Islamic Banking:
An opportunity for Belgium?
December 5, 2013
Introduction Michel Vermaerke,
Chief Executive Officer of Febelfin
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Introduction
Welcome
Context and the history of this colloquium
Objectives of this colloquium
European involvement
Islamic finance as a participative banking model
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Programme
Islamic Banking: An opportunity for Belgium? | December 5, 2013
09:00 Welcome
09:30 Introduction
Michel Vermaerke, Chief Executive Officer of Febelfin
09:40 Islamic banking in theory and practice
Professor David Bassens, VUB & Geert Bossuyt, CEO of Khalij Islamic
10:20 Close experience in Islamic Banking - The case of Luxembourg and of France
Rachid Ouaich, Président de l'IFPA (Islamic Finance Professionals Association) - Luxembourg
& Gilles Saint Marc - Lawyer Gide Loyrette Nouel A.A.R.P.I - Paris
11:00 Break
11:15 Detailed Legal and Tax analysis of Islamic Banking in Belgium
Dominique Blommaert - Lawyer & Imane Karich, Consultant in Islamic finance
12:00 Closing note
12:10 Q & A
12:20 Networking lunch
Islamic banking in theory and
practice Professor David Bassens, VUB
Geert Bossuyt, Chief Executive Officer of Khalij Islamic
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Outline
What is Islamic finance?
Islamic retail banking model
Geographies of Islamic finance
European involvement
Prospects for Islamic retail banking in Belgium
Islamic Banking: An opportunity for Belgium? | December 5, 2013
What is Islamic finance?
Islamic finance = “halal” finance = Shari’a-compliant finance = faith-based banking,
finance, and insurance in line with the Shari’a, an interpretation of Quran & hadiths by
Shari’a scholars
The Shari’a generally prohibits:
• Riba: ‘growth’, generally interpreted as all forms of interest
• Gharar: ‘uncertainty’ in contracts, legal risk
• Maysir: ‘gambling’, unnecessary risk taking (= speculation)
• Investment in haram products/sectors: (e.g. weaponry, pork meat, pornography,
and alcohol)
Islamic economy: prevent unequal distribution of risk & wealth in society via profit-and-
loss-sharing, while encouraging entrepreneurialism
Islamic finance: no pure debt-trading, but asset-backed/asset-based products
• Wholesale: no to bonds, derivatives, short selling, etc.; yes to stocks & sukuk
• Retail: mudarabah deposits & Islamic mortgages
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Islamic retail banking model
In theory two-tiered equity investments (cf.“profit-and-loss sharing”); in practice one-
tiered model with “mark-up” products that circumvent interest-prohibition
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Liabilities Assets
Mudarabah:
- Transaction deposits (nominal
value guaranteed, no returns)
- Investment deposits (nominal
value not guaranteed, PLS)
1. Two-tier mudarabah
- Mudarabah financing (PLS)
2. One-tier mudarabah
- Musharakah financing (PLS)
- Murabahah (mark-up)
- Ijarah (mark-up)
- Salam (mark-up)
- Al-Istisna (mark-up)
Qard al-Hasanah (benevolent
loans)
(Bassens et al., 2011)
Geographies of Islamic finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Distribution of “Shari’a-compliant assets” in 2012
(adapted from The Banker, 2012)
World Region 2011 (US$ ml) 2011 (%) 2012 (US$ ml) 2012 (%)
Non-GCC MENA 390,960 40 487,427 42
GCC 358,242 36 404,897 35
Asia 170,310 17 208,482 18
Australia/Europe/North America 53,391 5 54,717 5
Sub-Saharan Africa 10,753 1 10,733 1
Total 983,613 100 1,166,256 100
Geographies of Islamic finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
International Financial Centres involved in Islamic finance
(Bassens et al., 2010)
“European” involvement
Wholesale: Mostly a UK business!
• UK: London as a global centre for sukuk structuring & listing, Shari’a-compliant
funds, recent plans to issue a sovereign sukuk and offer Shari’a-compliant index
• German: issuance of a sovereign sukuk (Saxony-Anhalt sukuk)
• Luxembourg: sukuk listings and funds
Retail markets: UK again
• UK: 1 full-fledged Islamic bank (Islamic Bank of Britain) and conventional banks
with Islamic windows (e.g. HSBC) -> level-playing field (e.g. licence non-interest
paying banks, cut double stamp tax)
• Some developments in France & declaration of intention in The Netherlands, but
stymied by regulatory issues
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Prospects for Islamic retail banking in Belgium
Belgian opportunities: underserviced, but entrepreneurial (urban) Muslim
population in Belgium (e.g. Islamic deposits & Islamic mortgages & SME
finance)
Belgian challenges: • Limited demand, nothwithstanding potential because of low awareness of Islamic
products and idea of necessity (“darura”)
• Limited success of investment products (e.g. Islamic funds) because of socio-
economic status of target groups (e.g. halal fund Fortis, 2007)
• Specific regulatory challenges: obligation to give interest as a “bank”; double stamp
tax for Islamic mortgages
Belgian solutions: • Jump-start via Islamic windows: cross-subsidization by large conventional banks to
dilute risk now located in target groups
• Go beyond the niche: address broader demand for safe & ethical deposit and
investments with Belgian middle-classes -> “mainstreaming” Islamic finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Practical differences between Islamic and
conventional finance
Conventional finance and Islamic finance are very similar as the financial
needs are similar
For any conventional concept/contract there is an Islamic comparable contract Murabaha: the most common form of lending. If done with banks then equivalent to deposits/money
markets
Ijara: medium – long term financing. If done as a financial lease then equivalent to fixed income
asset class/bonds. If publicly traded/securatised then becomes known as Sukuk
Arboon: can be used as call and put option, or for short sale
Mudaraba: investment management where fees are profit based, can be used as a framework for
Sukuk type instruments
Wakala: also fund management and brokerage
Istisnaa: project finance
Musharaka: management partnership close to preference share, managing partner can earn fixed
fee as salary and larger share of profit
Role of Scholars/fatwa and ethics
The contradictio in terminis
Islamic banking is about banking
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Facts and Figures
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The Islamic market is still relatively small: Shari’a compliant assets worldwide total close to an estimated $1500bn (depending on source) and
have been growing at around 15% per year over the last ten years, placing Islamic finance as a global
asset class all on it own
Only about 12% of Muslims banks according to Shari’a principles
Geographically main centres are Middle East and Malaysia while highly populated countries as
Indonesia, Pakistan, parts of India, Nothern Africa…. still lag behind
However, the potential is huge: There are about 1.5-2 bn Muslims in the world and Islam is the fastest growing religion of all major
religions (by 2030-35 one third of world population is expected to be a Muslim)
Wealth of Muslims is fastest growing
It is expected that Islamic banks will account for 40 – 50% of total savings of Muslim population
worldwide in 8 -10 years
Belgium counts about 900.000 people of Muslim descent (roughly 8% of total population)
What is driving the growth of Islamic finance?
Islamic Banking: An opportunity for Belgium? | December 5, 2013
90%
10%
65%
35%
“Shari'a Compliance does not matter”
“ Shariah compliance is important” “ I would buy Shari’a compliant products only if I don’t have to compromise return
or service quality”
“ I would use Shari’a compliant products even
if I have to compromise some return or
service quality”
Source: McKinsey Report
The caring minority-and not the indifferent majority- will dictate the shape of the market. Kosher chips in the USA Halal beef in the UK
The future of Islamic finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Short term future: Muslims will become more and more aware of the possibility to bank according to Shari’a principles
and hence will ask more and more for such products. Muslim world: International financial players will further expand in the ME and Muslim countries in general. Their product range will
be adapted to the local needs. Conventional local banks will expand in Islamic finance or convert to an Islamic bank The (retail) market will become ‘Islamic” rapidly
Western world: Western banks will (need to) recognize more and more the importance of Islamic finance and adapt product range Islamic banks will be further set-up (though face economies of scale disadvantages)
Long term future: The “Islamic” market will become the “conventional” market in most Muslim countries and lose its
differentiating feature Deposit market in Malaysia Sukuk market
Over time, all Western banks will have an Islamic product range (or a conventional product range that is Islamic as well ) and compete with Islamic banks
My thoughts vis a vis Belgium
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Islamic finance is an opportunity: Market is not yet fully mature; growth rate is high Pool of liquidity Pool of new clients/better client satisfaction
Islamic finance is a necessity: The trend towards Islamic finance is irreversible Staying at the side-line while others react also gives a signal
Islamic finance is ‘easy’: Also conventional bankers can do Islamic finance (Islamic banking is in the first place about banking) The amount of rules and regulations to be adapted to create a level playing field is relatively limited
Close experience in Islamic Banking -
The case of Luxembourg and of France Rachid Ouaich, Président de l’Islamic Finance Professionals
Association - Luxembourg
Gilles Saint Marc, Lawyer Gide Loyrette Nouel
A.A.R.P.I - Paris
Luxembourg – Hub for Islamic Finance
Content
- Luxembourg: A history of innovation in the European Islamic Finance market
- Luxembourg: Leading European center for Islamic finance
- Broad choice of investment vehicles in Luxembourg
- Sharia Compliant Fund Structuring in Luxembourg
- Islamic Products in Luxembourg
- Taxation of Islamic Finance Products
- Sukuk Opportunities in Luxembourg
- Initiatives (IFSB, IILM, Islamic Bank,…)
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Islamic Banking: An opportunity for Belgium? | December 5, 2013
A history of innovation in the European Islamic
Finance market
Luxembourg – Hub for Islamic Finance
• 1978 – First Islamic finance institution established in a western country
(Islamic Banking System)
• 1982 – First life insurance company (Takafol SA)
• 1983 – First Sharia compliant insurance company in Europe
(Bahraini Solidarity Group)
• 2002 – First European stock exchange to enter Sukuk market
(Malaysia Global Sukuk)
• 2009 – Deutsche Bank domiciles the Platform “Al Mi’yar”
(Sharia compliant securitization vehicle)
• 2009 – Luxembourg Central Bank became member of IFSB
• 2010 – Luxembourg Central Bank became member of IILM
• 2012 – FWU German and Luxembourg based insurer launched debut corporate sukuk (USD 55
million)
• 2013 – IILM launches first sukuk
• 2014 – Launch of first Eurozone fully fledged Islamic Bank with head office in Luxembourg
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Leading European centre for Islamic finance
Luxembourg – Hub for Islamic Finance
33 regulated Sharia compliant Funds and Sub-Funds with AUM of USD 1,95 billion
(CSSF statistics July 2013)
Total assets under management in Sharia compliant investment vehicles is getting to
USD 4 billion (unregulated vehicles included)
16 Sukuk with a combined value of USD 7.3 billion listed at the Luxembourg Stock
Exchange (Bourse de Luxembourg)
3rd domicile for Sharia compliant funds in the world with 111 funds following
Malaysia (263), Saudi Arabia (163) => Thomson Reuters/Lipper Global Islamic Asset
Management Report 2014
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N°1 fund international servicing centre in Europe and the 2nd worldwide
147 Banks (N°1 location in EU for private banking)
High quality regulated framework for UCITS and non UCITS funds
Worldwide leadership in cross border distribution of financial products /
World leadership in cross border distribution with 75% on the market /
700 Luxembourg domiciled funds are registered in Bahrain.
Flexible and tax efficient structures (SIF, SICAR, SOPARFI)
Committed to develop Sharia compliant solutions. Stable and predictable environment
Compatible with Sharia Law, Tax Circulars, Large Double Tax Treaties
Large Double Tax Treaty Network : 64 DTT’s in force; 21 DTT’s pending (eg UAE,
Bahrain, Qatar, Malaysia, Kuwait, Morocco, Lebanon, Turkey, Kazakhstan, Saudi
Arabia, Oman, Tunisia, Indonesia)
Leading European centre for Islamic finance
Luxembourg – Hub for Islamic Finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Broad choice of investment vehicles
Luxembourg – Hub for Islamic Finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Luxembourg investment requirements must prevail as imposed by the December 10th
2010 Law or SIF Law 13th February 2007
Compliant with written guidelines relating to the Sharia investments principles
The fund will be run within the Sharia principles interpreted and laid down by the
Sharia Board under the responsibility of the Board of Directors or the Management
Company
Role and functioning of Sharia Board to be described in the Prospectus. In case the
Sharia scholars have an executive power equivalent to those of the Board of
Directors, this has to be pre-approved by the CSSF.
Sharia Compliant Fund Structuring
Luxembourg – Hub for Islamic Finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Murabaha deposits, Murabaha on shares
Wa’ad (underlying : FX or equities)
Islamic Funds (Equity, Real Estate, Private Equity, etc,...) using Murabaha, Ijara,
Istisna and Musharaka structure
Takaful
Sukuk using securitization structure
Islamic Products in Luxembourg
Luxembourg – Hub for Islamic Finance
Islamic products that can be set up within the existing legal and
tax framework of Luxembourg – the full range including:
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Liberal approach to Islamic transactions
Pragmatic and open minded position
Confirmation of compatibility of the Luxembourg Tax framework with Islamic Finance
requirements
Tax Circular 12th January 2010 in relation to direct taxes applicable to Murabaha
agreements and Sukuk transactions
Tax Circular 17th June 2010 issued by the Luxemburg indirect Tax authorities
providing guidance regarding registration duties (real estate transfer taxes) and
certain VAT aspects applicable to Murabaha and Ijara transaction in relation to
Luxemburg real estate
Taxation of Islamic Finance Products
Luxembourg – Hub for Islamic Finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
SUKUK
Yield on sukuk treated as interest payments on conventional debt instruments
Applies even though the yield on the instrument is directly contingent on the
income earned on the underlying asset
Yield will be tax deductible at the level of the sukuk issuer in the same way as
interest on a conventional debt obligation
No withholding tax applies on such a yield under Luxembourg domestic law
(implications of EU savings directive should be fairly limited given the nature of
the instruments and the residency of the investors)
Taxation of Islamic Finance Products Tax Circular 12th January 2010 (Direct Taxes)
Luxembourg – Hub for Islamic Finance
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MURABAHA “Substance over Form” approach
Income assimilated to interest from a tax point of view
Taxation of the income can be deferred over the term of the transaction.
Treatment granted if the following conditions are satisfied:
• Finance provider acquires the goods with the aim of reselling them (maximum period of six
months following the initial acquisition)
• Predetermined mark-up as remuneration for the services provided, known and accepted by
both parties
• The remuneration must be deferred for accounting and tax purposes in the finance provider’s
books (based on a straight-line method)
Taxation of Islamic Finance Products Tax Circular 12th January 2010 (Direct Taxes) – cont’d
Luxembourg – Hub for Islamic Finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Registration duties and certain VAT aspects applicable
to Murabaha and Ijara agreements
Registration duties (transfer tax)
Taxation of Islamic Finance Products Tax Circular 17th June 2010 (Indirect Taxes)
Luxembourg – Hub for Islamic Finance
When a property is acquired in order
to be resold: Increase in the tax rate
from 6% to 7.2%, or 9% to 10.8%
• Refund of 4% or 6% if the resale
takes place within four years
following the acquisition
• Refund of 5% or 7,5% if the resale
takes place within two years
following the acquisition
Only the difference between the
transfer tax due and the transfer tax
refundable is due on the first sale
(from the client to the operator)
When the deeds of acquisition and
resale are presented to the
authorities simultaneously
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Registration duties and certain VAT aspects applicable
to Murabaha and Ijara agreements
Registration duties (transfer tax) – Cont’d
Luxembourg – Hub for Islamic Finance
Non-application of transfer tax on
“capitalised interests”
Conditions:
- The client must take immediate
possession of the property;
- the delay between the purchase of
the property and its resale to the
client must not exceed ten days;
- the contract for the original
purchase of the property must
contain a clause stating that it is a
Murabaha, and a copy must be
attached to the notarial deed.
The difference between the
acquisition price and the resale
price is not liable to transfer tax.
The resale price which the client
pays the operator (usually an
SPV) will in principle be higher
than the acquisition price paid by
the operator.
The Circular states that this
difference should be analysed as
“capitalised interests”
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Registration duties and certain VAT aspects applicable
to Murabaha and Ijara agreements
Luxembourg – Hub for Islamic Finance
VAT
- SPVs used to operate deals under Murabaha or Ijara mode are
subject to VAT (VAT registration)
- SPVs benefit from exemptions linked to real estate transaction (e.g.
VAT on rents for Ijara)
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Listing of Sukuk with the Luxembourg Stock Exchange
Sukuk can be structured under the Securitization Law of
22nd March, 2004
Tax efficient capital market investments and transactions
Sukuk in Luxembourg
Luxembourg – Hub for Islamic Finance
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To raise issuers profile in Europe by accessing the global debt market with its fast
business growth and expansion.
Cost efficiency
The issuer should seek to benefit from all the advantages that Luxembourg Capital
market is offering:
• An attractive international listing market place for securities
• Support of international clearing and settlement entities
(Clearnet, Euroclear, Clearstream)
• A gateway to international issues and securities
Why listing Sukuk in Luxembourg ?
Luxembourg – Hub for Islamic Finance
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Securitization Law – Main features
Securitization vehicle as a company or a fund (with a management co)
SV not supervised by CSSF unless it issues securities continuously to the public
All assets can be securitized such as: mortgages, trade receivables, commercial credits, current
accounts, shares, debenture loans, buildings, etc…
No withholding tax on interest or dividends
Expenses and payments to SV holders are tax deductible
VAT exempt
No Luxembourg wealth tax
Benefit from DTT for Securitization companies
Can be listed on the Luxembourg Stock Exchange
Possibility to have segregated compartments
Sukuk & Securitization Law
Luxembourg – Hub for Islamic Finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Asset-backed securities in accordance with article 2.5 of the Commission Regulation
809/2004 (the “Prospectus Regulation”) if they are securities (a) representing
interests in assets, including rights intended to assure financial servicing or receipt by
the holder of such assets of payments ensuring timely discharge of payment
obligations under the sukuk, or (b) secured by assets where the terms of the sukuk
provide for payments related to payments or reasonable projections of payments
calculated by reference to identified or identifiable assets, or
Debt securities guaranteed by a third party pursuant to article 23.2 and Annex VI of
the Prospectus Regulation, provided that principal and periodical distribution are paid
independently of the performance of the underlying asset(s)
Disclosure – CSSF regulation as per 26th January 2011
Asset Backed vs Asset Based Sukuk
Luxembourg – Hub for Islamic Finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
- October 2010: Set up of International Islamic Liquidity Management Corporation based in Kuala
Lumpur
- Collaborative effort by 10 central banks or monetary agencies including Central Bank of Luxembourg,
as well as one multilateral organisation to assist institutions offering Islamic financial services in
addressing their liquidity management
- The regulators collaborating for the setup of IILM are the shareholders of the initiative
- Main objective is to address the major weakness in Islamic Finance : shortage of highly liquid,
investment-grade financial instruments which banks can use to manage their short-term funding
- August 2013: IILM auctioned its debut issue of Islamic bonds, selling $490 million of three-month
sukuk => priced at 30 basis points over LIBO and issue fully subscribed
- Future issuances to be listed in Luxembourg
- Several Luxembourg banks are primary dealers on the IILM sukuk
Central Bank of Luxembourg part of IILM initiative
(2010)
Luxembourg – Hub for Islamic Finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
- First Eurozone fully fledged Islamic Bank
- Head office : Luxembourg
- Dedicated to retail, corporate and private banking
- USD 80 million capital
- Shareholders : Private investors from Gulf Arab countries, including a royal family
from the United Arab Emirates and a supranational financial organization
- License procedure ongoing and to be obtained end of Q1 2014
- Operations to start Q4 2014
- Branches to be opened in Brussels, Paris, the Netherlands and Frankfurt
Eurisbank : First Eurozone Islamic Bank
Luxembourg – Hub for Islamic Finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
LFF and ALFI working groups : Islamic Finance Task Force
Education: IFBL – Islamic Finance educational program
IFPA: Islamic Finance Professionals Association
CSSF (Regulator) revised its website to include a part dedicated to Islamic Finance
Luxembourg governmental sukuk?
Other initiatives
Luxembourg – Hub for Islamic Finance
Rachid Ouaich
Islamic Finance Professionals Association (IFPA)
Chairman
Wafra Capital Partners L.P.
Head for European Investments
Email: [email protected]
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Islamic Banking : An opportunity for Belgium ?
Gilles Saint Marc
Partner, Gide Loyrette Nouel A.A.R.P.I
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Table of contents
Islamic Banking: An opportunity for Belgium? | December 5, 2013
1. France’s interest and approach of Islamic Finance
France’s interest in Islamic Finance
The French approach
2. France, a Shariah-friendly legal and tax environment
Common principles
Adequate general legal structures
Dedicated law and regulations
− Mutual fund - principles
− Mutual fund – technical clarifications
− Issue of Sukuk - Principles
− Issue of Sukuk – French compatibility
− Issue of Sukuk – Example of a structure
− Issue of Sukuk – Technical clarifications
− Issue of Sukuk – Tax clarifications
− Assets financing
− Projects financing
3. Islamic Finance in France today
Islamic Banking: An opportunity for Belgium? | December 5, 2013
1.
France's interest and approach of Islamic Finance
France’s interest and approach of Islamic Finance France’s interest in Islamic Finance Consequences of the economic and financial crisis of 2008
Economic and financial crisis: credit crunch and need for liquidity to finance
the French economy
− Will the credit and bond markets return to normal reduce appetite for
Islamic Finance?
− Developing the idea of a Great Sukuk to finance capital expenditure of the
State and local authorities without jeopardizing the French State’s national
debt
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France’s interest and approach of Islamic Finance France’s interest in Islamic Finance
Integrating factor of a modern and moderated Islam: France concentrates the
largest Muslim population in Europe (6 millions)
− 3 times bigger than Muslim population in the UK
Islamic Finance: an alternative means of financing
− Simplicity and practicality vs. unnecessary complexity
− Long-term financing: matching maturity of long-term investment
− Participative financing in the performance of the underlying assets: the capital provider acts as a partner of the company and its remuneration is only based on the cash-flows generated by the financed assets
− Asset-based financing: financing based on tangible assets (project finance, shipping, car fleet, aircraft, goods, machinery) vs. financial assets (derivatives, CDO etc.), which limits the risk of bubbles and of excessive leverage
− Transparency: Sharia-compliancy of the financing provided that the use of funds be Sharia-compliant itself
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France’s interest and approach of Islamic Finance France’s interest in Islamic Finance
Principles underlying Islamic Finance are not the monopoly of Islam
− Money is not an end in itself but an instrument to facilitate the exchange of goods and
services
− As such, money shall not be remunerated by the mere lapse of time (prohibition of riba).
The remuneration is only legitimate if its derives from the profit made by an investment in
productive activities. The capital provider is not a passive creditor of the company but an
active partner associated to the profits and losses (with no guaranteed remuneration)
− Idea already stated by Aristotle and the Franciscans in the 13th century and found in the
Middle Ages with la commande and le prêt à la “grosse aventure”, then in the industrial
revolution with capitalism. Interest bearing loans have only been accepted by the
Catholic Church in 1917 and the usury remained prohibited between professionals in
France until 2003
− Reaction to the financial speculation from the 70s that Islamic finance has made the
herald
− It only belongs to the conventional finance to come back to basics: finance the real
economy and receive remuneration only if the investment or the company is profitable
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France’s interest and approach of Islamic Finance The French approach
Development of Islamic Finance vs. secularism of the French State
− Secularism: state neutrality with respect to the private spiritual sphere, but
not promoting agnosticism or atheism (the French Minister of the Interior
is also Minister of Religions)
− The French legal system is inherited from the Judeo-Christian religion,
and does not take into account the specificities of Islam: reverse
discrimination against 6 millions of French nationals?
− Less than a failure to secularism, encouraging the communitarianism that
does not correspond to the French republican model of integration
(crucible as opposed to the Anglo-Saxon model of juxtaposition of several
communities)?
− But is integration in a community not the necessary intermediate step prior
to integration in the Republic?
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France’s interest and approach of Islamic Finance The French approach
State law vs. Shariah principles ?
• Case Shamil Bank of Britain EC vs. Beximco Pharmaceuticals Ltd (Court
of Appeal, 28 January 2004): The governing law cannot be English law
subject to Shariah principles
• French position: To ensure higher security, it was decided to recommend
that contracts be governed by national law (e.g. French law)
The question of the compatibility of the transaction and the contract with
Shariah is a separate issue from legal validity and enforceability, and must be
dealt with separately in the fatwa issued by the Shariah board (which can be
appendixed to the contract)
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France’s interest and approach of Islamic Finance The French approach
Strong political determination of Christine Lagarde (former French Minister of finance): "We will
adapt our legal environment so that the innovation and stability of our financial sector can benefit to
Islamic Finance and make its activities as welcome in Paris as they are in London and other places "
(International Financial Meetings Paris Europlace July 2, 2008)
Creation of the Islamic Finance Committee of Paris Europlace January 2008
Assignment letter: identifying the legal and tax obstacles to the development of Islamic Finance in
France and making proposals to remedy the identified obstacles
Conclusions of the Islamic Finance Committee in June 2008: 3 statements
− Similar principles
− Adequate general legal structures
− Necessity for technical and tax adjustments:
• Collective Management: Recommendation of the AMF of July 2007
• Sukuk: Recommendation of the AMF of July 2008, operational guide NYSE - EuroNext Oct.
2009 ; tax instruction of August 2010
• Murabaha transactions: tax instruction of August 2010
• Ijara transactions: tax instruction of August 2010
• Istisna'a transactions: tax instruction of August 2010
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France’s interest and approach of Islamic Finance The French approach
Importance of simultaneous dissemination of what Islamic Finance is about
− Memorandum of Understanding with the AAOIFI (Accounting and Auditing
Organization for Islamic Financial Institutions): Normalizing organism
headquartered in Bahrain
− Nearly 60 legal and accounting standards established (Figure-type
contracts)
− Translation of more than 20 standards of literary Arabic into French
− Teachings of the principles of Islamic finance at several universities:
Strasbourg, Dauphine, Paris I, Paris II, Sciences Po
− Multiplication of seminars on the subject
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Islamic Banking: An opportunity for Belgium? | December 5, 2013
2.
France: A Shariah Friendly legal and tax environment
France, a Shariah-friendly legal and tax environment Similar principles
French and Islamic Laws: an analogous tradition sharing similar principles
− Prohibition of remuneration by the mere lapse of time: Riba
− Prohibition of speculation and uncertainty of situations: Garhar, Maysir
− Prohibition of investments into specific activities: haram activities
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment Adequate general legal structures
Existing legal structures suitable to Islamic finance concepts:
− Ijarah Leasing regime applicable to moveable assets or real estate assets
(leasing regime of articles L.313-7 and seq. of the French Monetary
and Financial Code)
− Mudarabah Participating loans (regime provided by articles L.313-13 and seq. of
the French Monetary and Financial Code)/AIF and UCITS
− Sukuk Issue of bonds:
subordinated bonds (French Commercial Code, art. L.228-97)
subordinated instruments (French Commercial Code, art. L.228-37);
and
ability to provide for an index-based remuneration (articles L.112-2
and L.112-3 of the French Monetary and Financial Code which allow
for the indexation to the performance of the issuer of the interest paid
to bondholders)
Implementation of a French equivalent to Anglo-Saxon trust: Fiducie
Outside these existing structures: freedom to contract subject to:
− Compliance with French rules of public order
− Absence of tax discrepancy: conventional finance and Islamic finance need to be on an equal
footing regarding tax law
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment Dedicated law and regulations Mutual fund - principles
The ideal contractual type for investment funds: the mudaraba
Similar to a limited partnership, a party (rab
al maal) provides the funds, other provides
the know-how (mudarib)
Under French law, this structure
corresponds to the regime applicable to
any mutual fund (UCITS and AIF)
Two requirements :
only invest in halal activities,
only invest in companies whose debt ratio
is below 33%
Investor
(Rab al maal)
Investment Fund
Management
Company
(1) Deposit (2) Profits
and losses
(3) Provision
of know-how (4)
Remuneration
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment Dedicated law and regulations Mutual fund – Technical clarifications
Recommendation of the AMF July 17th, 2007 regarding UCITS
− This recommendation provides that UCITS may :
• use extra-financial criteria (developing for example an index management
based on a Shariah compliant index, Dow Jones Islamic Index, FTSE Global
Islamic Index, S&P Shariah Index , etc.).
• purify the impure part of their dividends by making donations to public utility
foundations (such as the Institut du Monde Arabe), within the limit of 10%
• use the services of a Shariah board, provided that it does interfere in the
management of the affairs of the UCITS which is managed by the management
company
− It is the first provision which expressly refers to Islamic Finance in France. On its
basis, BNPP has obtained an approval in July 2007 for the first Shariah compliant
fund
− Other Shariah funds have emerged since then (real estate, monetary funds)
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment
Dedicated law and regulations Issue of Sukuk – Principles The sukuk al ijara/sukuk al musharaka
Sukuk (saak in singular) are financial instruments similar to asset-backed securities. The remuneration received by the investor depends on the cash flows generated by the underlying asset and not to the mere lapse of time (prohibited)
Conditions for the issuance of sukuk (Notice of AAOIFI February 2008) :
The assets of the issuer must be tangible assets, either the assets themselves (e.g. car fleet) or the usufruct (e.g. flow rents of a car fleet assigned by a third party who remains the owner: standard 17 AAOIFI)
Assets cannot consist in interest-bearing receivables
The originator / manager / guarantor cannot repurchase the assets of the issuer at par value (no transfer of risk to investors) but only for their market value or, for property leased, for their remaining rental value
The remuneration of sukuk may be fixed or variable. It shall not be paid if the underlying asset does not generate the expected cash flows
The Shariah board shall upon the issue of its fatwa validate the structure but also review all contractual documentation. It shall also ensure the compliance of the transaction throughout its life
Investors
(5) Redemption
Final
Buyer
Seller
Financer
(1) Transfer of
the ownership of
the asset
(3) Rent of the assets
(4) Payment of rent
Investors
(0) Sukuk subscription
(5) Redemption
Entrepre-
neur
Financer
Company /
Project
(1) Capital
inflow
(3) Profits and
losses (2) Contribution in kind
(3) Profits and losses
(2) Cash payment
(0) Sukuk subscription
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment Dedicated law and regulations Issue of Sukuk – French compatibility
The compatibility of the French law :
− The bond issuance
• It is possible to make all types of bonds, including participating notes (Article
L.228-97 and Article L.228-37 of the French Commercial Code)
− Indexation of the remuneration
• Articles L. 112-2 and L. 112-3 of the French Monetary and Financial Code permit
the indexation of the remuneration paid to bondholders on the economic
performance of the issuer
− The possibility of higher remuneration
• The stipulation of a usurious interest rate is no longer prohibited among
professionals
Legal regime of sukuk under French law (Paris Europlace Meeting with AAOIFI in
November 2010): two structures under current French law has been validated by
AAOIFI.
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment Dedicated law and regulations Issue of Sukuk – Example of a structure
Participatory notes (all kind of assets financing)
• Remuneration depending on the corporate issuer’s
performance (income or profit)
• Repayment of the certificate: value of the assets paid
by the Corporate or, in case of default, by a third party
purchaser on the market
Investors
SPV Issuer
Corporate
Participatory
notes
Investment
100 % held
subsidiary
Management
Company
Lease +
undertaking
to purchase
Rents +
repurchase
price
100% held subsidiary
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment Dedicated law and regulations Issue of Sukuk – Example of a structure
Comments on the structure
− The investors invest in specific assets held by a specific SPV which will be set up for the
purpose of the investment. The SPV Issuer is a 100% held subsidiary of the Corporate.
− A Management Company will be responsible for the management of the financed assets. It will
receive a small annual management fee.
− The SPV Issuer will lease the financed assets to the Corporate against payment of rents. At the
maturity of the participatory notes, the Corporate will undertake to purchase the leased assets
from the SPV Issuer against payment to the SPV Issuer of a purchase price equal to the market
value of the leased assets. The legal form of the participatory notes will be bonds (obligations).
Their economic characteristics would be similar to preferred shares.
− In case the Corporate fails to perform its purchase undertaking, the Management Company will
take care, on behalf of the SPV Issuer, of disposing of the financed assets on the market and
allocate the proceeds to the repayment of the investors, potentially with a loss or a gain if the
market value of the financed assets is, respectively, less or higher than the amount initial
subscribed by the investors.
− In the event a capital gain is realized upon the sale of the assets, the Management Company
will receive an exceptional fee corresponding to most of the capital gain.
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment Dedicated law and regulations Issue of Sukuk – Technical clarifications
Sukuk :
− Recommendation of the AMF on 2 July 2008 for listing of the Sukuk on Euronext
Paris:
• Sukuk are assimilated to debt instruments and not equity
• Acknowledges that Sukuk issues may be structured either
• as asset-backed or
• as asset-based
• Provides information on level of disclosure to be set out in offering circulars
• A target remuneration ("expected profit rate") is indicated to the Sukuk holders
− Practical guide issued by NYSE-Euronext (Oct. 2009) regarding the listing of
Sukuk on Euronext
− Practical guide issued by AMF (October 2010) regarding the format of a Sukuk
prospectus
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment Dedicated law and regulations Issue of Sukuk – Tax clarifications
Tax treatment of Sukuk transactions and assimilated debt instruments such as indexed loans or bonds
(Tax Instruction of 24 August 2010):
− Sukuk are assimilated to debt instruments for tax purposes provided that they comply in particular
with the four following requirements
• Sukuk must rank senior to any shareholders of the SPV
• Sukuk must not entitle the holders to any shareholders rights like voting rights in the SPV,
right to liquidation surplus etc.
• Remuneration under Sukuk must be based on the assets’ performance or on the results of
the SPV and must be subject to a predetermined cap (Euribor, Libor), plus margin
• When the value of the financed assets exceeds the par value of the Sukuk or the amount of
the loan, the repayment may exceed the amount of the principal pursuant to the indexation
rule provided for in the contract
− As a result thereof, the remuneration under Sukuk:
• is deductible from the taxable result of the SPV under similar conditions than interests (at
expected profit rate)
• is exempted from withholding tax when paid to non French tax residents (except in case of
payment to non cooperative territories)
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment Dedicated law and regulations Assets financing
The contractual ideal type for assets financing: the murabaha
This is a cash purchase followed by resale with a deferred payment, with a margin ("profit return") corresponding to the economic interest (vendor-financing)
The Financer has some risks on the Buyer (in
case of bankruptcy of the latter), which owns the property financed
To reduce its exposure related to the quality of owner, the Financer creates a special purpose vehicle (SPV)
The Buyer undertakes to indemnify the Financer for all costs incurred by the transaction (however, always a risk of buyer-credit)
Final Buyer
Seller
Financer
(1) Transfer of the
ownership of the asset
(2) Cash
payment: 100
(3) Transfer of the
ownership of the asset
(4) Deferred
payment : 100 +
20 (margin)
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment Dedicated law and regulations Assets financing
The contractual ideal type for assets financing: the ijara
This is a lease, possibly with a purchase option of
the property at the end (wa-ik-tina'a ijara)
The Financer is the owner of the property
financed and transmits it at the expiration date of the lease
To reduce its exposure related to the quality of owner, the Financer creates a special purpose vehicle (SPV)
Often, the Financer delegates to the lessee the
burden of the maintenance and the insurance of the property financed. Assets are generally insured by a takaful
Final Buyer
Seller
Financer
(1) Transfer of the
ownership of the
asset
(2) Cash payment
(3)The rent of the
asset
(4) Payment of the rent
(with a purchase
option)
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment Dedicated law and regulations Assets financing
No immediate taxation of the Murabaha profit (Tax instruction of 24 August 2010)
− Assimilation of Murabaha profit realized by the SPV (financier) to interest payments and
therefore taxation of such profit on an accrual basis over the life of the transaction, notably
provided that:
• the Murabaha contract provides that the asset is acquired by the SPV with the intention to
retransfer it to the investor within a short period of time not exceeding 6 months
• the Murabaha contract mentions (i) the acquisition price by the SPV; (ii) the acquisition
price by the investor; (iii) the distinction between the Murabaha profit corresponding to the
remuneration for the purchase price being payable over the time and the consideration of
the SPV for the intermediation service it provides.
The Murabaha profit must be spread over the life of the transaction on a accrual basis for tax
purposes, whatever the effective payments are, and strictly in accordance with the accounting
treatment of the transaction and the payment schedule appendixed to the Murabaha contract
Absence of withholding tax
− If the SPV is not a French tax resident, Murabaha profit paid by a legal entity which is tax
resident of France is exempted from withholding tax (except in case of payment to non
cooperative territories)
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment Dedicated law and regulations Assets financing
Murabaha over property
− The SPV will benefit of the regime applicable to the purchase of the real-
estate assets for the purpose of resale provided by Article 1115 of the
French general tax code pursuant to which the acquisition by the SPV of
the real estate is subject to reduced registration duties at a global rate of
0.815% (instead of 5.09%)
Murabaha over shares in a property company
− Pursuant to the regime applicable to the purchase of real-estate assets for
the purpose of resale provided by Article 1115 of the French general tax
code, the acquisition of shares in real-estate companies by the SPV would
not be subject to registration duties (instead of 5%). Only the subsequent
sale to the investor would be taxable under the standard rules
Islamic Banking: An opportunity for Belgium? | December 5, 2013
France, a Shariah-friendly legal and tax environment Dedicated law and regulations Projects financing
The combination of contractual ideal types for projects financing : istisna / ijara
Funding of the construction phase:
the Istisna is a form of financing for
future asset in construction
Funding of the operating phase:
ijara by the Financer to the Project
Company
Construction phase : istisna
Manufacturer
Project company
Financer
(1) Provision of funding
with successive
payments under the
istisna
(2) Purchase of an
asset to build
Operating phase : ijara
Project company
Financer
(4) Rents of the asset
with a purchase
option
Islamic Banking: An opportunity for Belgium? | December 5, 2013
(3) Transfer of the
ownership of the
asset
France, a Shariah-friendly legal and tax environment Dedicated law and regulations Projects financing
Two new tax instructions of 24 August 2010 set forth the tax regime applicable
to Ijara (lease) and Istisna’a (equivalent to the sale of property for future
completion).
With respect to Ijara, the instruction specifies that if the Ijara contract complies
with the conditions of a leasing transaction as defined under the French law,
all the legal regime and the administrative doctrine concerning leasing
transactions will be applicable mutatis mutandis to Ijara transactions.
With respect to Istisna’a, the instruction specifies that the income received by
the financier as result of the deferred payment can be assimilated, for fiscal
purposes, as interest payments.
A useful clarification for project finance combining a construction phase
(Istisna’a) and an operating phase (Ijara).
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Islamic Banking: An opportunity for Belgium? | December 5, 2013
3.
Islamic Finance in France today
Islamic Finance in France today
More than 6 billion of commercial real estate financing since 2006
Banks : 3 major French banks have Islamic windows in the Gulf. Several Islamic banks
are approved in the UK and can offer their Islamic products in France on the basis of
the European passport
Concerns of the Bank of France to approve an Islamic bank : the issue of liquidity
(Achilles heel of Islamic finance) and the accounting of transactions (and by extension
of the application of prudential standards Basel 3)
Chaabi Bank (a subsidiary of the Banque Populaire du Maroc) was established in
France since August 2011 two retail products relating to deposits and residential
mortgage
Insurance: The Scor has a reinsurance company in Malaysia called Retakaful, an
insurance product called Takaful has been distributed in March 2012
Collective Management : BNPP Sicav in July 2007, Société Générale Sicav distributed
in Reunion Island, several REITS
Islamic Banking: An opportunity for Belgium? | December 5, 2013
ALGER
BRUXELLES
BUCAREST
BUDAPEST
CASABLANCA
HANOI
HÔ CHI MINH VILLE
HONG KONG
ISTANBUL
KIEV
LONDRES
MOSCOU
NEW YORK
PARIS
PÉKIN
SHANGHAI
TUNIS
VARSOVIE
Gide Loyrette Nouel A.A.R.P.I.
22 cours Albert Ier
75008 Paris
tél. +33 (0)1 40 75 60 00
[email protected] - gide.com
Gilles Saint-Marc
Partner
tél. +33 (0)1 40 75 29 34
Detailed Legal and Tax analysis
of Islamic Banking in Belgium Dominique Blommaert, Lawyer
Imane Karich, Consultant in Islamic finance
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Brussels Chaussée de La Hulpe, 187
Terhulpsesteenweg 187
1170 Brussels - BELGIUM
Tel. : + 32 2 675 30 30
Fax : + 32 2 675 30 31
Nivelles Place Albert 1er, 13
1400 Nivelles - BELGIUM
Tel. : +32 67 21 79 95
Fax : +32 67 21 72 45
Gent
Congreslaan, 27
9000 Gent - BELGIUM
Tel. : +32 9 240 77 20
Fax : +32 9 244 51 81
60 years of solutions
Dominique BLOMMAERT
Advocaat Vennoot
Wetenschappelijk medewerker Inst. Financieel recht. U.Gent
Tel : + 32 2 663 07 53
Fax : + 32 2 675 64 29
www.janson.be
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Closing note Arnaud Lecocq
Moderator
Q & A
Islamic Banking: An opportunity for Belgium? | December 5, 2013
Thank you!
Islamic Banking: An opportunity for Belgium? | December 5, 2013