Korean lawmakers may revive legislation scuttled earlier this year amid opposition from church leaders that would pave the way for the first Islamic bond sales in the country.

A group of legislators will review the proposal as early as November regulating taxes on sukuk, or bonds that comply with Shariah law, said Choi Sung Soo, assistant director of the office of the committee’s Chairman Kang Ghil Boo. Lee Man Sub, head pastor at the Korean Association of Church Communication, was among Christian leaders seeking to stop the plan on concern Islamic charities would funnel contributions to terrorist activities from zakat, a tax paid by Muslims with wealth to be distributed to the poor and needy.

Sukuk sales in the nation could reach $1 billion a year as companies including GS Engineering & Construction Corp. try to raise financing that complies with Islam’s ban on interest to build power plants and skyscrapers in the Middle East, according to Korea Investment & Securities Co. The United Nations has a list of hundreds of organizations and individuals it suspects of supporting terrorism in a bid to control funding.

“Several church pastors have approached me, worried that Korean money would go to terrorists,” Yoo Il Ho, a committee member who belongs to the governing Grand National Party, said in an interview in Seoul. “But I told them that these bonds have nothing to do with that.”

There are about 35,000 Muslim residents in Korea and more than 100,000 Muslim foreign workers, said Cho Min-Haeng, director of administration at the Korean Muslim Federation in Seoul. The country has a population of about 49 million.

Protestants and Roman Catholics together make up the largest religious group in Korea, comprising 18.3 percent and 10.9 percent, respectively, according to a 2005 population census from the statistics office. About 23 percent are Buddhist and the rest are mostly non-religious, the census said.

Approving the tax “will be like pouring gasoline over a burning fire,” said Lee, whose organization represents the nation’s Christian groups in the media in Seoul. “That money can be used for terrorism, or money-laundering in our banks. It’s unfair to give them a tax advantage and with all that money pouring in, they could take control over our economy.”

He also cited concern proceeds would fund Islamic schools and infrastructure at home, which will mean “more Koreans may become Muslim.”

Korea Investment, a Seoul-based brokerage that said in February it hired Shariah scholar Mohammed Daud Bakar to help structure Islamic financial products, has put plans on hold because the legislation has yet to be approved. Mohammed Daud declined to comment in an e-mailed response to questions.

Concern that sukuk will fund terrorist activities is a “certain kind of phobia” and is difficult to substantiate, said Lee Yul Hee, head of the Islamic finance team at Korea Investment in Seoul.

Closer ties with the Middle East would help narrow Korea’s only regional trade deficit, he said. The Gulf Cooperation Council states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates pumped 68 percent of Korea’s oil and 53 percent of its natural gas last year, causing a $38 billion deficit, according to the Korea International Trade Association.

Korea Electric Power Corp., the nation’s biggest supplier, won a $20 billion contract to build nuclear power plants in the U.A.E. in December. Samsung Engineering Co., its biggest engineering company, won a $1.5 billion contract in April to build utility and offsite facilities for a gas project in Abu Dhabi. Samsung C&T Corp., the second-biggest contractor, built the world’s largest tower in Dubai. All the companies are based in Seoul.

Woori Investment & Securities Co., a unit of Korea’s third-largest financial company, signed an agreement in March with Qatar Islamic Bank SAQ, the Gulf state’s biggest Shariah- compliant lender, to cooperate in investment banking services, the Asian company said in an e-mail on March 10.

Mohamed Azahari Kamil, head of Asian Finance Bank Bhd., the Malaysian unit of Qatar Islamic, said the issue of terrorism was never discussed.

“There’s not enough evidence to prove that” charities are being used to fund terrorism, Mohamed Azahari said in an interview from Kuala Lumpur. “The accusation is baseless.”

Islamic bonds, which are based on the exchange of asset flows rather than interest, returned 3.7 percent this quarter, beating a 0.8 percent gain in the three months ended June 30, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in developing markets gained 7 percent this quarter, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The spread between the average yield for sukuk and the London interbank offered rate narrowed eight basis points, or 0.8 percentage point, so far in August to 393, according to the HSBC/NASDAQ index.

Global sales of sukuk fell 14 percent to $10 billion so far this year, according to data compiled by Bloomberg. Issuance totaled $20.2 billion last year, up 43 percent from 2008. Debt offerings will increase in the second half, led by first-time issuers, because of improved international market conditions, Standard & Poor’s said in a statement on July 28.

The yield on Malaysia’s 3.928 percent dollar-denominated Islamic note due June 2015 fell 25 basis points this month to 2.67 percent, according to prices from the Royal Bank of Scotland Group Plc.

Korea’s Ministry of Strategy and Finance is pushing ahead with plans to sell Islamic bonds to diversify financing, said Sohn Byung Doo, director at the international financial policy division in Seoul. The global credit crisis in 2008 caused international funds to leave the country, he said.

“Sukuk will allow Korea to diversify funding sources, especially since capital flight during a crisis may dry up money pools,” he said. 

(Bloomberg)