Shariah Compliant Funds Seek A Safe Haven In Brazil’s Free Trade Zones

About Alexandre Lopes

Alexandre is head of the Brazil office of New York headquartered international law firm Maalouf, Ashford & Talbot and an executive director at the Europe China Foundation. www.maalouf.us

With expansion plans charted beyond core market horizons in the Middle East and Malaysia, Islamic Finance now set its sights on finding a safe haven to dock in southern waters. Banco do Brasil S.A, Latin America’s biggest bank by assets, is ready to welcome these sea-bound explorers with the launching of Brazil’s first Shariah-compliant equity fund.

History repeats itself on the South American continent, as new waves of investments 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, 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 favored that if rightly cultivated, it will yield everything because of its waters.”  In agricultural terms, Brazil has literally provided food for much of the world, and figuratively, sowing economical 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.

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 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 midst these stormy seas, well trained eyes 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 on 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, president of ABRAZPE, says, “ZPEs, the Brazilian Free Trade Zones, offer 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 Favorable 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 is among the countries with the vilest of taxation systems, draining the lifeblood and 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 spending, 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, is a daunting task, indeed!

So, what is the way?

Clearly, this may be an inhospitable environment for many businesses, and lethal 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 U$ 500 billion in net exports. There are free zones in the United States, 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 fueled 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 United Arab Emirates, 38 specific Free Zones cater to different commodities and services. Among them, the Jebel Ali Free Zone and Dubai Multi Commodities Centre have both experienced unprecedented growth, developed on Islamic Finance foundations. This rich experience and expertise will be of invaluable importance for the ZPEs in Brazil.

Favorable winds bring favorable sailing

Navigating in friendly waters, with a clear horizon ahead and an agreement with the ‘forces of nature’ as to sustained blue skies and steady winds, are the pledge of ZPEs to the Islamic Finance community. Export and investment resources and monies are sheltered from any internal torments, harbored in the financial institutions at home. Companies are allowed to install equipment and import supplies without the need for licenses and authorizations from federal agencies, with the exception of goods that may represent issues related to health, national security and/or environmental protection control.

Alternatives to Islamic Finance

Islamic Funds may choose from a number of investment options regarding the ZPE model:

1. The first option is to seek advice at the ABRAZPE, in terms of the vocation of each unit, its geographic location and specific legislation, once there are ZPE that are especially suited for gems and precious stones, 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, equipments could be purchased under murabaha agreements‏ without being exposed to heavy indirect taxes, offering alternative financing structures.

2. 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.

3. 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.

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. This could be the beginning of a new chapter on the history of the country, a time when Islamic Finance will eventually cast its anchor in Brazilian safe waters.

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