireland-islamic-finance http://www.finance.gov.ie/viewdoc.asp?DocID=6209 3 http://pewforum.org/uploadedfiles/Orphan_Migrated_Content/Muslimpopulation.pdf

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need to develop Islamic windows with in their existing operations to provide Islamic financial solutions. Irish Banks can not only start Islamic financing for their local population to facilitate trade business or mortgages but can also attract Islamic deposits from Islamic financial institutions based in the Middle and Far East. While the European continent is not an area of focus for the Middle and Far East based Islamic banks at this stage, it certainly provides countries like Ireland an opportunity to do the necessary housekeeping so that no opportunity is wasted as and when the European markets return to normalcy. The recent crisis has affected the Irish rating and the effects in the other Euro zone economies have not helped the cause. However, the EU/IMF package does provide a layer of comfort to the international financial institutions when they look at dealing with Ireland. The same level of comfort should also be available in relation to dealing with the Islamic window operations of an Irish (government owned) banks. Therefore, the Islamic window should also be able raise funds from the relatively liquid Islamic banks in the Middle East. The global Islamic banking industry is feeling the shortage of short term liquidity management products. There are multiple (and not so complex) solutions available to overcome this shortage. If Irish Government (central bank) takes up this initiative and comes up with a Shari a compliant liquidity management products that can be rolled out in multiple jurisdictions, it should not only allow Ireland to exploit the first mover advantage, the product can also be the best Irish ambassador to the Islamic financial world. New comers always prefer to use tested routes, as going through an unchartered territory might not be as easier. The UK exploited the first mover advantage and as a result have now in place a system of laws and regulations for Islamic finance that have been tested, not just by the revenue and regulatory authorities, but also at the level of their courts. The natural clustering effect of this is that any Islamic bank looking at establishing a European footprint first considers the UK as their base location. If Ireland is to dilute the UK effect over Islamic banks, it will have to adopt a different approach as the first mover advantage is no more available. Given that the leading Irish banks are now effectively nationalized, the Irish Government should encourage one or two of the local Irish banks to set up Islamic window operations within and outside of Ireland to test the applicability of Irish tax and regulatory laws from a domestic operations perspective as well as from a foreign operation perspective. Such testing of new developed laws for accommodating Islamic Finance will definitely encourage more Islamic Banks to look up to Ireland as an alternate Islamic Financial centre.
The writer is an Islamic Banker ba sed in the Middle East.