Islamic bond conspiracy theories

The government plan to revise the tax code in order to pave the way for the country’s first issuance of Islamic bonds, or sukuk, have hit a snag in the National Assembly because of controversy over the religious connotations. The presidential office and leadership of the Grand National Party argue that the Islamic bond deal can diversify the sources of the country’s fundraising from overseas. But some from both the ruling and opposition parties oppose the plan for fear of a religious backlash. Church leaders stormed into the headquarters of the GNP, threatening to boycott ruling party candidates if the party pursues the bond sales.

Sukuk bonds differ from typical debt financing as they do not pay interest in order to comply with the teachings of the Koran. Instead, they are structured to pay profits or rent from underlying business, commodities, or real estate assets. Such a cash flow structure demands a levying of transfer, acquisition and registration taxes as well as value-added taxes, making the bonds about four percent more expensive to borrow than other overseas debt. The government’s bill proposes to make the bonds an exception in order to help Korean companies save borrowing costs in their business deals in the Middle East. The bill therefore aims to lift restrictions on Islamic bonds, not favor a certain religious bond. Britain has revised its banking law to offer the same tax incentives to Sharia-compliant bonds as those for conventional bonds.

Yet the plan has sparked fears and conspiracy theories. The opposition party suspects a dark connection with the multibillion-dollar project awarded to the Korea Electric Power Corp. to build nuclear power plants in the U.A.E. Christian communities are raising concerns that revenue from a bond issuance could find its way to terrorist groups through the zakat program, a tax paid by Muslims to help the poor. But zakat is similar to the tithe in Christianity, where believers contribute one tenth of their wealth to the church. Efforts to block funds to terrorist groups should come from the international security network, not via a certain financial instrument.

It is distressing to watch religious groups lashing out for their own benefit. The issue should be dealt with from an economic and financial perspective, not a political or religious one. Islamic bonds backed by rich natural resources are one of the world’s fastest growing financial instruments. They can diversify the country’s overseas financing route as well as boost business prospects in the Middle East for Korean construction and resources companies.