With expansion plans charted beyond core market horizons in the Middle East and Malaysia, Islamic finance is setting its sights on finding a safe haven to dock in southern waters. Banco do Brasil, Latin America’s biggest bank by assets, is ready to welcome these explorers with the launch of Brazil’s first Shariah compliant equity fund. Alexandre Ferreira Lopes guides us through these new waters.
History repeats itself on the South American continent, as new waves of investment find fertile grounds to set root and flourish. In 1500, Pedro Alvares Cabral led a fleet of ships to the shores of the new world, and Pero Vaz de Caminha depicted his first impressions in a letter to D Manoel, the king of Portugal. “Brazil is a land of such vastness and an enormous tree line, with abundant foliage that is incalculable...there is great wealth, an infinitude of waters. The country is so well favoured that if rightly cultivated, it will yield everything.”
In agricultural terms, Brazil has literally provided food for much of the world, and figuratively, sowing economic seeds has yielded good harvests in terms of its natural resources and industrial capacities. This El Dorado is the world’s leading producer of tin, iron ore and phosphate, a land with large deposits of diamonds, manganese, chromium, copper, bauxite, rare earths and many other minerals.
To land, set root and flourish in Brazil’s fertile economic soils and waters, Islamic funds will have to seek conditions that conform to well-established precepts. Change does take time and political clout in this promising scenario, often prompting investors to look elsewhere. In the midst of these stormy seas, however, well-trained eyes can spot the perfect haven, where economic culture is not merely safeguarded and respected, it is welcomed with open arms. This port of call is no novelty in the financial world in the form of free trade zones, a model adopted by over 130 countries worldwide to attract foreign investments, enable the transfer of technology and to foster the economic development on a municipal, state and federal level.
A source of food commodities
Among the major concerns in GCC countries is the heavy and rapidly increasing dependency on imported food products. The question has always been how to access and safeguard this immense market within the non-negotiable rules and philosophy of Islamic funds. To a very large degree, this means traversing uncharted waters and defining a steady course to follow with local authorities.
The efforts of Banco do Brasil to establish Shariah compliant funds may well represent the inroads into the Brazilian economy, an effort that must be pursued with increased momentum.
On the other hand, Dr Helson Braga, the president of ABRAZPE (Associação Brasileira de Zonas de Processamento de Exportação), said: “ZPEs, the Brazilian free trade zones, off er monetary security, by allowing 100% currency to be kept and transacted outside the country, stability in terms of rules and regulations, and a wide range of products according to the location of its 24 units, distributed strategically throughout the country.”
A favourable economic environment
In view of this, Islamic funds are allowed to implement their own economic and financial practices, unencumbered by indirect taxes. These free trade zones are regulated by Law 11.508/2007 that guarantees the rules of the game for 20 years. Among the incentives are the suspension of Import Taxes, Federal Taxation on Industrialized Goods (IPI), Social Integration Program (PIS), Social Contribution on Revenues (COFINS), PIS on Imported Goods, to name a few.
The conditions offered by the ZPEs are in sharp contrast with the typically deep-seated and entangled legal and fiscal, not to mention, political jungle that has been stifling development in Brazil. Amazingly, the far reaching arms of vested interests have kept the system from taking off in any economically viable sense for over 30 years. It is only recently and currently that these opportunities have become a reality, propelled by plentiful and undeniable evidence, on a global scale, of the effectiveness and importance of special economic zones.
The land of taxes
Brazil has a heavy and unpopular taxation system, which reduces buying power of its citizens and the competitiveness of its corporations. Foreign investors are not only weary of this heavy burden, but also aware of a past of monetary mayhem, wreaking financial havoc and keeping prospective investors at bay.
Taxes are levied on municipal, state and federal levels, forcing companies to spend, in addition to these taxes, considerable resources on their team of accountants and corporate lawyers. Finding one’s way through the ‘flora,’ the ‘biodiversity’ of tax-on-taxes, exemptions and alternative paths, can be a daunting task.
The way forward
Clearly, this is an inhospitable environment for many businesses, and difficult for Islamic finance with its concepts of justice and fairness. The search for a safe port, surrounded by fertile economic soils is again reflected in the words of Pero Vaz de Caminha — Islamic finance needs a forthcoming environment so all can prosper and venture forth into a new era of mutually beneficial collaboration.
Facts and figures
According to the International Labor Organization more than 130 countries have adopted “safe ports” to boost their economies, employing approximately 70 million people and moving US$500 billion in net exports. There are free zones in the US, in the European Union, in Asia, in Africa and in Central and South America. More importantly, emerging countries have focused on these mechanisms to attract foreign investments in an attempt to close the gap between them and the developed world.
The widespread use of free zones has fuelled the successful development of the renowned Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan) and, more recently, of China and India. Fundamental in the rapid growth of the UAE, 38 specific free zones cater to different commodities and services. Among them, the Jebel Ali Free Zone and Dubai Multi Commodities Center have both experienced unprecedented growth, guided by principles of Islamic finance. This rich experience and inspiring success will be of invaluable importance for the ZPEs in Brazil.
Favourable winds bring fair sailing
Navigating in friendly waters, with a clear horizon ahead, the ZPE system has pledged to encourage and welcome the Islamic finance community. Companies are allowed to install equipment and import supplies without the need for licenses and authorisations from federal agencies, with the exception, of course, of goods that may represent issues related to health, national security and/or environmental protection control.
Alternatives for Islamic finances
With all mutual benefits considered, Islamic funds may choose from a number of investment options regarding the ZPE model:
- The first step is to seek advice at ABRAZPE, in terms of the vocation of each unit, its geographic location and specific legislation, once there are ZPEs that are especially suited for gems and precious metals, others for iron ore, meat, sugar and soybean. Finding a fortuitous match with the aspirations and needs of Islamic finances will ensure a profitable and lasting relationship. Offices or industrial plants can be leased, built, purchased or otherwise set up for specific purposes. Within the boundaries of ZPEs, equipment can be purchased under Murabahah agreements without being exposed to heavy indirect taxes, offering alternative financing structures.
- On a grander scale, an entire ZPE can be purchased and run by the Islamic fund, making it easier to control its members and to chart coordinated goals for the group.
- A further option would involve the setting up of a brand new ZPE, which would provide tailor-made conditions for Islamic funds to operate in. This route does involve time considerations and would be appropriate for long-term planning.
Considering the extensive and very successful experience gathered in recent decades in Islamic free zones, there will be opportunities in all segments of the economy to team up with Brazilian partners, forming joint ventures or establishing independent offices and plants within the Brazilian ZPEs. Echoes of Pero Vaz de Caminha’s words promise a successful voyage through this new business portal: “All good seeds will reap good harvests.”
Alexandre Ferreira Lopes is the head of Brazil office of Maalouf Ashford & Talbot.
This article first appeared in Islamic Finance News (6 August 2014, Volume 11, Issue 31, Page 32-33). For more information, please visit www.islamicfinancenews.com.