May 10, 2010 / 2:13 PM / 7 years ago

FACTBOX-Islamic finance regulations around the world

May 10 (Reuters) - Islamic finance is fast gaining momentum around the globe as countries look to cash in on a market that ratings agency Moody's forecasts could hit $5 trillion over time.

But Islamic finance has no global standardisation, which means individual countries have to tweak regulations to accommodate the market.

Here are examples of what some nations have done to accommodate Islamic finance and what they still need to do.

MALAYSIA - Malaysia's central bank has tightened sharia rules for Islamic banks by requiring them to set up sharia review, audit and risk management functions to reinforce compliance. Rules for standardising Islamic financing structures such as ijara, mudaraba and musharaka are seen by the end of 2010.

Malaysia also has a national sharia council whose financial rulings are used throughout the country's Islamic financial institutions. Some critics, however, think Malaysia's regulators are too liberal in their interpretation of sharia and allow products to mimic conventional banking products.

UNITED ARAB EMIRATES - The UAE has launched a series of Islamic finance tailored handbooks designed to help firms embarking on Islamic finance in the Dubai International Financial Centre. All Islamic finance companies within the DIFC are expected to adhere to AAOIFI guidelines and Islamic banking activities are guided by the central bank. The appointment of sharia committees at these companies depends on the approval of the Ministry of Islamic Affairs.

SAUDI ARABIA - Saudi laws, by definition, are required to adhere to sharia so the Saudi Arabian Monetary Agency makes no differentiation between conventional and sharia-compliant banking. The kingdom is planning to issue its first sharia-compliant mortgage law which is expected to fuel more Islamic home finance in both individual and corporate arrangements.

The plan has been in the works for over two years but is expected to pass in 2010. In addition, experts say Saudi will play a major role in sukuk issuances this year given its liquidity and high focus on infrastructure buildup. Saudi's Dar Al Arkan was the first sukuk to price this year in an otherwise lackluster market.

BAHRAIN - Bahrain's central bank was the first to make AAOIFI standards mandatory for all Islamic institutions. The central bank also has rules covering capitalisation, risk management, financial crime and disclosure and is pushing to train sharia scholars to aid industry growth.

UNITED KINGDOM - The nation aims to be the global capital of Islamic finance. The UK introduced legislation to provide relief from capital gains tax and stamp duty land tax for sukuk issuances and sharia-compliant home mortgages. Value added tax, however, remains a concern for some transactions.

FRANCE - France has taken baby steps to changing its taxation rules for financial transactions. It has issued tax guidelines to potentially avoid value added tax on murabaha contracts and is addressing whether sukuk payment is a tax-deductible item for the issuer. It has been touting the possibility of issuing a 1 billion Euro sukuk but that has not yet materialized.

LUXEMBOURG - The country is promoting itself as a haven for sukuk and Islamic investment funds. It has signed tax treaties with the UAE, Qatar, Kuwait and Bahrain. Currently Islamic investors enjoy no double stamp duty, no wealth tax and no liability to Luxembourg tax on profits and income.

UNITED STATES OF AMERICA - Islamic finance is largely confined to allowing for sharia-compliant mortgage products for ijara or murabaha structures.

Under regulatory rules, a bank must be a lender, which inhibits the development of standalone sharia-compliant institutions. And political risks also cast Islamic finance in a negative light.

INDONESIA - The parliament passed a law last year removing double taxation on Islamic instruments as of April 2010. But experts say the government must create a sukuk issuance law to boost the market. Given the huge Muslim population, changes to the regulatory framework could make Indonesia a powerful player.

AUSTRALIA - Australia's assistant treasurer recently went on a tour of the Gulf states with Islamic finance in his sights. The country is looking to revamp some of its taxation laws to accommodate Islamic finance growth in the country. Experts see it as a hot market for the industry, once laws are overhauled.

INDIA - The finance ministry is now considering allowing for non-banking finance companies to offer Islamic banking products in the country but under current rules, such businesses would face double taxation. Commercial banks are still prohibited from offering Islamic finance products.

Reporting by Shaheen Pasha, Cecilia Valente and Frederik Richter and Mazen Zein; Editing by Sitaraman Shankar

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