This article was first published in Islamic Finance news Volume 16 Issue 22 dated the 5th June 2019.
In 2011, the Irish government outlined ambitious plans for Ireland to become a center of excellence for Islamic finance. David Maughan and Eoghan O’Tuama examine some of the developments in Ireland since then with respect to Islamic finance and also look at some emerging trends.
Tax treatment of Sukuk
The increased attractiveness of Ireland to list Islamic finance products stems largely from the 2010 amendment to Irish tax legislation (via Part 8A of the Taxes Consolidation Act 1997 (as amended)). This introduced the concept of ‘specified financial transactions’ into Irish law, which granted equivalence to Takaful, Ijarah and Islamic investment fund products. The intention was that interest payments on Sukuk (Islamic compliant bonds) that are listed on the Regulated Market (the RM) or the Global Exchange Market (GEM) in Ireland can be made without any withholding tax by relying on the quoted eurobond exemption, provided all the relevant conditions required for that specific exemption are satisfied. Reforms such as this led to the first issuance of Sukuk under Irish law in 2018.
Subsequently, the revenue commissioners issued a further guidance note on the tax treatment of Islamic finance transactions in November 2018. This further guidance consolidated the existing legal framework in Ireland and provided further clarity on the tax treatment for Islamic finance transactions.
The listing regime
Ireland has become one of the leading international destinations for listing Sukuk. Since the first Sukuk facility was listed in Ireland in 2005, issuers of Islamic finance instruments have grown exponentially, with several sovereign Sukuk being listed — including the Omani, Bahraini and Saudi Sukuk programs and offerings, as well as countless listing of corporate entities.
The Irish Stock Exchange, trading as Euronext Dublin, is the leading debt-listing venue in the world. Ireland currently has two markets on which issuers can list securities:
- The Euronext Dublin market is the RM, as defined in the Markets in Financial Instruments Directive 2014/65/EU (as amended) (MiFID II). The RM is regulated by the Central Bank of Ireland (CBI), and
- The GEM is a multilateral trading facility as defined in MiFID II and is regulated by Euronext Dublin.
Regulators on both markets have adopted a consistent approach when reviewing Islamic finance documents and have proven to be both accommodating and knowledgeable in their review and approval. Issuers of securities on the Irish markets have found the process to be transparent and cost-efficient. The CBI and Euronext Dublin guarantee review times of three days for the initial review and two days for subsequent reviews — a feature which issuers find extremely beneficial. Some listed issuers in Ireland include Abu Dhabi Islamic Bank, Dubai Islamic Bank, Emirates NBD, National Bank of Abu Dhabi, National Commercial Bank and QIIB.
The OECD has estimated that US$$6.9trillion a year is required up to 2030 to meet climate and development objectives and transform the economy to a green economy. The year ended November 2018 saw total green bond issuance of US$167.6 billion — it was acknowledged that this level of issuance needs to be “scaled up to help fund that transformation and the transition from a largely ‘brown’ economy to a ‘green’ one”, according to the Climate Bonds Initiative (CBI).
The area of green financing is one which the Islamic finance industry is embracing. In 2014, the Securities Commission Malaysia revised its Islamic Securities Guidelines to cater for standards for socially responsible investment. Since then, some notable green Sukuk have been issued including the first green Sukuk by Tadau Energy in Malaysia in 2017 as well as the first green sovereign Sukuk issued by the Republic of Indonesia in March 2018. Green Sukuk issuance increased from US$755 million in 2017 to US$1.4 billion in 2018, according to the CBI.
Euronext Dublin has proven to be an extremely at t tractive venue for listing conventional green bonds in recent years. This experience coupled with the existing expertise with Islamic finance instruments could prove to be a decisive factor for issuers/arrangers in deciding where to list Islamic finance green bonds going forward.
Where next for Islamic finance?
With the prospect of the UK leaving the EU in 2019, Ireland will be the only native English-speaking country in the remaining EU27. With a long track record of listing Islamic finance instruments in Ireland, the Irish markets may prove to be a very attractive location for any UK-based Islamic financial institution that may be keen on exploring its listing options post-Brexit in order to maintain passporting rights to EU markets.
Since 2011, Ireland has developed into a center of excellence for Islamic finance, thanks in large part to government reforms of the tax code, the adaptability of the relevant regulators as well as the innovation of the various stakeholders in Ireland.
With the projected increase in green Sukuk issuance in the coming years, and the existing attractiveness of doing business in Ireland, issuers who are targeting a European investor base may consider listing in Ireland.