BELIEVING IN SHARIAH BANKING DID NOT YET TRANSLATE INTO A WORKABLE FRENCH SECTORFor more than 20 years, French banks have offered their expertise in financing operations (BNP Paribas Najmah, Crdit Agricole) for top companies or government projects in the GCC region. They are although a major actor of the Takaful industry (AXA, SCOR). If French companies were able to provide solutions abroad, it nevertheless appears that the only country where there are not yet operating in is, of all places, France. But thats about to change.
FIRST FRENCH PRODUCTS IN ISLAMIC FINANCE In 2007, the French regulator, namely the AMF, was the first to move forward when it published a regulatory instruction concerning funds. At this time, Islamic finance was unknown in France but lead by the French banks, the AMF introduced a little revolution by authorizing funds to use non-financial criteria in their fund management constraints. In order to be fully Shari'ah compliant, it added to the rule the possibility for funds to distribute at most 10% of their annual benefits to a third party which would not be part of the fund shareholders but regulated under the French law. This allowed funds to give non-Shari'ah benefits to charity organisations at the end of each business year. Following the introduction of this new rule, 14 Islamic funds and trackers have been listed in Paris since then and many more are in the process of being listed. (source)
In 2008, the French Economy, Industry and Employment Minister, Mrs. Christine Lagarde, expressed her vision to see Paris becoming the major financial hub for Islamic Finance in Europe. She requested from two renowned academics to compile in a report the worldwide market situation and to find out what was missing in France from a regulatory, market and legal standpoint. France has taken the issue as a top priority since then, showing a strong political will to support the development of Islamic finance in Paris, confirms Thierry Dissaux, coordinator of the French initiative for Islamic finance for Paris Europlace. The aim was for Paris to become the most attractive financial place for Islamic capital investment. One of our strengths was definitely to be located in the euro zone area, he added.
One of the major points that emerged from this report was that the French law and taxation will need to be amended. The question was then to decide between two axes: create a new series of laws such as what has been done previously in the UK, or adapt the existing laws and taxation in order to be compliant with the Shari'ah.
The second solution was finally considered as being the most appropriate for France, first because this was the shortest way to move on but also taking into consideration that the French public opinion would never agree to see a law with the word Shari'ah mentioned inside.
ISLAMIC FINANCE STANDARDS AND RULES IN THE FRENCH WORLD: A REVOLUTION!
From a practical standpoint, France decided to first adapt its taxation to Islamic finance and published four instructions in August 2010. This exercise took almost two years and requested the involvement of a little army of lawyers, specialists and officials specialised in both Islamic Finance and French tax and civil laws. These instructions where published in order to provide a clear statement of understanding concerning the Islamic contracts murabaha, Sukuk, ijara et istisna as a first stage in providing practical tools which were supposed to help professional concerning the tax treatment of these contracts.
Another set of instructions will probably be issued before the end of the year and will introduce the following contracts: mudaraba, musharaka, salam and wakala. Through these guidelines we aim to develop a regulatory and supervisory framework for Islamic finance products in France. That is what foreign investors need in order to bring to the French projects additional capital in a format that suits them, said Dissaux about these new tax instructions.
Among other issues, Sukuk contracts have been the most difficult to deal with for the French ministry. American trusts are not allowed in France but would have been an easy way to qualify the structure owner of the underlying assets. Nevertheless, France has a special vehicle called fiducie which may be used instead but its use in Sukuk patterns requires special attention to comply with the Shari'ah rules. Therefore, the issue remains open today.
Moving forward into the world of Islamic finance standards, Paris Europlace, a body promoting the Paris financial place and abroad, has signed a MoU with the AAOIFI (Accounting and Auditing Organization for Financial Institutions) in January 2009. Both institutions agreed to translate the AAOIFI Shari'ah accounting, ethics and governance standards in French with the help of lawyers, Shari'ah consultants and accountants, all specialised in Islamic finance. The French authorities hoped to gain recognition from the Islamic finance industry concerning its capacity to propose religious consensus positions accepted worldwide.
The final standards will be validated by the AAOIFI and at least 20 standards should be finalized for 2010, all by the end of 2011.
FRENCH ADVISORY BOARDS ARE ALIVE AND WISH TO BECOME INTERNATIONAL
Alongside the government and institutional initiatives, four Shari'ah advisory firms have been created in France. The ACERFI, which was created in 2008, is chaired by Sheikh Zakaria Seddiki; the COFFIS is headed by Mr. Mohamed Nouri and started in March 2008; the CIFIE was implemented in 2009 and is chaired by Dr. Moulay Mounir Elkadiri and AVERROES which was created in 2009. These four private organizations have been very active in the AAOIFI standards translation work mentioned above. The advisory firm called COFFIS has been initially in charge of translating the standards while the other advisory firms were to revise and correct the translation.
By encouraging and supporting these firms, the French authorities wish them to gain experience and legitimacy in France and abroad. COFFIS went one step beyond when the AAOIFI appointed to its Shari'ah committee Dr. Abdelsattar Khouildi who is also a committee member of the French advisory firm. This initiative should be followed by others within the next month in other international organisations.
PERSPECTIVE OF THE FRENCH ISLAMIC FINANCE DOMESTIC MARKET
Paris Europlace has also created an Islamic finance commission which is made up of investment bankers, lawyers, tax advisors and Shari'ah consultants and which aims to promote Islamic finance for foreign institutional investors. The commission is headed since March 2010 by Mr. Philip Henry, European Credit and Lending Head - Customer Management, HSBC. Two of this groups main areas of focus are first the drafting of new tax instructions as already mentioned and second the structuring of Sukuk schemes under French law.
Naturally, the next step for the banks who participate to this working group may be to hopefully be the first to issue a Sukuk in France. The initiative is the first in France which is market driven and thus their action towards the development of Islamic finance must be welcomed by all.
UNIVERSITY AND EDUCATION: FRANCE IS ON THE LEARNING CURVE
Another signal in favor of Islamic finance resides in the fact that universities have followed the trend created by the regulator and the institutions by providing excellent training to French and international students. The Strasbourg School of Management, headed by Mr. Kalika, has created a university degree in January 2009 and provides 400 hours of training. It was closely followed in September 2009 by the University of Paris-Dauphine who also created a university degree in Islamic finance. The opportunities available to students are numerous according to the head master at Dauphine, Ms. Jouaber-Snoussi: Half of our students are in continuous training and are therefore already employed. For others, we try to find job placements and to facilitate their recruitment after training. Some of our employees are keenly working on these issues. It is true that approvals of Islamic banks in France are slow in coming, but we remain confident in the near future.
Furthermore, several professional courses are offered by various organizations, some with certification.
WHAT ABOUT THE FRENCH DEMAND: IS THERE A CONSUMER APPETITE FOR ISLAMIC FINANCE?
According to a survey conducted in November 2009, the demand for Islamic finance in France is strong. Over 87% of the participants have heard about Islamic finance against 12.4% who have never heard of it. Muslims who live in France mostly think that France is far behind on this topic:
The survey also showed that French Muslims are already consumers of Islamic financial products in relatively large proportions. Not less than 18% of the participants have purchased products that are Shari'ah compliant in the Maghreb countries and 20% in Europe (Mainly in Luxembourg).
Regarding the product world, 84% of Muslims living in France wish to use Islamic finance to purchase their homes. Then there is a strong demand for financing other than real estate projects with 53% of people looking to finance a new business venture and 46% needing to finance the purchase of a car.In addition, up to 70% of participants to the survey said they were willing to pay more for a financial product if it complies with the Shari'ah, whereas only 16% would not agree and 14% had no opinion.
Finally, Muslims wish to be advised by specialists:
Therefore, there is a real demand for Islamic financial products in France, but it does not, unfortunately, have an answer yet as the retail market does not exist.
FUTURE AND PERSPECTIVES
France seems to be ready for Islamic finance from the investment banking perspective but with the exception of the first Islamic finance mortgage recently backed by the ACERFI Shari'ah board, the sector offers little solutions on the retail side. Alliances between French and foreign banks are in the pipeline like the Qatar Islamic Bank and the French BPCE Group who in March 2010 signed a Memorandum of Understanding to establish the framework of a joint reflection in the field of Islamic finance. Hopefully, other similar initiatives will follow. Paris Europlace also hopes to announce the validation of a French Shari'ah Sukuk scheme within the next few weeks and call for the issuance of a first Sukuk in France before the end of 2010. This bodes well for international markets hoping for France to have a quick start with Islamic finance in 2011.
Marianne IIZUKA is a Paris-based correspondent for BI. She has 12 years of experience in investment banking and asset management and worked for major banks like Crdit Suisse and Amundi as a financial markets expert. She is the founder of Sukuk.fr and al-Sukuk.com.
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