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By Jungmin Hong: South Korea plans to exempt Islamic bonds from tax on distributions as it seeks to expand its capital markets and attract Muslim wealth from overseas. The rules would affect Ijarah and Murabahah securities, the most common forms of Islamic bonds, which are also known as sukuk, the Ministry of Strategy and Finance said in an e-mailed statement yesterday. The ministry will submit its proposals to the National Assembly by the end of September, it said.

Special treatment for sukuk “will draw large-scale capital from countries in the Middle East, which are likely to benefit from rising oil prices, while helping the nation diversify funding,” according to the statement. Global sukuk sales jumped to a record $31 billion in 2007 from $2.2 billion in 2000 as surging crude prices spurred economies in the oil-rich Persian Gulf, according to data compiled by Bloomberg. They then plunged to $13.9 billion last year as energy demand slumped amid the global credit crunch, the data show. Oil closed at $72.04 a barrel yesterday from an intra-day low of $32.4 on Dec. 19.

Muslim Shariah law forbids interest payments and speculation, so sukuk are asset-based securities paying a profit distribution to investors rather than interest. GS Caltex Corp., South Korea’s second-largest oil refiner, hired Merrill Lynch & Co. and Malaysia-based RHB Investment Bank Bhd. to help it sell what may be the country’s first sukuk, Chay Wai Leong, RHB Investment’s chief executive officer, said in April. Seoul-based Daewoo Securities Co. will “actively seek” opportunities to sell sukuk, it said last year. Indonesia’s government drew $4.7 billion of orders for its first sale of dollar sukuk, seven times the $650 million of securities on offer, debt management office Director General Rahmat Waluyanto said in April.

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