development and perspectives of islamic finance in europe with special reference to italy gian maria...

DEVELOPMENT AND PERSPECTIVES

OF ISLAMIC FINANCE IN EUROPE

WITH SPECIAL REFERENCE TO ITALY

Gian Maria Piccinelli

Second University of Naples

ISLAMIC FINANCE PERSPECTIVES IN EUROPE

Three main issues:

1) The opportunity of attracting surplus liquidity from main Islamic countries and financial centres.

2) The challenge of Islamic finance as an alternative method of investment, which is less speculative and more likely to produce sustainable development in the real economies.

3) Integration policies of Muslim communities in Europe and the growing demand for compliant financial and banking services (with attention to the relation between Islamic label and Ethical label ).

DEVELOPMENT AND PERSPECTIVES OF ISLAMIC FINANCE IN EUROPE WITH SPECIAL REFERENCE TO ITALY

GIAN MARIA PICCINELLI


Prudent consideration to the Islamic experiments conducted in Great Britain.




Islamic finance developments in continental Europe

Different approach after 2001 and after the structural changes occurred in the EU (common currency, EU monetary policy, ECB and ESCB, coordination of credit and vigilance policies, control of payment systems).

In Europe, wider knowledge of the Islamic system.

In the Islamic system, effort of achieving the compatibility with standard rules governing transparency, risk and capital management.

2004: The Saxon-Anhalt region issued sukuks al-ijara for US$ 100 million




Germany

asset-backed securities based on leasing agreements with

a) an underlying asset in buildings owned by the German Ministry of Finance and conferred to the SPV “mudaraba” for 100 years;

b) a five-years leasing contract between SPV and the Ministry with an option to renew the lease;

c) the benchmark set to one basis point above six-months Euribor;

d) quotation on the Luxemburg stock exchange (the rating has been AAA for Finch and AA- for Standard & Poor’s)

From 2004 onwards: Banks and financial institutions engaged in experimenting Islamic financial instruments

- BNP Paribas through BNP Paribas Najmah (Bahrain) - Société Générale Group through SGAM-AI (SG Asset Management-Alternative Investments) BFC (Banque Française de Commerce)




France

From 2008 onwards : Study and enactment of legislative reforms to create a proper framework for Islamic finance and banking

BNP Paribas Najmah (Bahrain) offers Islamic saving, credit and investment contracts: deposits, operations of murabaha, sukùk, ijàra/leasing, asset management products, as well as FOREX with swap-free account and derivatives Investments funds are linked to the Dow Jones Islamic Market Index and to the FTSE Islamic Global Index.




France

SGAM-AIlaunched first protected capital products in 2004 (with a total amount of US$ 500 million at the end of 2007) prepared using dynamic portfolio insurance combined with a muràbaha and an option (‘arbùn). They offer the entire capital restitution or, if more positive, 85% of the highest market value obtained before stock’s maturity.




France SGAM Baraka Index

created as a dynamically managed proprietary index based on an active selection from a basket of 30 stocks selected in the Dow Jones Islamic Market Index and appraised in advance by its Shari’ah Control Committee SGAM Index Standard & Poor’s Shariah (2008)is a passive index which seeks to track the performance of the 500 Islamic titles listed in the S&P Shariah indexes within the SG unit trust in Luxembourg (in conformity with UCITS III European Directive). SGAM AI Shariah Liquidity (2008) by BFC in La Réunion -Products with 18 months maturity, providing daily liquidity through a certificate managed in accordance with murabaha principles.




France

May 14, 2008 audience with some Islamic funds’ experts and managers at the Finance Committee of the Senat

October 29, 2008The bill n. 1277-2008 (regarding improvement of SME credit access) has been presented at the National Assembly containing a revision of art. 2011 code civil concerning fiducie (trust) in order to introduce a distinction between legal property and economic property with the opposability of the destination clause to third parties (similar to the art. 2645 ter of Italian C.C.)

October 14, 2009Final enactment of the law without that provision after the rejection by the Constitutional Council.




Comparing definitions of bank in Islam and EuropeISLAMIC DEFINITION OF BANK

as for the adoption of participatory contractsBanks are institutions operating through a system where profits and losses are shared between the parties of each transaction (Profit-Loss Sharing – PLS) without a general guarantee of fund repayment.

as for the elimination of riba from all transactions Banks are institutions that collect money (savings) from the general public and provide credits through interest-free transactions both on the asset and liability sides.




Comparing definitions of bank in Islam and EuropeISLAMIC BANKS

PLS contracts for saving and credit- directly participatory contracts

mudàraba (limited partnership, joint venture)

mushàraka (venture capital, project finance)- indirectly participatory contracts

muràbaha (mark-up sale), ijàra (leasing), istisnà’ (procurement, order to manufacture)

Saving accountswide range of deposits repayable on demand or with a term or call period.




Comparing definitions of bank in Islam and EuropeEUROPEAN DEFINITION OF BANK

There is different definitions in each national legislation

A common frame could be found in defining Banks only those enterprises whose main activity (so called “banking activity”) consists both in collecting repayable funds from the general public and in providing loans as well as all other financial activities (Italian Banking Law n. 385/1993 – art. 10,3)




Comparing definitions of bank in Islam and Europe In the common European concept

The activity of collecting funds produces the bank’s obligation to repay and the depositor’s right to be reimbursed, while it does not produce any duty of compensation on the deposited amounts.

In the Islamic concept Different types of deposit do not produce a debt-based transaction between the depositor and the bank, but an equity-based transaction with the consequence that no guarantee on the deposit is allowed(even if only participatory accounts can actually suffer losses for inadequacy of bank’s capital and reserves).




Legislative reforms required1. Guarantees and credit risk management

various degrees of borrowers’ risk does not correspond to the application of different interest rates, but are congruent with different allocations of profit shares

2. the law of trust in civil law systems with special regard to the opposability of beneficiary’s rights to third parties

3. the discipline of civil guarantees (sale of goods and debt or credit transfer)

4. the leasing contract affecting goods or real estates5. fiscal legislation mainly in order to avoid double

imposition in temporary purchase and sale transactions




Islamic capital market

• More than 200 Islamic funds operating at national / international level

• Over 60% of such funds invests in stock markets due to the favour of Sharì’ah compliant scheme for equity investments / risk sharing investments

• Creation of specialised stock indexes where Sharì’ah compliant companies are listed (i.e. Dow Jones Islamic Market Index and FTSE Global Islamic Index)

• Interest-free bonds set up by Islamic banks and other public/private institutions (i.e. takaful certificate, sukuk certificate, etc.)




Ethic banks vs. Islamic banksPositive and negative criteria for investment selection

Sharì’ah-compatibility test excludes all those activity expressly violating the Qur’anic precepts (alcoholic production, swine processing, etc.) or conflicting with Islamic ethics deriving from the same precepts.

Ethic-compatibility test excludes all those activity not coherent with “socially responsible” activities (weapons, environment, sustainable development, fair trading, etc.)

Positive screening process of the financial pocket based on the efficiency evaluation and performance criteria




Ethic banks vs. Islamic banksPurification of investment returns

as a consequence of transparency that concerns directly the psychological security of each investor and calls for the principle of individual conscience to decide to follow an alternative way in money investment.

in ethic-compliant institutions the savers renounce all or part of the interests addressing them at projects in the third sector with a strong social value.

in Sharì’ah-compliant institutions returns contaminated by transactions operated within an interest-based system should be addressed to charitable purposes.




Ethic banks vs. Islamic banks

A convergence within ethic co-operative banks

“client-partner” model of activity inspires both systems where in theory it is considered a bank/client joint liability.

“partner-client” practices deriving from the experience of shareholders uptaking the bank services.

widespread community of shareholders as a common need

transparency and nearness to the client’s needs (from the economic, social and religious point of view) as a point of strength




Ethic banks vs. Islamic banksA convergence within ethic co-operative banks

Critical issues: additional costs derived by the duties of both information and vigilance remain particularly onerous for banks with an atomized shareholders community

Positive points for Islamic banks:- canalization of donations (zakat, sadaqa, remittances)- credit demand from ethnic firms- purchase of real estates- market of ethnic and “faith-compatible” goods

To avoid any form of religious discrimination in accessing credit and banking services




Conclusive remarks1. The Islamic label

- involves foreign policies- requires economic and financial strategic choices

- can be an instrument of socio-economic integration2. Islamic financial market- are more compliant with European regulation- alternative forms of investment able to attract liquidity from Islamic countries

3. The introduction of Islamic innovations in banking sector brings into question complex legislative reforms but also clear political strategies that can multiply good profits and positive returns arising from the continuous contamination and dialogue of world cultures




THANKS FOR YOUR ATTENTION

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